Slightly higher than expected consumer food price inflation in August 2021

by Wandile Sihlobo | Sep 22, 2021 | Food Security

South Africa’s consumer food price inflation continues to surprise on the upside. We thought the start of the second half of the year would moderate the increase we observed in the past few months. But the data released by Statistics South Africa today show that consumer food price inflation accelerated to 7,4% y/y in August 2021 after registering 7,0% in the previous two months. This is the highest level since March 2017.

The underpinning drivers of this uptick in consumer food price inflation was meat and, to a lesser extent, fish and vegetables. Meanwhile, most products in the food basket, including ‘bread and cereals, and ‘oils and fats’, decelerated, the latter after a sharp increase in recent months.

The notable increase in meat price inflation can be partly explained by the decline in cattle and sheep slaughtering activity over the past few months. For example, in July 2021, cattle and sheep slaughtering activity was down by 16% y/y and 11% /y/y, with 188 865 and 298 873 head slaughtered, respectively. The livestock industry is still in the herd rebuilding process that we have been in since the drought of 2015-16. Moreover, the continuous outbreak of Foot and Mouth Disease in some provinces of South Africa, such as KwaZulu-Natal, has recently led to farmers slowing the slaughtering activity.

This is slightly different from what we have observed in the past when such outbreaks and the temporary ban in exports that would typically result in a somewhat increase in meat supply and consequently softening in prices. Moreover, it is possible that the good performance in crops production may have helped to provide some financial breathing room for some diversified farmers to rebuild herds rather than sell more meat to the domestic market.

Moreover, the uptick in vegetable price inflation reflects the tight stocks we have been observing in products such as potatoes. This, however, is temporary, and supplies could soon improve, and prices may soften. Under such a scenario, the vegetable price inflation trend would follow other major products such as grain-related, which are cooling off from the higher levels of the past few months, reflective of agricultural commodity prices.

Overall, we still hold a constructive view of possible moderation on food price inflation which will most likely be underpinned by the possible softening in grain-related products, dairy and vegetables. The path for meat prices remains uncertain for now. We will closely observe the slaughtering data of the coming months to ascertain our view on the price trend of this particular product.

Exhibit 1: Slightly higher than expected consumer food price inflation in August 2021

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South Africa’s consumer food price inflation to moderate in second half of 2021

by Wandile Sihlobo | Aug 19, 2021 | Food Security

Although July 2021 consumer food price inflation of 7% y/y is unchanged from the previous month, there are clear signs in the underlying details that pressures are beginning to moderate. We are seeing a similar trend in the global market. The Food and Agriculture Organization of the United Nations (FAO)’s Global Food Price Index has slowed for the second consecutive month in July. After all, the acceleration in South Africa’s consumer food price inflation from late 2020 and in the first half of 2021 was not necessarily driven by domestic factors, but mostly unfavourable spillover effects from the global market.

Exhibit 1: I expect South Africa’s food price inflation to moderate in the second half of 2021
Source: Stats SA

As I have pointed out previously, South Africa had a large grains harvest in the 2020/21 production season, with maize production at 16,4 million tonnes, the second-largest yet. The soya bean harvest was the largest on record, and the same is true for citrus. With harvest figures like this, it is understandable that South Africans would have expected food price inflation not to reach 7% y/y in June 2021, which is the highest rate since June 2017.

But we experienced spillover effects of the global surge in agricultural commodity prices. The price increases were caused by a range of factors, including growing demand in China, lower production of palm oil in Asia, lower global grain stocks, dryness in South America and unfavourable weather in parts of Europe and North America at the start of 2021/2022 production season. But we have now seen a substantial change in these factors, and global prices are starting to reflect it – an example is a decline in the FAO Global Food Price Index. Production conditions have improved, notably in Europe and North America. Against this, the International Grains Council forecasts 2021/2022 global grain production at a record 2.3-billion tonnes.

These production forecasts suggest global agricultural commodity prices in the second half of the year could continue softening slightly from the levels of recent months. If this transpires, South African grain prices should follow a similar path, which bodes well for consumer food price inflation.

The only significant upside risk on grain prices is tightening global grain stocks and progressively growing consumption from the bioenergy industry. That said, the data so far point to improved affordability for consumers in the second half of the year. Another upside risk that is worth keeping an eye on is the rising fuel prices as South Africa transports a large share of the food by road. An example is grains and oilseeds where over 70% is transported by road.

The oils and fats in South Africa’s food basket, whose price direction is largely influenced by global vegetable oil price trends and were amongst products keeping food inflation at fairly higher levels in July 2021, could also soften in the coming months. Global prices are already on a downward path.

Meat, which also increased slightly in July, is likely to soften in the coming months. Bearish factors include biosecurity challenges, specifically foot-and-mouth disease in parts of KwaZulu-Natal and Limpopo, and the subsequent banning of South African beef from various export markets. While this disease is damaging and costly for farmers, it tends to put downward pressure on domestic meat prices due to the restricted exports and higher domestic availability.

In sum, all else being equal, South Africa’s consumer food price inflation probably now peaked and the coming months will present some moderation.

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Forecasts suggest South Africa’s consumer food price inflation will start to slow

by Wandile Sihlobo | Aug 2, 2021 | Food Security

If the questions I frequently receive through various media platforms and e-mail are anything to go by, I would say concerns about rising food price inflation still linger. These actually hold water, as various food product prices have been rising at a relatively faster pace.

For example, in June 2021 annual food price inflation accelerated to 7% from 6.8% in May, the fastest pace since June 2017. Ironically, this is after we have had one of the best agricultural seasons in the country’s history. To single out a few products, the 2020/2021 maize harvest is 16.2-million tonnes, the second-largest yet in SA. The soya bean harvest is the largest on record, and the same is true for citrus. With harvest figures like this, it is understandable that folk continue to wonder why we are seeing rising food prices.

For a start, we should appreciate that the surge in food price inflation is not unique to SA but is a global phenomenon. We are largely experiencing the spillover effects of the global surge in agricultural commodity prices. Over the past few months, global agricultural price increases were caused by a range of factors, including growing demand in China, lower production of palm oil in Asia, lower global grain stocks, dryness in South America and unfavourable weather in parts of Europe and North America at the start of the 2021/2022 production season.

But we have now seen a substantial change in these factors, and global prices are starting to reflect it. For example, production conditions have improved, notably in Europe and North America. As such, the International Grains Council forecasts 2021/2022 global grain production at a record 2.3-billion tonnes. This improvement in global grain production prospects is also evident in the Food and Agriculture Organization global food price index, which fell 3% in June from the previous month, the first drop after 12 consecutive monthly increases.

These production forecasts suggest global agricultural commodity prices in the second half of the year could continue softening slightly from the level of recent months. If this transpires, SA grain prices should follow a similar path, which bodes well for consumer food price inflation. The only significant upside risk on grain prices is tightening global grain stocks and progressively growing consumption from the renewable energy industry. That said, the data so far points to improved affordability for consumers in the second half of the year.

The oils and fats in SA’s food basket, whose price direction is largely influenced by global vegetable oil price trends, could also soften in the coming months. Global prices are already on a downward path.

Meat, which underpinned the increase in food price inflation in June, is likely to soften in the coming months. Bearish factors include biosecurity challenges, specifically foot-and-mouth disease in parts of KwaZulu-Natal and Limpopo, and the subsequent banning of SA beef from various export markets. While this disease is damaging and costly for farmers, it tends to put downward pressure on domestic meat prices due to the restricted exports and higher domestic availability.

The recent unrest in KwaZulu-Natal and Gauteng is unlikely to be a significant upside risk to domestic food price inflation. There will be higher insurance and security costs in the short to medium term, which could be passed on to the end consumer, but supply chains were quickly restored so I don’t expect this to change the softening food price inflation path.

There is also anecdotal evidence that at the height of the unrest, there were hikes in the prices of essential foodstuffs such as bread, notably in informal markets. But there was a correction as soon as the bakers reopened and the bread supply improved.

This essay first appeared on Business Day, 27 July 2021

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What’s behind South Africa’s rising food prices

by Wandile Sihlobo | Jun 30, 2021 | Food Security

Rising food prices continue to dominate the headlines, domestically and globally. It is not unusual for one to see complaints about rising sunflower oils or broader headline food price inflation on the domestic front. This has, in turn, raised questions of how this could be in a year of abundant agricultural harvest?

The answer goes back to the fact that South Africa is interlinked to the global food system, which at the present moment is facing an uptick in prices. Consider the sunflower oils; South Africa is a net importer of sunflower oils, importing on average 197 342 tonnes per annum in the past five years. Additionally, South Africa imports, on average, 477 185 tonnes of palm oil a year.

The global prices of these products have been on an upward trajectory for months, with the global vegetable oil prices reaching the highest level since 2011 in May this year. These increases are caused by the combination of lower supplies in Southeast Asian countries, specifically for palm oil, and rising demand for sunflower oils and soybeans, particularly in China and the global biodiesel sector.

South Africa gets to experience these shocks, hence even if one observes the recent consumer food price inflation data, the oils and fats were amongst the categories showing the fastest increases within the food basket in May 2021 CPI release. Also, worth noting is that, unlike other domestic summer crops, which are set to increase in the 2020/21 season, South Africa’s sunflower seed production is down by 9% y/y, which once again necessitates the need for imports.

In May 2021, South Africa’s consumer food price inflation accelerated at the fastest pace since July 2017, measured at 6,8% y/y, from 6,7% y/y in April 2021. The underpinning drivers of this increase were the aforementioned oils and fats, meat, vegetables, and to an extent, staple grain related products.

The grains products prices are at relatively higher levels, not because of supply constraints in the domestic market, but the surge in global prices. South Africa has its second-largest grains harvest on record, and maize prices are at export parity levels. The second-largest maize harvest on record in the 2020/21 production season has not led to a decline in domestic maize prices. This is mainly because of the 56% increase in export parity prices in the 2020/21 season. Export parity prices are derived from the global maize price multiplied by the exchange rate minus transaction costs and can be regarded as a “floor price” for domestic maize prices. As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, triggering an increase in volumes of exports or demand by foreign buyers.

Meat, which also underpinned the increase in food price inflation in May 2021, could likely soften in the coming months, albeit South Africa’s supplies being roughly balanced in red meat, while an importer of poultry products. This time around, the unique factor to South Africa, which stakeholders in the food industry will have to monitor consistently, is the impact is the biosecurity challenges. The most recent announcements of the foot and mouth disease in parts of KwaZulu-Natal and Limpopo and the subsequent ban of South Africa’s beef in various export markets is one such matter to monitor, along with the African swine fever and Avian influenza. While these diseases are damaging and costly for farmers, they tend to lead to a decline in domestic meat prices due to the ban in exports, then bode positively for local consumer food price inflation in the near-to-medium term.

Beyond our borders, the IMF released a note on 24 June 2021, highlighting four facts about the soaring consumer food prices. The first point of the note was that food inflation started increasing in 2018, before the pandemic. The price increases were induced by an outbreak of African swine fever in China, which wiped out much of China’s pig herd, which represents more than 50% of the world’s pig. This event led to an overall increase in global animal protein prices, which also filtered into countries such as South Africa. The intense trade conflict between the US and China at the time also contributed to animal protein price increases.

Secondly, the early lockdown measures, globally, and supply chain disruptions induced a spike in consumer food prices. This specifically refers to the shift in consumption patterns when lockdown started, from dining out to the retail grocery. Moreover, the stockpiling that occurred at that period across the globe also added to price increases. Nevertheless, this was a temporary event, and prices had moderated in the second quarter of 2020 for several countries.

Thirdly, the rising shipping and transport costs also contribute to increased global food prices. Lastly, global food producer prices have rallied, reaching multi-year highs because of supply concerns. Such concerns include the consistent downward revision of Brazil and Argentina’s maize and soybean harvest because of dryness there and the drier weather conditions in Russia, Ukraine, and the United States at the start of the 2021/22 production season.

The production conditions have since improved in Russia, Ukraine, and the United States, pointing to a reasonably good crop this season. Perhaps, the central point to make here is that while production conditions for the 2021/22 global harvest are promising for all major crops, there are generally lower stocks. This causes global prices to remain volatile or sensitive to any reports of unfavourable weather conditions in major producing countries, even if such weather events will have minimal impact on crops.

Ultimately, the rising consumer food price inflation in South Africa, which consumers have complained about, is not solely a domestic phenomenon but a global one. With that said, we still believe that South Africa’s food price inflation could soften in the second half of 2021. We base this view on the expected sizeable domestic harvest, the expected softening in global grains prices due to anticipated large harvest in 2021/22, and recent developments in the domestic meat industry, which we have discussed above.

The article was written for and first published on News24/Fin24.

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South Africa’s food price inflation could soften in the coming months

by Wandile Sihlobo | Jun 8, 2021 | Food Security

It sometimes feels like there is little more to discuss regarding South Africa’s consumer food price inflation. The local crop data continue to show that there are ample domestic supplies on the back of large harvests in field crops and horticulture, which would have ordinarily led to a decline in prices.

Still, the question that repeatedly comes out in discussions with various stakeholders in the food industry is the impact of higher global prices on the domestic food market and whether this is the reason local prices have remained elevated in the face of a large harvest. This is an important consideration because the price developments we have witnessed in South Africa’s soft commodities prices, specifically grains, in recent months reflect spillovers from the global market. This begs the question of where global grain prices are likely to go from here and how this could affect South Africa.

Before getting into the outlook for global grains, let us recall that South Africa is typically a net exporter of maize and is therefore well integrated into global markets. My rough calculations, using high-frequency data (daily data with more than 300 observations), shows that the correlation between domestic and international maize prices remains positive, about 60% for white maize (which is mainly traded into the African region) and 85% for yellow maize (which is traded into the global market). This implies that when global maize markets increase, domestic maize prices rise in tandem. Importantly, for wheat, rice and soybeans (and other vegetable oils), where South Africa is typically a net importer, the correlation between domestic and global prices is stronger.

Against this backdrop, the recent report that the FAO Global Food Index averaged 127.1 points in May 2021, which is the biggest month-on-month gain since October 2010 and about 40% higher on a y/y basis would worry the local food industry stakeholders. This sharp increase was underpinned by a surge in prices for vegetable oils, sugar and cereals along with firmer meat and dairy prices, all of which South Africa is generally exposed to in the global market. The downgrade of production prospects in Brazil, dryness in parts of the US, the expected lower palm oil output in Southeast Asia, and the rising Chinese demand for grains, meat, dairy and oilseeds have been the primary drivers of prices these past few months.

But the data released at the end of May by the International Grains Council (IGC) suggests a change in the global grains supplies outlook in the 2021/22 production season. Firstly, the cold temperatures that had slowed plantings in parts of Europe have abated and plantings have now improved. Secondly, the US received beneficial rains, which improved the crop conditions and supported the plantings of the new crop. Lastly, the weather conditions in Ukraine and China have improved and supported the planting of the grain.

You can read the full article by clicking here (paywall). The article was written for and first published on Fin24

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Brief reflections on South Africa’s consumer food price inflation data

by Wandile Sihlobo | May 19, 2021 | Food Security

On Wednesday morning, Statistics South Africa reported much higher figures for consumer food price inflation than some had expected. In April 2021, the country’s consumer food prices were at 6,7% year-on-year, the highest level since July 2017.

The different thing about 2017 is that it was a year that followed a drought period – so there were still pass-throughs of higher grain prices from the previous poor season. Notably, livestock farmers were restocking their herds after the devastation caused by the drought. This meant that there was less slaughtering activity and meat prices rose, driving the uptick on overall consumer food price inflation, which for July 2017 was reported at 6,9% year-on-year.

But we are far from that reality this time around. We have had two consecutive favourable agricultural seasons, characterized by higher rainfall, which supported crop yields and the livestock industry.

Nevertheless, we are operating in a global environment and developments in various regions of the world impact the South African agricultural market. A case in point are global grain prices, which remain elevated because of droughts in South America and dryness in parts of the U.S. and Canada. Driven by these higher global prices, on 13 May 2021, South Africa’s spot prices for yellow and white maize were up by 38% y/y and 31% y/y, trading at R3 586 per tonnes and R3 422 per tonne, respectively. Similar price trends are also evident in oilseeds (an additional price driver here is also robust Chinese demand for soybeans)

Therefore, in our view, the driving factors of local food prices is not so much what is happening in South African, where we are expecting the second largest maize harvest in history, about 16,7 million tonnes. Instead, the higher global grains and oilseeds prices are the driving factors of prices for reasons I have mentioned above.

We know from our most recent research (an article on this issue will appear soon in Business Day) that the correlation between domestic and international maize prices remains positive, about 60% for white maize (which is mainly traded into the African region) and 85% for yellow maize (which is sold into the global market). This implies that when global maize markets show an increase, domestic maize prices tend to rise in tandem. We see pretty much similar observations for soybeans, of which South Africa is a net importer.

These higher maize and overall oilseeds prices have been our reality since last year, putting increased pressure on the livestock industry. At the start of the week, Astral Foods, one of South Africa’s notable poultry companies, signalled that they are now being forced to pass on the rising input costs to consumers. Therefore, it is not surprising to see that one of the products that underpinned the recent increase in South Africa’s consumer food price inflation is meat. The meat producers have had a hell of a time with higher feed costs for such a long period. Eggs, milk and cheese also increased, and the driving factor is similar.

Oil and fats are another food product category that was behind the notable increase in consumer food price inflation. South Africa imports large volumes of vegetable oil a year, roughly half a million tonnes of palm oil and just over a hundred tonnes of sunflower oil. Currently, the global prices of vegetable oils are relatively higher because of supply constraints in the palm oil producing Asian countries, combined with generally higher global demand. What we are witnessing here in the domestic market is a spillover of this phenomenon.

You can read the full article by clicking here (paywall). The article was written for and first published on Fin24.

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Most food-insecure SA provinces have vast tracts of underutilised land, which could be a priority for agricultural expansion

by Wandile Sihlobo | Mar 15, 2021 | Food Security

Global agricultural indices typically have to contend with several challenges in the quest to provide a valuable measure of any particular subject. Data consistency in quality, coverage, frequency and reliability across all countries is one of them, as are the weightings and ranking. The compilers of an index have to give thorough consideration to these because they can be subjective.

I was reminded of these points by professor Johann Kirsten of Stellenbosch University when we looked at the Global Food Security Index (GFSI) recently released by Corteva and the Economist Intelligence Unit.

The index showed that SA’s ranking in terms of food security has dropped to 69th place out of 113 countries from 44th in 2019. On the face of it, this is worrying. Still, when one looks more closely, it becomes clear that SA is not doing as badly as the headline ranking suggests. In this case, SA’s score dropped just 1.4 points from the previous year’s number of 59.2. Other countries meanwhile improved notably, resulting in the alarming drop in SA’s ranking. The index is based on four significant sub-indices: food affordability; food availability; food quality and safety; and natural resources and resilience.

Affordability and availability have a higher weighting for a combined two-thirds (each 32.4%). It is not clear how the larger weighting of these two sub-indices was allocated, which brings us back to the issue of subjectivity.

Nevertheless, in 2020, SA experienced a sharp deterioration in the food affordability sub-index (a 5.5-point drop), while all other sub-indices improved marginally. Notably, the major challenge was an overall increase in food prices and a deterioration in SA’s food safety-net programmes.

The food affordability results in the index is not far out of alignment with what Stats SA and other local researchers have observed in various surveys. For example, the third wave of the National Income Dynamics Study — Coronavirus Rapid Mobile Survey published last month also pointed to a rise in hunger in 2020.

Moreover, SA’s overall food price inflation also started rising in the last quarter of 2020, averaging 5.8% year on year, from an average of 4.3% in the first three quarters of the year. This challenge speaks to the rising costs of food in an environment where more people are out of work. The general increase in SA’s food prices in late 2020 was mainly underpinned by increases in staple grain prices.

The deterioration in food security was not an issue of availability because the sub-index of availability showed an improvement, reflecting higher agricultural output in 2020. The driving factor behind grain price increases was, to no small degree, the strong demand for South African grains and other agricultural products in Southern Africa and the broader global market.

This global demand phenomenon is illustrated by agricultural exports, which reached the second-highest level ever — $10.2bn (about R150bn) — in 2020. The weaker rand was among the factors increasing the competitiveness of SA’s products in the global market.

For context, the headline decline in SA’s ranking in the GFSI now suggests that Morocco, Algeria, Tunisia and Egypt are the most food-secure countries in Africa, with SA trailing them, though it has the highest ranking in Sub-Saharan Africa. Within the Brics (Brazil, Russia, India, China and SA) group, SA is two positions ahead of India, 18 positions behind Brazil, 29 places behind China and 44 behind Russia.

While I note the technical issues of this index, I think the picture or message is that SA will need to continue with its efforts of improving food security through expansion in agricultural production and job creation in various sectors of the economy. The food security interventions need to be more focused on household level and multiple communities, especially in the Eastern Cape, KwaZulu-Natal and Limpopo, which have higher levels of poverty.

The interventions could include encouraging smallholder farming. In areas where land availability and environmental conditions permit, commercial production and other programmes that improve employment prospects should be encouraged and supported by the government, NGOs and social partners.

As the eminent economist Amartya Sen once argued, much of the issue of food insecurity is an “acquirement” problem. So, the fact that unemployment and poverty are so high is not necessarily the fault of agriculture and food systems. Rather, it is a broader economic and socioeconomic challenge, with rising unemployment in SA.

In terms of agriculture, most food-insecure provinces also have vast tracts of underutilised land. These provinces should be a priority in the agriculture and agro-processing master plan. With a commercial focus where conditions permit, agriculture improvement would help job creation and, ultimately, household food security.

This essay first appeared in the Sunday Times on March 14, 2021.

Cover photo: Sunday Times

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