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South Africa faces food-price shock

As rand adds to drought woes.
South Africa is sitting on a food-price time bomb.
The effect of the worst drought in more than two decades is being compounded by the rand’s 18 percent plunge against the dollar this year to a record, boosting the cost of imports of corn, a staple food in the country that’s also used in animal feed. Food inflation is set to accelerate to above 10 percent by the middle of next year, more than double the current pace, according to forecasts from Stanlib Asset Management Ltd. and Macquarie Group Ltd.

“South Africa is facing a convergence of factors on food — global food pressure, currency and the domestic drought — you’ll see that become much more evident when you start importing more,” Kevin Lings, the chief economist at Stanlib in Johannesburg, said by phone. “Ultimately, this will be forced through to the consumer.”

Corn prices have surged by more than 50 percent this year in South Africa, while dry weather caused by the El Nino weather pattern has disrupted planting. A price shock may hurt consumers already facing job cuts and higher interest rates, further dragging down an economy that narrowly missed falling into recession this year.

Food’s 14 percent weighting in the consumer price index is the largest after transport and rising costs have the potential to drive inflation higher. The Reserve Bank has already raised its benchmark interest rate four times since the beginning of last year to 6.25 percent as it forecasts inflation will breach the 3 percent to 6 percent target band next year.

The last time food inflation was above 10 percent was between October 2011 and January 2012, when the worst drought in a quarter of a century ravaged crops in the U.S., the largest producer of corn. At that time, the central bank was cutting interest rates even though inflation was above 6 percent and the rand traded at an average of 8.08 to the dollar.

Now, inflation is sitting at 4.7 percent, while the rand reached a record low of 14.4410 per dollar on Nov. 16. The price of yellow corn, known as maize in South Africa and used to feed animals, surged 47 percent this year to an all-time high of 3,215 rand ($227.25) a ton this month on the South African Futures Exchange in Johannesburg. White corn, which is processed and eaten as a stiff porridge, has climbed 52 percent.

“To the extent that we’ve got a shortage of maize or some of the products, like meat, we will have to import that,” Reserve Bank Governor Lesetja Kganyago said on Nov. 19 after raising borrowing costs. “An acceleration in food-price inflation is likely, adding to the upside risk to the inflation outlook.”

Poorer households are the hardest hit because a third of their expenditure goes to food, more than three times the proportion that wealthier families spend, according to data from the statistics agency.

Social tension

That may intensify social tension in a country where one in four South Africans are unemployed and protests regularly erupt across townships because of a lack of adequate government services, such as water and sanitation.

“The country at the moment is in such a space that it can hardly come up with quick fixes, but at the same time the government will fear the social disturbance that may come with food riots,” Somadoda Fikeni, a political analyst at the University of South Africa in the capital, Pretoria, said by phone. “It could become a burning issue.”

Consumers have so far been sheltered from the worst of the currency’s slump.

Companies such as Tiger Brands Ltd., the country’s largest food producer, have absorbed cost increases rather than pass them onto consumers in an environment of weak demand, putting pressure on earnings. 

The profit margin for Tiger Brands’ grocery business has fallen to about 10 percent from as much as 15 percent in 2008, Peter Matlare, the chief executive officer of the Johannesburg- based company, said in an interview on Nov. 19.

“If the cost push is one rand, the consumer doesn’t absorb the full rand,” Matlare said. “When you put those costs increases through, you’ve got to wait a bit.”

Prices may escalate as global pressures increase. An index of 73 food prices rose 3.9 percent in October, the biggest jump since July 2012, the United Nations Food & Agriculture Organization wrote in a report this month.

“Food inflation should’ve moved up already,” Stanlib’s Lings said. “You’re already seeing the pressure everywhere.”

©2015 Bloomberg News

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