Food makers buckle under drought, rand pressure

2016-01-22 06:00
PHOTO: sourced Key staples such as white corn doubled while wheat rose 25%.

PHOTO: sourced Key staples such as white corn doubled while wheat rose 25%.

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SOUTH Africa’s worst drought on record, a plunging currency and debt-burdened consumers are weighing on the country’s biggest food producers, who may sacrifice profits in order to keep prices affordable and preserve market share.

The shares of food producers including Pioneer Food Group and RCL Foods have this month fallen to the lowest in more than a year as local prices of key staples such as white corn doubled over the same period while wheat rose 25%.

As the worst drought since records started in 1904 decimates food crops, import costs are surging, with the rand losing 30% against the dollar since the start of last year.

Apart from rising food prices, consumers’ spending power will be curbed by probable rate increases in a country where debt exceeds 78% of households’ disposable income, Lullu Krugel, an economist at KPMG LLP said by phone.

Tiger Brands, the largest producer of foods by market value, last week declined to the lowest level since June 2015, while Pioneer Food, the second-biggest, dropped to the lowest since December 2014 on Friday. RCL Foods, which makes chicken, fell to the weakest since November 2012.

Food prices are expected to increase by as much as 25% in the year ending April 2017, said Ronald Ramabulana, chief executive officer of the National Agricultural Marketing Council.

Higher input costs doesn’t necessarily imply sacrificing margins, Phil Roux, CEO of Pioneer Food, said in an email.

The company is the largest seller of maize meal, derived from white corn and used to cook a staple porridge known as pap.

Tiger Brands is investing in its operations to reduce the cost of manufacturing food, which will help offset the effect of pricier ingredients, said Nikki Catrakilis-Wagner, the head of investor relations.

This year “will be tough,” she said by email.

Smaller food producers such as Rhodes Food Group, which produces canned goods and supplies prepared meals to retailer Woolworths Holdings, may perform better than its peers because it is not as dependent on drought-hit grains such as corn or wheat as their larger peers, Klipin said.
- News24.

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