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.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jan 22, 2020 | Agricultural Production
South Africa’s food price inflation averaged 3.1% y/y in 2019, which is well below market expectations. What many analysts seem to have underestimated was the length of the period that meat prices would remain subdued for, and its influence thereafter on the overall food price inflation headline number. This is because meat contributes 35% of the food inflation basket, which is a significant share.
The subdued meat price trend was largely caused by the ban on exports on the back of a foot-and-mouth disease outbreak at the start of 2019. Seeing that foot-and-mouth disease is again a challenge this year, South Africa’s meat prices could again remain subdued for the greater part of 2020. But the lower base of 2019 will mean that meat will not keep overall food price inflation at lower levels in 2020 as in the previous year.
Therefore, the lower base of meat prices is one of the key factors that could add upward pressure on food price inflation this year. Another important factor is that there is still uncertainty about is the maize harvest. In 2018/19 season, South Africa harvested 11.2 million tonnes of maize. And the current estimates for 2019/20 season vary between 12.0 and 14.0 million tonnes. The crop in the fields is looking great, although planted way behind the normal schedule. If the next two months could bring sufficient rains, then it is plausible that South Africa could get a decent maize harvest (in a range of aforementioned estimates) which bodes well for consumers.
The key concern is the prospects of below-normal rainfall between this month and March 2020 which the South African Weather Service has flagged. The question is, how will this affect the crop, which at this point is looking relatively good in most parts of the country? Another concern is, of course, the possibility of frost later in the season as the crop is planted late and the impact thereafter on crops?
In short, there is still some level of uncertainty about the maize harvest in South Africa. But in an event that we get a good maize harvest as various market estimates reflect, then South Africa’s food price inflation should hover around 4.0% in 2020. Under this scenario, the upside pressure will largely come from meat; it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
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.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
