Food prices keep rising

2014-06-01 15:00

Volatile wheat and maize prices are the leading contributors to higher prices

Rising food prices have significantly compromised consumers’ disposable income, forcing them to dig deep in their pockets to pay for basic foods.

The latest inflation figures show overall inflation at 6.1%, but the food inflation basket, weighted at 14.2% of the total, is at 8.2%.

Bread and cereal prices rose 10.2%, indicating volatile wheat and maize prices are the leading contributors to higher food prices.

Grain SA economist Wandile Sihlobo said the increase in the demand for domestic white maize that occurred between November and January, as well as political instability in Ukraine, are the reasons behind high retail food prices.

“There was a sudden increase in the demand for white maize by Zimbabwe and Mexico late last year until January. Zimbabwe imported 27% (246?000 tons) of its white maize from us and Mexico imported 21% (190?000 tons). This sudden demand for white maize resulted in the price increase. What we are experiencing now is the lag impact of that increased demand of maize during those months,” said Sihlobo.

This is shown in the bread and cereals inflation amount, which rose from 4.3% in December to its current 10.2%.

Food shortages in Zimbabwe forced its government to import maize from neighbouring countries to augment local production.

Grain SA chairperson Louw Steytler said President Robert Mugabe’s land reforms made food security a real issue because Zimbabwean farmers couldn’t produce enough to feed themselves. This caused a strain on local maize production as the increase in international demand for local maize led to higher food price inflation.

The other reason behind higher food prices and the high bread and cereal inflation is the price of wheat.

Sihlobo said: “In 2013/14, we [South Africa] imported 41% of our wheat from Russia and 29% from Ukraine. Geopolitical issues in that region and fears of instability caused an increase in wheat prices because there was a fear there would be a shortage.”

According to him, the political instability in Ukraine and Russia forced wheat importers to look to Germany and Australia. “Within that period, 11% of wheat was imported from Germany and 5% from Australia. This meant importers were double hit by the more expensive exchange rate with these countries,” Sihlobo said, adding that the stability of wheat prices “will depend on the new president of Ukraine’s ability to stabilise the political situation between his country and Russia”.

Bread and cereals food inflation escalated from 4.6% in January to 7.4% in February, and continued to increase to 9.2% in March.

The volatile rand also affected the price of wheat, making imports more expensive. Bread and cereal inflation accelerated from 4.3% in December to 10.2% in April.

The weakening rand also contributed to the volatility in petrol inflation, which increased from 10% in December to its highest level of 14.7% in January.

Petrol inflation has since declined because the rand gained strength against major currencies between January and April.

The rand reached R11.39 to the dollar in January, the highest level since the 2008 global financial crisis. It is now trading at around R10.40 to the greenback, resulting in falling food price inflation.

Sihlobo said maize prices have declined but consumers will only enjoy the benefits of low prices in the coming months because of the lag effect.

This was reiterated by SA Reserve Bank Governor Gill Marcus in her Monetary Policy Committee address, where she said although there was evident pressure in the agricultural producer price inflation for cereals, which was measured at 26.5% in March, the negative outlook on food prices and especially agricultural produce inflation is more likely to moderate “following the sharp reversal in domestic maize prices and the low global food inflation”.

Investec chief economist Annabel Bishop agrees that currency and agricultural price lag effects are still evident in food inflation. But the “upside pressure”, according to her, “should dissipate because of favourable weather conditions and a sizeable harvest which have reversed the maize price increase by nearly 40%”.

Bishop added that the lag effects will be less pronounced in the second quarter of the year, which suggests “more contained food prices”.

Other factors that contributed to the above 6.1% overall inflation were books and newspapers, water services and hotel price increases – all of which rose by between 8% and 12%.

Telecommunications equipment seems to be the only item that didn’t negatively affect inflation, showing a 10.6% decline.

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