WANDILE SIHLOBO: Drought and heatwaves make for rocky food inflation outlook

The damaging effects of persistent dryness and heatwaves in SA’s summer crop growing regions have raised concern about a possible rise in consumer food inflation in the coming months. With food price inflation averaging 11% in 2023 (from 9.5% in 2022, 6.5% in 2021 and 4.8% in 2020), which was relatively high compared with recent periods, talk of further upside pressure in inflation comes as an unwelcome development.

However, the underlying drivers of the increase in food inflation in the past two years were international agricultural commodity prices and, to a far smaller extent, idiosyncratic domestic factors.

The drought in South America, China’s strong demand for grains and oilseed, rising shipping costs, higher energy prices and the Russia-Ukraine war were some of the factors behind the higher global agricultural producer prices, which boosted domestic prices and led to relatively elevated consumer food price inflation in 2022 and 2023.

Also worth noting is that SA food manufacturers had to absorb some of the increases and did not pass them on in full to consumers, who were already under pressure because of weak economic conditions and higher unemployment in the country.

For example, in 2022, while consumer food inflation averaged 9.5%, produce price inflation for agricultural products was 15%, and food manufacturer inflation was 12.3%. This means manufacturers did not pass on the total costs to consumers, contrary to what some regulators have argued.

The factors that underpinned higher consumer food inflation in 2022 and 2023 have somewhat subsided. There are ample grain supplies in the global market, with the 2023/24 global maize harvest forecast at 1.2-billion tonnes, up 6% year on year, according to data from the International Grains Council. Wheat, rice and soyabean production levels are also solid.

These global production forecasts imply a general improvement in the stocks of these major commodities and a moderation in prices. For example, the UN’s Food & Agriculture Organisation recently released its food price index for February. The index measures the monthly change in international prices of agricultural commodities, not final food products. It averaged 117.3 points in February, down 1% from its revised January level and 11% from the corresponding period in 2023.

Other major factors driving SA’s food inflation over the past year were the increases in vegetable and poultry product prices. The poor harvest led to an increase in vegetable prices after load-shedding at the start of the year, undermining crop quality.

Things have changed in 2024. While it has been fairly dry across the country since the beginning of February, vegetable production has not taken strain because all commercial production in SA is under irrigation and load-shedding, while a risk, has not been as severe as at the start of 2023.

Moreover, the rise in meat prices at the end of 2023 was due to supply constraints of poultry products due to avian influenza. But there is now anecdotal evidence that the restocking process is under way and poultry product supplies have improved.

Considering the above developments, the major risks to consumer food inflation in SA in 2024 will primarily affect white maize products, which have been hardest hit by the current dryness in the central and western regions of the country. Meanwhile, other products within the food basket may moderate or show sideways movements in prices.

For wheat and rice, the exchange rate also matters, as SA imports about half its annual wheat consumption and all its rice consumption. Still, the challenge presented by persistent dryness domestically, at least over the near to medium term, relates to white maize supplies and the potential price reaction to reduced supplies.

In a nutshell, the consumer food inflation path for 2024 has increased uncertainty. However, the underlying factors are not all on one side, and one has to consider all the products’ price movements and their weighting when arriving at forecasts for the year.

• Sihlobo is chief economist at the Agricultural Business Chamber of SA and a senior fellow in Stellenbosch University’s department of agricultural economics.