Food inflation

30 Jun 2022

SA relatively well-placed to manage the rise in global food prices

Ayan Ghosh | Equity analyst

Rising food inflation has been a feature of the world economy this year. What are the implications for SA’s inflation outlook, the agricultural sector and for the country’s food requirements?

Wandile Sihlobo, the Chief Economist of the Agricultural Business Chamber South Africa (Agbiz), was the main speaker in a recent webinar hosted by Investec Securities. He outlined SA’s food inflation outlook and how well the local agricultural sector was placed to deal with the current challenges.

Sihlobo is a respected agricultural economist. He was appointed to President Cyril Ramaphosa’s Presidential Economic Advisory Council in 2019 after serving on the Presidential Expert Advisory Panel on Land Reform and Agriculture during 2018 and 2019.

There were three key takeaways from the discussion:

  • Consumer food inflation could average about 6% year-on-year in 2022 (from 6.5% in 2021), with a potential peak likely in July, although it may remain elevated in the medium term
  • There is no shortage of soft commodity supplies in SA
  • Nonetheless, the agricultural sector’s gross value may contract by about 2% this year, mostly because of base effects, with impressive growth of 13% y/y and +8.3% y/y in 2020 and 2021 respectively. 
Listen to podcast

Agbiz's Wandile Sihlobo discusses the impact of the oil price on fuel, electricity and food in South Africa.

SA bucks the global trend

Explaining the background to the forecast of the 6% rise in consumer food prices in 2022, Sihlobo emphasized the role of price variation in food products within SA’s food basket, given the global shocks that underpin them. Food (about 15.3% of the total CPI basket) accounts for a substantial share of SA’s consumer price inflation basket. Within the food basket, the key components are meat (35%), bread and cereals (21%), milk, cheese and eggs (17%), vegetables (8%), sugar, sweets and desserts (4%), oils and fats (3%), and fruit (2%). 

Sihlobo noted that the primary food staples that SA imports include wheat (c.50% of annual consumption), rice (c.100%), palm oil (c.100%), and poultry products (c.20%). Of these, wheat and palm oil have been particularly affected by global events: Russia and Ukraine together account for 28% of global wheat exports, while Indonesia imposed export restrictions on palm oil (which have subsequently been reversed).

“Prices of these two items may remain elevated in the near-term, given global supply shortages,” he noted.

He added that rice prices locally and globally continued to trend sideways, thanks to improved global rice supplies. However, the potential uptick in the cereals and oil and fat product prices in may be offset by downward pressure on meat, vegetables and fruit prices. 

“The recent outbreaks of foot-and-mouth disease in SA have led to the temporary closure of some key export markets for the red meat industry, thus adding downward pressure on red meat prices,” he explained.

On the other hand, said Sihlobo, there were fears of a potential increase in South African poultry product prices, which could lessen the benefit of softer red meat prices. 

Of major grains in SA are transported by road

“In the case of fruits and vegetables, SA has had a sizable harvest and the disruption of SA’s fruit exports to the Black Sea region could also add downward pressure on fruits and vegetable prices in SA.”

However, Sihlobo warned that the rise in fuel prices posed a significant threat to his food inflation price forecasts, given that 80% of major grains in SA are transported by road.

Healthy availability of key crops

Crop supply availability remained healthy relative to the previous three years, as evidenced by supply-demand dynamics, and current stock levels that were similar to the average levels between 2019 and 2021.

SA’s maize supply was above the average supply levels from 2019 to 2021, Sihlobo pointed out. When it came to wheat, Sihlobo said that while SA is unlikely to run out of supplies, prices may remain elevated in the medium term. 

1.43 million tonnes
Of wheat is imported by SA every year

“SA typically imports 1.43 million tonnes of wheat every year, however 1.1 million tonnes have already landed on SA shores, with the remaining approximately 300,000 tonnes to be imported from parts of Australia, South America and Argentina,” he said. 

Despite the sunflower oil shortage globally, Sihlobo argued that SA remained self-sufficient as far as sunflower oil supplies are concerned. “Agbiz forecasts 2021/22 sunflower seed production of 963,000 tonnes for South Africa, which is the second-largest harvest of all time, primarily due to expansion in area plantings and expected better yields in some regions,” explained Sihlobo.

At the same time, 2021/22 production estimates for soybeans are 1.93 million tonnes, which would make it the largest harvest on record.

“In summary, there is no shortage of soft commodity supplies in SA,” he added. 
Annual growth rate in SA agricultural sector 2021

Base effects come into play

Agbiz forecasts South Africa’s agricultural sector gross value to contract by about 2% in 2022, given base effects, following impressive annual growth rates of 13% and 8.3% in 2020 and 2021 respectively.

“The recent rains and severe flooding in KwaZulu-Natal may however lead to contraction in citrus, deciduous fruits, sugarcane and dairy industry production,” he warned.

Of grain input costs are attributed to fuel

With fertiliser making up 35% of grain input costs and fuel contributing 13% of grain input costs, there was some concern about the outlook for SA’s winter and summer crops, in the light of high fuel and fertiliser prices, which may reduce fertiliser usage, and consequently lead to lower crop yields. 

While these higher input costs are a key risk, Sihlobo argued that initial discussions between Agbiz and SA farmers suggested that farmers would maintain adequate area plantings of approximately 4.3 million hectares for summer grains and oilseeds, similar to the long-term average. SA’s weather outlook for the 2022/23 production season also remained fairly positive, he added.

Importantly, high output prices and good yields over the last two years had improved the financial position of SA farmers over the past two years, and should help them to absorb the current higher input costs.

“Tractor sales continue to track double-digit growth this year, which is indicative of SA farmers’ strong balance sheets,” he said. 

More content you may be interest in