Food inflation may have peaked but prices will remain high

Agriculture commodity prices are expected to soften this year after hitting record levels in 2022, but South Africans should expect local food prices to remain high.

Zhann Meyer, head of agricultural commodities at Nedbank Corporate and Investment Banking, said food inflation came down slightly to 12.4% in December from November’s 12.5%, but it was still at the highest levels since April 2009.

“This is being driven by the high inflation and interest-rate environment we are currently operating in here and globally, and locally by the deepening electricity crisis.

“I think we will see a softening of the food inflation numbers year on year, but we won’t see a massive decrease in staple food prices. SA’s food inflation basket is geared towards food staples that are highly affected by a weak rand which in turn results in higher fuel prices,” Meyer said in an interview with Business Day.

Beef and other animal proteins make up about 35% of the food basket, and grains and cereals 21%. Several factors put upward price pressure on these foods, including problems with animal disease outbreaks such as foot-and-mouth disease in the beef industry, high input costs and the effects of loadshedding on irrigation farmers and poultry producers. A severe drought in Argentina could support higher grain and oilseed prices in the coming season.

Bureau for Food and Agriculture Policy (BFAP) food-inflation figures show that in December prices for bread and cereal products rose 20% year on year, vegetable oil prices were up 22% and meat prices increased about 10%.

According to BFAP, SA experienced some relief in January from a stronger rand and slightly lower fuel costs. Beef prices in January also traded lower on the back of increased supply and reduced demand after the festive season. This could push food inflation for January 2023 to below 12% year on year.

Meyer said they hoped to see food inflation come down from about 12% to a range aligned with general CPI and below 8%.

Global commodity price increases are expected to soften on an expected slowdown in global demand, he said.

This is especially true in some of SA’s most important export markets for agricultural products, which means lower prices will cut two ways for SA, which exports 51% of its agricultural products, earning SA almost $12.4bn a year, Meyer said. Europe imports 24% of SA’s agriculture exports (40% goes to other African countries).

With a UK recession likely this year and the eurozone still experiencing interest rate and inflation pressure, demand in those markets is likely to be somewhat subdued.

Among the biggest threats to farmers this season is Eskom’s inability to meet electricity demand. Irrigation farmers need a solution urgently to give them power when they need it at critical times in irrigation cycles, Meyer said.

“Unless we address this, we are in for a hard time. We were lucky in the last three years; we had rainfall that assisted farmers when they could not implement their irrigation plans as they might have wanted when the power was down. But in an El Niño year you are destined for a major catastrophe if you can’t irrigate at the right time and with the right amount of water.”

Weather reports indicate that SA may be entering a drier, El Niño phase. Farmers are gearing up for a drought cycle.

But, Meyer said, it is not all doom and gloom. Farmers have had a good run. Thanks to three pronounced La Niña years they were able to produce “massively good yields” and record maize harvest topping 15-milllion tonnes. Now, with the drier years in mind, farmers are not “spending over the top.

This year, even though SA is expected to enter a low rainfall cycle, the Crop Estimates Committee says in its first area planted estimate for the year that farmers will plant about 2.5-million hectares of maize after 2022’s crop of 2.6-million hectares.

THEY HOPED TO SEE FOOD INFLATION COME DOWN FROM ABOUT 12% TO BELOW 8%