Why a good harvest doesn’t always mean low food prices

Rising food prices continue to dominate the headlines, domestically and globally.

It is not unusual for one to see complaints about rising sunflower oils or broader headline food price inflation on the domestic front.

This has, in turn, raised questions of how this could be in a year of abundant agricultural harvest?

The answer goes back to the fact that SA is interlinked to the global food system, which is facing an uptick in prices.

Consider sunflower oils: SA imports on average 197 342 tons per annum over the past five years. Additionally, SA imports, on average, 477 185 tons of palm oil a year.

The global prices of these products have been on an upward trajectory for months, with the global vegetable oil prices in May reaching the highest level since 2011.

These increases are caused by the combination of lower supplies in Southeast Asian countries, specifically for palm oil, and rising demand for sunflower oils and soybeans, particularly in China and the global biodiesel sector.

If one observes recent consumer food price inflation data, oils and fats were among the categories showing the fastest increases within the food basket in May’s CPI release.

Also worth noting is that, unlike other domestic summer crops which are set to increase in the 2020-21 season, SA’s sunflower seed production is down 9% year-on-year (y/y), which necessitates the need for imports.

In May, SA’s consumer food price inflation accelerated at the fastest pace since July 2017, measured at 6.8% y/y, from 6.7% y/y in April 2021.

The underpinning drivers were oils and fats, meat, vegetables and, to an extent, staple grain-related products. Grains products prices are at relatively higher levels because of the surge in global prices.

SA had its second-largest grains harvest on record, and maize prices are at export parity levels.

This has not led to a decline in domestic maize prices, mainly because of the 56% increase in export parity prices in 2020-21.

Export parity prices are derived from the global maize price, multiplied by the exchange rate, minus transaction costs, and can be regarded as a “floor price”.

As domestic prices trade closer to export parity levels, SA maize becomes more competitive in international export markets, triggering an increase in volumes of exports or demand by foreign buyers.

Wandile Sihlobo is the chief economist of the Agricultural Business Chamber of South Africa (Agbiz) and a visiting research fellow at the Wits School of Governance.