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Jan 28, 2011

The impact of higher food prices on South Africa’s inflation remains highly uncertain

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The food price index rose to 215 points in December 2010, statistics released by the Food and Agriculture Organisation (FAO) of the United Nations show, with food commodity price indices having risen for sugar to 398 points, for oils and fats to 263 points, and cereals to 238 points.

In fact, up for the sixth month in a row and fuelled by increases in these food commodity price indices, the FAO index was at it highest level, in nominal terms, since records began in 1990, topping the high of 213,5 in June 2008 – a period characterised by food riots in some countries. Potentially compounding matters was an associated poll by the agency, which showed that oil would rise to a higher average of over $86/bl this year, which could further spur food inflation.

But what is the likely impact on food prices in South Africa?

Agri South Africa (Agri SA) economist Dawie Maree says that it is likely that food price inflation will increase this year, since the prices of most of South Africa’s food products are derived from international prices.

Agri Africa member and former National Agricultural Marketing Council chairperson Professor Eckart Kassier nots that the country has moved from being a net exporter to a net importer of food, which could make the country vulnerable. At the moment, the price sting has been lessened by the stronger rand, but the rebound in the currency has also hurt farmers and their exports.

But local exports and imports and their prices will be affected by the international food commodity prices and food price indices, depending on the magnitude of the inter- national price increases. Imports will become more expensive, which could mean that more locally produced produce is sourced, to the benefit of local producers, Maree says.

He adds that export earnings might also increase as prices increase, although a strong rand would counteract the benefit. However, this is dependent on the economic recovery of South Africa’s trading partners, of which the European Union is the largest, he says.

During 2010, South African consumers were not significantly affected by the sharp rise in global commodity prices, perhaps mainly owing to the strength of the rand, says Nedbank economist Carmen Altenkirch.

“More recently, there has been a more notice- able increase in some food prices at consumer level but overall food inflation still remains very low. However, if global agricultural prices continue to rise, or even remain at their current levels, they will begin to have a more noticeable impact on domestic inflation, particularly if the rand weakens,” she adds.

Investec analyst Annabel Bishop has argued that interest rates would likely remain unchanged in 2011, with a slight possibility of one more cut in rates, at best. However, this is assuming that food and demand pressures, in general, remain subdued.

Bishop warns that the benign consumer price index outlook could be influenced by certain food price pressures that could occur in the next year owing to current poor weather conditions. “If the late rains and patchy weather conditions continue to negatively affect crops, there is likely to be greater than currently expected upward food price pressure in 2011, while the year’s economic demand is expected to pick up to 3,6% year-on-year, compared with the previous 2,8%,” she said.

Altenkirch agrees that a food price increase is likely to put some upward pressure on consumer inflation, but says that it is unlikely to cause the Reserve Bank much concern. As a result, even with a slight uptick in consumer inflation, Nedbank believes that interest rates will remain unchanged this year and well into next year.

Edited by: Martin Zhuwakinyu
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