Food price inflation is easing in the rest of the world – but not in SA
Kevin Lings
Chief Economist,
STANLIB
Key takeouts
South Africa’s food prices were up 14.4% year on year in March 2023, the highest rate of food inflation since March 2009. Food inflation has since eased to 12.0%, but this is still well above target. Food is the biggest single component of the CPI, accounting for over 15% of the basket.
The main factors influencing domestic food prices are a weaker rand, load shedding, the need for producers and
retailers to restore profit margins, and the deterioration of infrastructure, especially in rural areas.Global food prices retraced from their highs in the first half of 2022 but SA’s food inflation has remained stubbornly high.
SA’s food inflation is expected to moderate to an average of 5.5% in 2024, assuming a continued slowing in global food inflation, an easing of electricity outages, an improvement in summer crop production, a stable rand and a stabilisation of margins in the food supply chain.
Listen to the podcast
The idea that gangsters would risk their liberty for a few gallons of liquid gold reflects an underlying reality that is no joke for South African consumers. According to the Competition Commission, in the first six months of 2022 the price of cooking oil rose by 72% due to a shortage of supply, rising input costs and producers chasing wider margins.
“
Consumer price index (CPI) data shows overall food prices in SA were up 14.4% year-on-year in March, the highest rate of inflation since March 2009. Food inflation has since eased to 12.0% in May but remain stubbornly high.
"
The prices of bread and cereals rose 20.3% in March, while maize meal, the staple diet for many South Africans, was around 35% more expensive than it was in the same month in 2022. Food is the single largest component of SA’s CPI, accounting for over 15% of the basket.
Impact of global events
In February 2022, almost two years after the beginning of the Covid-19 pandemic, global food inflation was
finally starting to slow when Russia invaded Ukraine, plunging one of the world’s great agricultural exporters into a war of survival. Ukraine accounts for at least 10% of the world’s wheat supply, 15% of its maize, and around 50% of its sunflower oil. Meanwhile, sanctions against Russia significantly tightened the supply of crude oil; in the weeks following the invasion, the price of crude oil surged from $79 per barrel at the end of 2021 to a high of $124 per barrel in early March 2022.
The prices of these commodities naturally spiked, reflecting not only the threat of reduced supply but also the impact of higher oil prices on the cost of producing and transporting fertiliser and food itself.
Consequently, global food inflation re-accelerated, averaging 25.2% in the first half of 2022, as global markets digested the prospect of food insecurity. There was hoarding at all levels of the system, further exacerbating upward pressure on prices.
Subsequently, global food inflation has plunged to -20.9% year-on-year in June 2023, averaging -15.8% in the first half of 2023.
This welcome retreat in global food prices reflects a combination of factors:
- the elimination of almost all Covid lockdown measures around the world
- the easing of the blockade by Russia on Ukrainian ports in August 2022
- a statistically high base effect given the prior surge in prices
- the drop in international oil prices (Brent crude is down around 12% in the past six months to around $75 per barrel), and
- a better-than-expected wheat harvest in Ukraine in 2022.
SA’s food inflation is hit by other events
SA’s consumer food inflation has remained extremely high in 2023, for several reasons. There is typically a lag of about three to six months before a falloff in international commodity food prices reflects fully in SA’s consumer food inflation. However, a number of factors have combined to keep food inflation trending higher:
While a relatively small portion of SA’s food consumption is imported, most domestic agricultural commodities track global prices. International food prices have softened, but the rand has weakened by around 13% against the dollar during the past year to end June, so the rand equivalent of those international prices remains elevated.
SA has experienced more than 250 days of load shedding since October 2022, disrupting food production and increasing costs significantly for a wide range of manufacturers, including food retailers who need to keep fridges running 24 hours a day. Higher operating costs, greater wastage, and supply disruptions have undoubtedly contributed to the continued acceleration of domestic food inflation.
During the 2020/21 surge in international food prices, many South African food producers and retailers tried to absorb the bulk of additional cost pressures, hoping that this would be short-lived. They were concerned that households would be unable to afford a substantial increase in prices. However, the persistence of a range of other cost pressures has forced most producers and retailers to raise prices in an effort to restore profit margins.
The ongoing deterioration of SA’s infrastructure, especially in rural areas, has compromised the efficiency of the agricultural supply chain, including crop irrigation, food storage and export capacity at the ports. This has added a layer of costs which has made its way into higher end-prices for food.
“
More positively, SA’s food inflation is expected to moderate to below 10% by the end of 2023 and fall further to an average of 5.5% in 2024.
"
This projected slowing in domestic food price inflation assumes:
There are various risks to this forecast. These include sustained high fertiliser prices, a worsening of electricity outages during the upcoming unforeseen breakdowns, and the impact of climate change on domestic food production. SA has experienced four years of above-average rainfall, which is unlikely to persist. Fortunately, SA’s agricultural output remains encouraging, while the domestic food supply chain is in the process of adjusting to the various pressures in the system. This should allow domestic food inflation to moderate significantly over the next 12 to 18 months, bringing some welcome relief to households across South Africa.