Food prices will rise as infrastructure fails, producers warn

SA food producers, among the biggest on the continent, are spending hundreds of millions of rand mitigating prolonged power blackouts, water supply issues and crumbling infrastructure.

This investment, sometimes at the cost of essential capital expenditure, will eventually be passed onto consumers, making food prices higher for longer, food companies, economists and lobby groups said.

It comes at a time when SA is already struggling with acute unemployment, 14-year high interest rates and ballooning inflation and complicates efforts of the Reserve Bank to ease interest-rate hikes.

“We are very aware of the struggles that consumers are going through ... but inevitably some of it will be passed onto our consumers unfortunately,” chief manufacturing officer Derek McKernan of Tiger Brands, said.

The group, one of the biggest food producers in Africa, has allocated R120m in capital expenditure for the second half of its financial year to mitigate against the effect of power cuts, he said. That includes additional backup generators, fuel and water storage facilities, rooftop solar, mobile generators and water tanks to be operational from July.

It has even supplied a generator to one of the local municipalities, he added.

SA faces daily power cuts as creaking, old power plants breakdown, plunging Africa’s most industrialised economy into prolonged blackouts. This has affected sectors across the board from telecoms to insurance.

For much of 2023, the country has been in the throes of stage 6 load-shedding, with almost 10 hours of daily power cuts, forcing companies to scramble for alternative power and water sources.

Premier Group, among the top five food producers, has invested in diesel generators and boreholes to isolate any effects of power cuts up to 16 hours a day, CEO Kobus Gertenbach said. It said in June that it would take all necessary steps to protect margins.

Rival Libstar said it had built storage capacity to ensure up to three days of production at most sites.

Poultry producer Astral, diversified food producers AVI and RCL Foods have indicated in their recent earnings statements that the mitigating measures would eventually translate into higher food prices.

The listed food producers have collectively lost almost 15% in their market value since the beginning of 2023.

Power cuts have eased in the past few weeks sparking hopes of better times ahead, but there is a palpable fear that as winter takes a deeper hold in July, power demand will far exceed generation.

Nightmare to be a farmer

It is not only companies that are on the receiving end. Their suppliers — farmers — are also being battered by power and water problems and general infrastructure bottlenecks.

“It’s a nightmare to be an irrigation farmer today,” Grain SA CEO Pieter Taljaard said, adding that he expected local wheat production to fall 15% in 2023.

The SA Cane Growers’ Association has estimated that continued power cuts between stages 4 and 6 would translate to a loss of R724m in irrigated areas, CEO Thomas Funke said.

Stage 8 could mean a loss of R2.4bn and an almost 65-tonnes per hectare drop in yield, besides hitting the entire value chain, he said.

“To pack your sugar, refine your sugar and manage it in your warehouse and eventually transport it somewhere ... a lot of those processes also require electricity.”

Amid falling yields, farmers are also forced to plant less to accommodate erratic supply schedules.

“This is actually [the] same situation [as] when you have a very severe drought ... we can't irrigate enough, so you plant less,” Rosle Boerdery MD Charles Rossouw said. And as supplies fall, prices will increase, he added.

SA’s food price inflation in May eased to 11.8% from 13.9% in April but remained high, hovering in double-digits.

The central bank predicted in May that food inflation would average above 10% for the year.

The mitigating measures are coming at a cost two to three times more than the price of electricity, said Kandas Cloete, senior analyst at the Bureau for Food and Agricultural Policy (BFAP).

And some people are worrying there could eventually be a threat to food security if power and water woes worsen.

“In my view, stage 8 would start to impact our ability to continue to produce enough product to service our market,” Gertenbach from Premier said.

Reuters