by Wandile Sihlobo | Mar 18, 2020 | Agricultural Production
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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by Wandile Sihlobo | Feb 6, 2020 | Agricultural Production
A version of this column was published on Business Day on 05 February 2020
My last column two weeks ago painted a bleak picture of SA’s 2019/2020 agricultural outlook, highlighting prospects of drought in some regions of the country. Lately, conditions have improved notably, and farmers managed to plant the area they intended.
This was confirmed by the preliminary plantings data released last week by SA’s Crop Estimates Committee (CEC), which put the 2019/2020 summer crop area at 3.97-million hectares. This encompasses yellow maize, white maize, sunflower seed, soya beans, groundnuts, sorghum and dry beans.
This planting area is up 1% and 8% from the intentions to plant data released in October 2019 and area planted in the 2018/2019 season, respectively. There is an improvement in area plantings of all crops, with the exception of sorghum and dry beans, whose area planting fell 28% year on year and 13% year on year, respectively.
With soil moisture having improved across the country after recent rains, these numbers signal the possibility of a good harvest in the 2019/2020 production season. This would particularly be the case if there is widespread rainfall within the next two months.
In its latest monthly Seasonal Climate Watch released on January 31, the SA Weather Service indicated that most regions of the country could receive below-normal rainfall between February and April 2020. This does not bode well for summer crops, which will need good moisture over the next two months’ pollination time for a number of regions that planted beyond the normal optimal planting periods because of delayed rainfall.
However, it is worth highlighting that this is not the first time the SA Weather Service has painted such a picture. In its December 2019 release the agency warned of the prospects of below-normal rainfall between January and March 2020, but the weather conditions during this period turned out differently. There was normal rainfall in most parts of the country in January and soil moisture improved notably, leading to favourable summer crop conditions.
In the case of staple grains such as maize, the CEC data reinforces the Agricultural Business Chamber of SA’s view that SA could see its maize harvest improving by at least 11% from the 2018/2019 season, reaching 12.5-million tonnes.
Here we’ve applied the preliminary maize planting data of 2.5-million hectares (up 10% year on year), at an average yield of 5-tonnes per hectare, which is plausible with current soil moisture. The US agriculture department forecasts SA’s 2019/2020 maize harvest at 12.8-million tonnes (commercial production only). Meanwhile, the International Grains Council (IGC) estimates 13.5-million tonnes.
What causes the difference between these organisations’ estimates and ours is the yield assumptions. The US department has a yield estimate of 5.1-tonnes per hectare, while the IGC has a much higher yield estimate of 5.4-tonnes per hectare. Both estimates are plausible if SA receives normal rains to support the crop within the next two months.
The highest average maize yield SA achieved over the past decade was in 2016/2017 at 6.4-tonnes per hectare. That was a year of a record maize harvest of 16.8-million tonnes from 2.6-million hectares. Even if SA receives normal rains that support the crop, we doubt such a harvest would be possible in the 2019/2020 season.
Importantly, a bigger maize crop from the 2018/2019 commercial harvest of 11.3-million tonnes would mean SA will remain a net exporter of maize and also that food price inflation could be contained at comfortable levels in 2020. The country’s food price inflation averaged 3.1% year on year in 2019, a year that saw elevated inflation of grain product prices and subdued meat prices.
Our sense is that 2020 food price inflation could average 4% year on year if there is a good maize harvest. Here I’m also assuming subdued red meat prices on the back of restricted exports after another outbreak of the foot-and-mouth disease in the country.
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by Wandile Sihlobo | Nov 21, 2019 | Food Security
Since the news that South Africa could be hit by yet another drought, a frequent topic of discussion has been its possible implications on South Africa’s food price inflation. This comes at a time when South Africa’s food price inflation has generally been subdued, having averaged 2.9% y/y in the first nine months of this year.
This is because of relatively lower meat, milk, eggs and cheese prices, amongst other products, which managed to overshadow the price increases of grain-related products over this period. The lower consumer demand has also played a part in this inflation development as consumer food price movements have not necessarily moved in conjunction with producer price inflation as has been the case in the past.
Although this year’s drought is a concern, current indications such as soil moisture, near-term weather forecasts and meat market dynamics, suggest that it might not be as intense as the 2015-16 drought, where South Africa’s food price inflation was at double-digit highs for some time. There are three major reasons for this.
First, over the past two weeks, there has been a general improvement in South Africa’s soil moisture content and that has allowed farmers to commence with summer crop plantings, specifically in Mpumalanga, Limpopo, KwaZulu-Natal, the eastern Free State and the Eastern Cape. Estimates from various farming groups and our conversations with farmers suggest that about a third of the expected maize hectares have now been planted, mainly in Mpumalanga and the eastern Free State. This, however, is way behind the optimal maize planting window for these provinces which is typically from 15 October to 15 November 2019. There is a risk of frost later in the season from planting beyond this date which impacts yields. Be that as it may, the plantings spurred by improved soil moisture might benefit from potential maize price increases in the near term.
Second, the near-term weather forecasts from wxmaps.org, a George Mason University-based weather forecast, show prospects of 16 and 60 millimetres of rainfall this week over the summer rainfall areas of South Africa. This is with the exception of the Eastern Cape which is expected to remain dry and warm throughout the week. This would generally further improve soil moisture and subsequently crop-growing conditions in areas that have started planting. As with the previous point, this would keep maize prices hovering around its current levels. On 14 November 2019, yellow and white maize prices traded around R2 637 per tonne and R2 692 per tonne, which is up by 8% y/y and 12% y/y, respectively.
Third, meat, which accounts for more than a third of South Africa’s food price inflation basket, could remain subdued in the near term. The possible marginal upticks will mainly be because of base effects. Last week, we highlighted another case of foot-and-mouth disease in the Molemole district of Limpopo. The consequence of this is likely to be a temporary ban on South Africa’s meat exports. Mozambique, Zimbabwe and eSwatini are some of the countries that have already placed a ban on South African livestock and its products imports. This could result in a slight increase in domestic meat supply and thereby keeping meat prices at fairly lower levels in the near term. This bodes well for consumer price inflation, but the same cannot be said for farmers.
Overall, I had initially estimated South Africa’s food price inflation for 2020 at 4.9% y/y and I will revisit this estimate at the end of January 2020 when there is concrete evidence about the actual summer crop area planted and weather outlook for the rest of the 2019/20 production season.
The main upside risk for food price inflation in 2020 is the weather. The outlook suggests that South Africa could receive below normal rainfall from the end of January 2020. This includes all regions, and is, therefore, a concern even for the western and central regions of South Africa, which in the near term could receive above-normal rainfall between November 2019 and January 2020, according to the South African Weather Service.
With that said, the food price inflation outlook is much better than during the 2015-16 drought years. Also, worth noting is that the global agricultural environment is likely to have minimal impact on South Africa’s food price inflation in the medium term. The main product that South Africa is exposed to the most is wheat, and there are large supplies of it in the world, keeping prices at comfortable levels. This is beneficial to the South African consumer.
Written for Agbiz.
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by Wandile Sihlobo | Oct 23, 2019 | Agricultural Production
South Africa’s food price inflation is relatively contained and I am beginning to think that the 3.6% y/y average we expected for 2019 might be an overestimate. The average for the nine months data we have thus far is about 2.9% y/y, which means to average at 3.6% y/y in 2019, the next three months will have to show a notable uptick.
There are two food categories that could potentially present an uptick: bread and cereals (maize) and meat.
Bread and cereals (maize) price inflation
While maize prices have come off the higher levels we saw at the beginning of 2019 when there were fears of possible poor harvest, the current price levels — roughly R2 800 per tonne — are still double-digit higher than October 2018. Also, the expected uptick in regional maize demand, specifically from Zimbabwe and Mozambique, could add upward pressure on South African maize prices in the coming months.
The one factor that is worth monitoring, but one should not necessarily factor it into their judgement and calculation, for now, is the weather ahead of the 2019/20 maize plantings. It is currently dry out there (I’ve discussed this here (video)) and the planting might be delayed as the dates for the optimal maize planting is from 15 October to 15 November in the central and eastern regions of South Africa. So far there is not much activity in the field. With that said, this will only start to worry us if we get into mid-November with no adequate rainfall (I hope that doesn’t happen).
Wheat, which is also important for the bread and cereals food category, shouldn’t concern us this season. Yes, South Africa’s wheat harvest could be lower than we initially anticipated at the start of the season, but what is important for price movement is the global wheat harvest. On this end, 2019/20 global wheat production could amount to 765 million tonnes, which is 5% higher than the previous season, according to data from the United States Department of Agriculture. As a consequence of this, global wheat stocks could increase by 4% y/y to 287 million tonnes. This will essentially keep global wheat prices at comfortable levels, which is beneficial for consumers in importing countries such as South Africa
Meat price inflation
I am closely observing pork, poultry, beef and other meat prices. In the case of pork, the increases we saw over the past few months are in line with the developments in the global pork market where prices have been supported by increasing demand in Asia. The Asian demand comes after the region’s pig industry, specifically in China and Vietnam, declined notably because of the spread of African swine fever.
Domestic beef prices have also recovered following a period of suppressed prices when there was a ban on South African exports because of a foot-and-mouth disease outbreak at the start of 2019. South African beef exports have since resumed, and with that came an uptick in demand which supported prices. Poultry prices could also lift somewhat in the coming months as there are prospects of import tariff adjustments.
Concluding remarks
Overall, it will be interesting to see what the next couple of months will look like on the food price inflation side. The story of the weather that I mentioned earlier, will not only be important for grains per se but the overall health of the agricultural sector, and thereafter broader food basket price inflation.
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by Wandile Sihlobo | Sep 18, 2019 | Food Security
I didn’t get to write a note on South Africa’s food price inflation data, which accelerated to 3.8% y/y in August 2019, from 3.0% y/y in July.
I was in Lichtenburg, North West sharing thoughts with farmers and agribusiness there. The mood was generally positive, but folks are concern about South Africa’s land reform policy direction and climate change (I will write something on these points in the coming days).
So, with limited time to write about food price inflation, I decided to record a short video sharing my thoughts on the data. You can access it here.
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by Wandile Sihlobo | Aug 21, 2019 | Food Security
Since the start of the year, South Africa’s agricultural commodity prices have increased notably from levels seen over the same time in 2018, specifically grains and oilseeds. Under normal circumstances, one would expect the price increases in agricultural commodities to translate to higher consumer prices, with a lag of roughly three to six months (I have discussed the food price transmission mechanism story here). But consumer food inflation has been relatively contained this year for a number of reasons.
One of the key factors has been the lower meat prices in the earlier part of this year because of the ban on beef exports contained the headline food price inflation number at relatively comfortable levels. But the ban has now been lifted and meat prices are beginning to increase somewhat. (Other factors contributing to the meat price increase is the pork, which is influenced by lower production in Asia).
The price inflation of food categories such as grains (cereal and bread) have consistently accelerated since the start of the year. But I suspect the passthrough of prices we are seeing at farm levels (+30% y/y) has been soft this time around. Hence headline food price inflation slowed to 3.0% y/y in July 2019 from 3.2% in the previous month. (The cereals and bread price inflation were up by just 7.9% y/y in July. Remember, under normal circumstances, there is roughly 63% price transmission between the prices of white maize and retail maize meal, with a delay of three months).
The point I am trying to convey here is best captured by the chart below which illustrates the food producer price inflation (PPI) and consumer price inflation (CPI) — see Figure 1 below. Historically, there has always been a good co-movement in these trends, but we are now seeing a decoupling.
Figure 1: South Africa’s food producer and consumer price inflation
Source: Stats SA, Agbiz Research
My sense is that the retailers and food producers are finding a hard time passing the costs to consumers due to weak buying power. This speaks to a broader extraordinary economic difficulty that South Africa finds itself in today.
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