Food prices are likely to keep surging
There is speculation that we may be entering another global commodity supercycle
Food inflation has increased globally since late 2020, and there is speculation that we might be entering another global commodity supercycle characterised by structural demand shifts that push up prices.
In SA, consumer price index (CPI) headline inflation was recorded at 3.2% in January 2021 and food inflation made up 28% of this, even though food and nonalcoholic beverages make up only 17.24% of the total CPI basket. This supports the notion that food prices are a key factor in inflationary dynamics. Overall, we predict that the general price surge is likely to persist.
Global agricultural commodity price increases during the latter half of 2020 and early 2021 have been the underlying cause for the surge in local grain and oilseed prices. This drives up the prices of bread, cereal, vegetable oil and related products at a retail level.
Recently the UN Food and Agricultural Organization reported that grains and oilseed prices have been propped up over the past seven months by strong demand from China, as the country rebuilds its swine herd after African swine fever outbreaks over the past few years. In addition, supply disruptions, such as a dry start to the grain production season in South America, have increased prices for SA producers.
Meat and dairy prices increased in the second half of 2020 as numerous exporting countries reported incidents of avian flu in poultry and African swine fever in pork. Dairy prices increased due to strong demand from China, combined with lower exports from key producers such as New Zealand.
Similar trends have been apparent in the SA market. January 2021 food inflation rates reflected significant inflation across all food subcategories, ranging from 5.1% for bread and cereals to 6% for fruit, dairy and eggs, 7.2% for meat and 10.5% for oils and fats.
To measure the effects of these dynamics on the consumer, the Bureau for Food and Agricultural Policy (BFAP) developed a food basket approach. The BFAP Thrifty Healthy Food Basket measures the cost of basic healthy eating for low-income households in SA, taking into consideration national nutrition guidelines, food intake patterns, official Stats SA food retail prices and typical household demographics.
Consisting of a nutritionally balanced combination of 26 food items, the basket is designed to feed a family of four for a month (two adults and two children). In January 2021 the cost of the BFAP food basket amounted to R2,866 for a family, which was 8.6% higher than a year ago and also up by 1.2% since the end of 2020.
In January 2021, a household with two members earning the national minimum wage, receiving two child grants and beneficiaries of a school feeding scheme had to spend about 29% of their income on food to afford the BFAP food basket. With significant inflation observed for starch-rich staples (such as rice, bread and maize meal), as well as food items contributing to dietary diversity (selected foods from the meat, eggs, vegetables, fruit, fats/oils and legumes groups), food security among lower-income households is clearly under threat.
What to expect over the next six months and the effect on headline inflation.
Though world agricultural commodity price surges point to a revival of demand after Covid-19 and its associated lockdowns, global supply and demand estimates indicate sufficient supplies for current levels of demand.
To predict another commodity supercycle with a structural change in demand may be premature, but we envisage that certain supply constraints in global agricultural markets will persist over the medium term. Animal disease remains a concern and rebuilding herds after outbreaks takes time, so global food and agricultural prices are expected to remain strong.
Locally, increases in input costs such as agricultural wages, electricity and oil prices will add pressure to agricultural and food prices in 2021. How consumers will be able to absorb this is unclear and it is likely that food inflation could negatively affect both adequate energy intake and dietary diversity for consumers at lower income levels.
Finally, the rand has proved to be remarkably resilient against the dollar since the beginning of 2021, providing some reprieve from global price increases. But there is a general consensus that the rand will weaken in coming months, pushing up headline inflation.
Given these factors, food inflation will continue to be a key driver of headline inflation and could nudge headline inflation to 4% by the end of the year. We predict food inflation levels to reach up to 6%, with the effect of global commodity price increases in January manifesting in retail food prices.
• Louw is a senior agricultural economist at Absa Agribusiness. Vermeulen is consumer economics division manager at the Bureau for Food and Agricultural Policy.
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