Brace for higher food prices

It appears that SA’s already hard-pressed consumers will face a swathe of higher food prices in the coming months.

Factors like a weak rand and the severe drought, which has hit large parts of SA’s agricultural land with the Western and Eastern Cape slightly spared, are expected to drive up food inflation.

Efficient Group chief economist Dawie Roodt says its house view is that food inflation will accelerate to 12% by the end of the year – well below other bearish inflation expectations of about 15%. Other factors like high unemployment levels, tepid economic growth and a potential downgrade of the country’s credit rating, are factored in.

The benchmark consumer price inflation (CPI) for food and non-alcoholic beverages increased by 8.6% (year-on-year) in February, latest Statistics SA figures show. Overall, CPI was 7% during the period – the highest rate since May 2009 when the rate was 8%.

However, those likely to be feeling the pinch before consumers are food manufacturers. A pressing threat is whether the El Niño drought – believed to be one of the worst on record – could intensify and cause further deterioration.

Estimates for crop harvest are bleak, as the Department of Agriculture’s Crop Estimates Committee is forecasting that the country’s grain (white and yellow maize) harvest is expected to decline by 25% during the 2015/16 agricultural season.

The decline in the harvest of white and yellow maize– typically used in maize meal, wheaten products, and animal feed – will result in the drop of production volumes for farmers, sparking grain shortages in SA. It is expected that maize will have to be imported, pushing up the prices for manufacturers from import parity pricing, to export parity pricing.

Says Stanlib chief economist Kevin Lings: “The [drop in] crop harvest estimates will be worse if we don’t get follow up rain. Many farmers would have to be done with planting crops by December. Farmers are planting in January and even February. It’s risky, because if you have an early winter, then that will destroy crops”.

Adding further pressures for farmers and manufacturers is sustained rising electricity and labour costs and the increase in wheat import duty.

Counting the costs

Food manufacturers are reporting higher input costs for raw materials like maize, wheat, and milk, which affect household staple items like bread, pasta, dairy products, rice, flour and breakfast cereals. On the latter, cereal inflation has already risen by 52% in recent months.

Any rise in prices will be passed on to food retailers who inevitably pass on the costs to consumers, resulting in the ramp up of food inflation.

Food and beverage manufacturer Pioneer Foods, which owns brands like Sasko, Bokomo Cereals, White Star Super Maize Meal, Spekko Rice, Ceres Fruit Juices and more, says the increase in the cost prices of raw materials cannot be absorbed by any food processing company, thus passing the costs to retailers becomes inevitable.

“This means the consumer can expect to pay more for maize-related products and other affected products in the near future. To this end, price adjustments have been in progress for some time, and will continue for a while still,”  the company told Moneyweb.

Grocery retailers

In recent years, SA’s grocery retailers have been absorbing higher costs from producers and holding off on food increases to maintain market share and court more shoppers into stores.

Results released since January show that retailers are still being aggressive in maintaining their prices, if their internal inflation figures (which were well below CPI) are anything to go by. Internal inflation is a key metric used by retailers to assess the price movements of their selected goods, but retailers don’t usually disclose their actual pricing strategy for competitive reasons.

Sector heavyweight Shoprite had the lowest internal inflation for the six months to December 2015 at 2.2%, compared with 5.2% in the corresponding period.  “Shoprite has kept inflation well below the official figure in order to squeeze other retailers for market share,” says Anthony Rocchi, a portfolio manager with Rexsolom Invest.

Shoprite CEO Whitey Basson noted that it’s unavoidable that “competition among retailers in SA would intensify and this has put margins under pressure as everyone battles for their share of the consumer’s rand”. Because of its focus on the lower LSM, Shoprite’s performance is viewed as a litmus test for the financial health of consumers.

Woolworths, which traditionally targets consumers in the LSM 8 to 10 segments, saw a food price movement of 5.7% for the 26 weeks to December 27 2015. Pick n Pay and Spar are yet to report their interim earnings.

Rocchi says the low pricing strategies of retailers is not sustainable given market pressures faced by producers. Miles Dally, CEO of RCL Foods, which owns brands like Supreme Flour, YumYum, Ouma, SunBake and more, supports Rocchi’s view, saying retailers are generally resisting price increases but “in some cases price increases have been pushed through”.

“We expect that consumers and customers will tighten their belts in 2016, looking to cut costs where possible resulting in customer push-back in response to proposed price increases and possible government price regulations on staples,” Dally adds. Lower LSM consumers, who spend a large percentage of their income on food items, are likely to be hit the hardest.

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