International overview
The FAO Food Price Index was 13,1% higher in July 2022 compared to July 2021, but the index declined for the fourth consecutive month (decreasing by 8,6% from June 2022). This was driven by a significant decline in commodity prices for vegetable oils and cereals, with less severe declines observed for sugar, dairy and meat.
Declining commodity prices are mainly linked to the agreement between Ukraine and Russia to unblock Ukraine’s main ports in the Black Sea, indicating the pending reopening of exports from Ukraine, combined with subdued demand from China. However, further declines in global commodity prices could be halted by uncertainty around weather conditions in the Northern Hemisphere and BFAP is expecting a tug-of-war between bearish and bullish factors for the next couple of months.
Food inflation drivers and expectations
Inflation for food and non-alcoholic beverages reached 9,7% in July. This is comparable to levels last recorded in 2016/2017 – which was due to the widespread drought in South Africa.
The high levels of inflation are a culmination of numerous factors in global commodity and money markets. In this regard, the effect of the Russian invasion of Ukraine in late February, which caused prices for grains and oilseeds to surge during March and April, is likely still affecting local bread and cereal prices, which recorded inflation of 13,4% in July.
Research has shown that price shocks in local grain and oilseed markets take approximately three to four months to fully transmit to retail prices and although global prices fort hese commodities have eased over the past weeks, a weaker exchange rate and persistently high global shipping costs are keeping local commodity prices elevated. The weaker rand is largely the effect of high inflation and hawkish monetary policy around the globe and increased and intensive load shedding during June and July. Concerns around slower global growth result in pressure on emerging market currencies such as the rand.
Continued high grain prices are also affecting prices in the meat complex, where feed is a major cost driver, with inflation recorded at 9,4% for meat. Here, slaughter numbers for June are down almost 3% year on year for cattle, and this occured from a base that already recorded low slaughterings in 2022. Although slaugter statistics for July are not available yet, this trend is expected to have continued.
Poultry prices also continued to rise, following global markets, where persistent supply constraints in the Northern Hemisphere amid the continued spread of Avian Influenza have pushed the FAO poultry price index to an all-time high.
Vegetables also recorded substantial inflation of 8,3%. This is the result of two factors at play in South Africa: The first is wet and cool weather which affected yields for key vegetables over the past months. Secondly, consumer demand is also firm as certain vegetables serve as a possible substitute for high staple food costs such as maize meal.
It is BFAP’s view that food inflation is close to peaking – if the July figures were not at the peak already. The reason for this view is that commodity prices were higher in the latter half of 2021, which would result in lower base effects. This, combined with easing global commodity prices, and short-term outlooks for the exchange rate suggesting that the rand could trade at average levels of around R16,15, could result in food prices losing momentum.
The upside risk is the ban on cattle transport in an attempt to curb the spread of Foot and Mouth Disease (FMD), which was instituted in the third week of August. Any extension of the initial 3-week period could limit red meat availability towards the end of the year and during the festive season. If this is the case, meat prices would likely be a key contributor to food inflation during November and December and we could see food inflation figures gaining momentum again.
Crop quality issues and possibly lower yields due to hot and dry conditions in the Northern Hemisphere also remain a concern and could add to global price pressures towards the end of the year. This is however a developing issue and should be monitored closely over the coming months.
