Food price inflation uptick temporary
Agricultural Business Chamber(Agbiz) said that the recent uptick in the South African food price inflation could be temporary.
Agbiz chief economist Wandile Sihlobo said that South Africa’s food price inflation accelerated to 4.8 percent in May 2020, from 4.6 percent in the previous month.
“This uptick was mainly underpinned by relative price rises of milk, eggs and cheese oils and fats, and fruit. Meanwhile, other products’ price inflation slowed and some remained roughly unchanged. In the case of eggs, the sharp demand at the start of the lockdown period was, in part, a key driver of the uptick in prices in May and also the previous month. In terms of oil and fats, South Africa imports a notable share, therefore the weaker ZAR/USD partially supported the prices. We were surprised by a notable uptick in fruit prices as the country has large supplies this year. And we think this could be a temporary blip,” said Sihlobo.
The Agbiz said that their overall view on South Africa’s food price inflation remains roughly unchanged from what we argued last month. Sihlobo said that what would essentially matter the most for the direction of food price inflation this year were developments in the grains, meat markets and fruit as these three food categories accounted for nearly two-thirds of South Africa’s food price inflation basket.
Sihlobo said that the outlook for South Africa’s grain production was positive, with the maize harvest estimated at 15.5 million tonnes, which was the second-largest harvest on record. The global wheat and rice prices of which South Africa was a net importer could soften in the coming months due to large supplies. The USDA forecasted the 2020/21 global wheat and rice harvest at 761 million tonnes and 502 million tonnes, each respectively up by 1 percent. The slightly firmer ZAR/USD, and if sustained, would bode well for imported products amid subdued international oil prices.
Agbiz said secondly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. This year, the base effect of 2019 would mean that meat price inflation could show a mild uptick.
Sihlobo said that thirdly,South Africa had a generally good fruit harvest this year, with the citrus industry recently noting a 13 percent increase in available supplies for export markets. He said this could keep prices at relatively lower levels this year. There was also a broad recovery in the production of deciduous fruit, with apple and pear production up by 5% y/y and 1% y/y, respectively in 2020.
“Against this backdrop, we still think that South Africa’s food price inflation could average
around 4 percent in 2020 from 3.1 percent in 2019. The upside pressure would largely come from meat; it will mainly be base effects in the case of red meat, and an uptick in poultry products prices on the back of a recent tariff adjustment,” said Sihlobo.
Economist Dr Thabi Leoka said that she still believed that South Africa’s inflation would remain muted because while there was a general uptick in food price inflation, other aspects were relatively flat. She added that the agricultural sector was currently seeing a rebound from drought and the likes of the foot and mouth diseases hence the normalisation which was generally characterised by the uptick and good harvests. She added that the sector had not seen any interruptions and enjoyed good weather, but would not necessarily make a huge impact in the broader SA inflation.
University of Johannesburg Economics senior lecturer Dr Peter Baur said that while transport and fuel prices had decreased, production expenses should have lessened however this was not the case. “Household disposable income lessened due to high unemployment rate and the low labour absorption rates. The money that is left is going to food and creating a great demand. The slowdown in trade was also a factor leading to the general uptick in food price inflation,” said Baur.
He added that with many businesses affected and many people having lost their jobs, high food prices were a devastation putting pressure on the unemployed, pensioners and dependants.