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Food prices seen falling as fuel costs drop

| Economic factors

Food prices should drop in coming months after the sharp fall in oil and fuel prices, but declines will not be significant, say local food producers.

Oil prices have fallen in recent months and this week reached a nearly six-year low of $45.70 a barrel. Lower oil prices have helped bring down inflation in SA and lower the petrol price by a cumulative R3.09/l since August last year. Lower petrol prices are good for producers, particularly those whose food products are transported by road.

Grain SA CEO Jannie de Villiers said food prices should fall in coming months as producers benefit from lower transport costs. He said 50% of grain transport costs were usually fuel costs as imported wheat was moved from Durban to Gauteng.

"If fuel prices come down, then the prices of maize meal and bread should also be lower," he said.

The prices of some grains were already "fairly low" compared with last year, he said.

The latest Statistics SA figures show food inflation has fallen in recent months from a high of 9.5% year on year in August last year to 7.7% in November.

The prices consumers pay for food, however, are determined not only by producers’ transport costs but also by input costs such as electricity and labour.

Both these costs are set to rise even further this year, with Eskom being granted an almost 13% electricity tariff increase for this year while workers continue demanding above-inflation wage increases. Supply and demand also play a role in the final price consumers pay at the tills.

Red Meat Producers’ Organisation CEO Gerhard Schutte said producer prices could fall 2%-5% and these benefits could be transferred to consumers.

"There are other supply and demand issues that we are facing that will mean prices will not come down significantly," he said.

He cited one of these factors as a drought that caused meat producers to implement "emergency slaughtering" and played a role in lowering supply.

The UN Food and Agriculture Organisation (FAO) food price index last week fell 3.2 points to 188.6 points last month.

The index was on a downward trend between March and September, remained fairly stable in October and November, and fell again last month. It tracks the prices of cereal, vegetable oil, dairy, meat and sugar. The indices representing vegetable oil, dairy, meat and sugar all fell.

That for cereals rose, driven primarily by a rise in wheat prices, which more than offset a decline in rice quotations.

The FAO said concern about the possible introduction of restrictive export measures by Russia pushed up wheat prices, and a general strengthening of the dollar and weak trade activity limited the increase.

Rice prices fell sharply, reflecting a combination of abundant export supplies and sluggish import demand, the FAO said.

Lower fuel prices in SA have improved the inflation outlook but the weak rand makes imported commodities more expensive and threatens the outlook.

The improving inflation outlook is among the reasons most economists expect no change in interest rates when the Reserve Bank’s monetary policy committee meets later this month.

The World Bank said on Tuesday that where economic growth had been weak and inflation elevated in countries such as Brazil and SA, "monetary policy would gain room for greater accommodation if inflation pressures and inflation expectations eased".

The Bank warned that if the pass-through of currency depreciation intensified inflation expectations, central banks would have to weigh their options. "Rate hikes could stem inflation but would trigger a stronger cyclical slowdown in growth," it said.

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