High grain prices are likely to have cost-push inflationary effects on livestock sectors and could result in persistently high food inflation during the first half of next year, said Casey Delport, an investment analyst for fixed income at wealth and asset management business, Anchor Capital.
For 2023 specifically, exchange rate movements and the progression of the southern hemisphere crop, mainly in South America, would be critical determinants in commodity prices and the direction of local inflationary data.
“It is important to note that South Africa continues to trade at export parity for key commodities such as maize, sunflower, soybeans, and canola. This essentially means that surplus production is keeping local prices low and that current inflationary trends are driven by global prices, the weak exchange rate and the growing costs of logistics and processing of products, such as transport, electricity, and wages,” Delport said.
This was amid increasingly uncertain global macroeconomic conditions, as the FAO Food Price Index (FFPI), which measures the monthly change in the international prices of a basket of food commodities averaged 135.9 points in October, –unchanged from September.
An upturn in the Cereal Price Index countered drops in vegetable oils, dairy, meat, and sugar indices. With this latest update, the index was 14.9% lower than its all-time high recorded in March, while it remained 2% above its October 2021 level.
Nonetheless, Delport said global food prices steadied in October, as supply disruptions wrought by Russia’s war on Ukraine were partly offset by slowing demand for staples.
Furthermore, good weather had bolstered supplies of crops like barley, and soaring inflation is curbing the trade of goods from cheese to pork. In turn, this has helped buffer supply shocks from the Black Sea.
Anchor Capital said that overall, this continued decline offered some relief to households grappling with a cost-of-living crunch. The index was down for a seventh month, its longest slump in nine years, and food inflation had begun to slow in nations from Indonesia to Paraguay.
Still, the firm said the index remained significantly elevated versus recent years, and the soaring US dollar was making it more difficult for food-importing countries to bring in supplies.
“Furthermore, it can take time for commodity price shifts to filter down to retail prices for consumers, and globally manufacturers are struggling with the additional higher expenses for labour and energy. Lastly, the trajectory of grain and vegetable oil shipments from Ukraine, a key determinant for food prices going forward, remains unclear.
“In that vein, grain prices rose 3% year-on-year in October – the only commodity group in the index to increase. This week, Russia resumed its part in the Ukraine crop export pact after a brief suspension that temporarily halted ships. The deal comes up for renewal in mid-November, and officials have yet to verify an extension,” Delport said.
In South Africa, the prices of food and non-alcoholic beverages increased by 11.9% year-on-year in September. The main inflation contributors were bread and cereals (+3.6% year-on-year), followed by meat (+3.1% year-on-year) and milk, eggs and cheese (+1.3% year-on-year). The major drivers behind the double-digit food inflation are global grain and oilseed price surges, which have been further exacerbated in the local context by a weakening exchange rate.
Although local maize price increases lost some momentum during August due to easing global maize prices, they gained renewed momentum in September on concerns regarding the size of the maize harvest in the northern hemisphere.
Subsequently, in early October expectations of another dry summer production season in South America, amid persistent La Niña conditions fuelled another maize price run. Delport said this was likely to keep bread and cereal inflation and food inflation in general at elevated levels for the remainder of 2022 and 2023.
At the end of last month, the Bureau for Food and Agricultural Policy’s Tracy Davids said South Africa’s food price inflation reached a multi-year high in September, a phenomenon largely driven by global dynamics and evident in many countries around the world.
“Among the various food groups contributing to inflation, meat is the largest at 32% and therefore, while the price of meat has not increased to the same extent as vegetable oil, bread and cereals, it has been a major driver of rising food inflation in South Africa. Within the meat basket, poultry (12%) and beef (8%) products make the largest contribution. Thus, it is worth considering the key factors driving meat prices and how these factors might evolve over the coming months,” Davids said.