Thoughts on South Africa’s food price inflation

Thoughts on South Africa’s food price inflation

The data released this morning by Statistics South Africa shows that the country’s food price inflation accelerated to 4.2% y/y in February 2020, from 3.7% y/y in the previous month. This uptick was mainly underpinned by relative price rises of meat; milk, eggs and cheese; oils and fats; and vegetables.

Nevertheless, this doesn’t change our view that what will matter the most for the direction of food price inflation this year are developments in the grains, meat markets and fruit. These three food categories account for nearly two-thirds of South Africa’s food price inflation basket.

Firstly, the outlook for South Africa’s grain production is positive. Maize production could increase by 35% y/y to 16.0 million tonnes, according to the latest forecasts from the USDA. This could be the second-largest maize harvest on record after the 2016/17 season (which was 16.8 million tonnes for total maize). What’s more, global wheat production, which South Africa is a net importer of, is set to be up 5% y/y to 764.0 million tonnes. This means grain-related product prices could be under pressure in the coming months. The only key risk which we continue to monitor is COVID-19, specifically on wheat shipments. So far, however, we haven’t noticed glitches.

Secondly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. We are seeing a repeat of a similar situation this year following another foot-and-mouth disease outbreak at the end of 2019. This means South Africa’s meat prices could again remain at relatively lower levels for the greater part of this year. But the lower base effect of 2019 will mean that meat will not suppress the overall food price inflation in 2020 as much as in the previous year.

Thirdly, there are prospects of good fruit harvests this year, with the citrus industry recent noting a 13% y/y increase in available supplies for export markets (see here). Amid the COVID-19, especially within the EU and Asia region, which are important markets for South African fruit exports; any glitches in supply chains would result in an increased supply for the local market, thereby lowering prices. This would be good for a consumer, but the inverse can be said for farmers.

Against this backdrop, we are convinced that South Africa’s food price inflation should hover around 4.0% in 2020 (food price inflation averaged 3.1% y/y in 2019). Under this scenario, the upside pressure will largely come from meat; and importantly, it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices on the back of a recent import tariff adjustment.

In my Business Day column this morning, I discuss the question of food supplies in the country (see here). In brief, we expect South Africa’s food supplies to hold despite COVID-19. The implications of the panic buying that the virus has induced on food price inflation remains unclear in the near-term. Suffice to say that prospects are positive on food supplies in the country, where the pain could be felt in the near-term is amongst the farming businesses. This is because of the negative impact COVID-19 has on global supply chains and thereafter global demand.

We continue to monitor the situation and will update as more data and information become available.

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South Africa: Coronavirus, sanitizers and food retailers

South Africa: Coronavirus, sanitizers and food retailers

With only a week after the first case of the novel coronavirus (COVID-19) was confirmed in South Africa (and two more cases since then), the fear of a spread of the virus is changing consumer behaviour and demand patterns. Anecdotally, over the weekend we noticed a surging demand for sanitizers to an extent that several retailers had run out of supplies in Pretoria (South Africa). In other countries such as the United States, consumers are on “panic-buying” mode, clearing shelves of everything from cleaning wipes, hand sanitizer to pasta, rice and bottled water. The United Kingdom is experiencing similar behaviour with retailers reporting a spike in demand for essential products and foods.

Will South Africa experience similar behaviour? It is too early to tell, but we find the growing demand for sanitizers, spooked by fear of the virus spreading, similar to consumer behaviour in the United States and the United Kingdom when the first cases were reported. If a similar shift in consumer behaviour were to happen in South Africa, in the very short run, an increase in demand would be a positive for retailers, especially food and other essentials. In the medium term, however, depending on whether the virus continues to spread, there might be a decline in demand possibly due to quarantine restrictions, business and school closures and fear of exposure to public spaces with large numbers of people.

Businesses at the forefront of such an adverse shock would include restaurants (and subsequently agricultural suppliers), public transport, hairdressers and similar personal services providers, to name a few. So far, we haven’t observed much changes in consumer patterns in such establishments, at least from anecdotal observations over the past few days. The traffic in most restaurants around Pretoria and Johannesburg seemed normal.

In the United States, restaurants and fast food stores have increased their in-store cleanliness efforts as a way to ease consumer fears. We will be monitoring if such efforts and consumer behaviour become prevalent in South Africa in the coming weeks, and what would that mean for the food retailers and thereafter demand for agricultural products and prices.

Another area we are monitoring and highlighted last week is global agricultural value chains. The potential decline in Asia’s agriculture demand and falling prices could see the value of South Africa’s agriculture exports to Asia also declining in 2020. South Africa’s agriculture is export-orientated, with exports of roughly US$10 billion in 2019, according to data from Trade Map, the potential disruptions the coronavirus could cause on global value chains is a key concern. This is specifically the case for Asia, as the epicentre of the outbreak, and also an area that accounts for a quarter of South Africa’s agriculture exports. The commodities most exposed to the Asian market are wool, fruit, grains, beverages, vegetables and red meat.

Globally, what we have learned over the past few weeks is that fear changes consumer behaviour and subsequently changing demand patterns for products. South Africa appears to be experiencing early signs of this through spiking demand for sanitizers. If this extends to food and other essentials as is the case in other countries affected by the virus, the agribusinesses will fundamentally experience the shocks in the domestic market (possibly through spiking demand first and softening in the medium term). The implications of this on food price inflation are unclear in the near term.

Suffice to say, South Africa has large food supplies for 2020. Hence, we have placed our forecast for food price inflation this year at about 4% y/y.

Of course, COVID-19 is a world-wide shock and it remains too early to make any definitive assessment of the potential economic effect. There is still a lot of unknowns, including how far the virus could still spread, particularly in Africa, how swift global efforts to contain the spread will be effective and how quickly consumer behaviour normalizes after the virus is overcome. These are some of the issues that we will be paying close attention to going forward.

Written for Agbiz.

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