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Only higher supply can help lower food prices in the short term, says Futuregrowth

21st September 2022

By: Marleny Arnoldi

Deputy Editor Online

     

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As the war in Ukraine rages and global inflationary pressure mounts, South Africa is unlikely to see reductions in key input costs – fuel and fertiliser – and, therefore, food prices will remain above pre-2020 levels, reports asset management company Futuregrowth.

South Africa’s overall rate of inflation in June was 7.4%, compared with June 2021, with the rate of increase in the prices of food and non-alcoholic beverages averaging even higher at 8.6% over the same period, the effects of which are felt directly by consumers.

On the positive side, agricultural producers should respond to higher agricultural commodity prices, hopefully leading to increased production.

According to data released in August by the Crop Estimates Committee, South African producers have increased their plantings of winter crops, notably wheat, barley and canola, for the 2022/23 season, to take advantage of higher prices.

Futuregrowth says production conditions for South African farmers will be critical, but higher supply should lead to somewhat normalised prices in the medium term.

The risk of extreme weather events, however, remains. Globally, farmers are feeling the ever-increasing effects of climate change and, consequently, the price of food increases.

This while the economic damage from the Ukraine war poses a material risk to global growth projects.

Futuregrowth explains that elevated inflation in this low-growth environment complicates the trade-offs to be managed by central banks, which must now balance the risks to growth and inflation, creating a material risk of entering a cycle of stagflation.

The asset manager has seen most central banks tighten monetary policy by increasing interest rates, which, in turn, places pressure on emerging markets and developing economies such as South Africa.

“A weaker rand makes agricultural imports more expensive in rand terms, which could place upward pressure on local food prices,” Futuregrowth explains.

Crude oil and natural gas prices, however, seem to have stabilised, albeit at higher levels than the historical average.

Futuregrowth cites Bloomberg consensus estimates, which expects energy prices to remain elevated in the near term, but to normalise by late 2023.

Linked to this, fertiliser costs are also expected to ease over the next 12 to 24 months, but at higher levels than historical norms.

“If anything is certain, it is that we are living in very uncertain times. Agricultural producers face an array of challenges, including an ongoing war and the ripple effect that various governments’ policies will have on the global and local economy,” Futuregrowth says.

The asset manager explains that Russia is a major supplier of gas to the European Union and a major exporter of petroleum oils. The ongoing war in Ukraine and sanctions against Russia had driven up energy and fuel prices since March.

According to Statistics South Africa, fuel prices were up 45.3% in June, the largest yearly increase for fuel since the agency's consumer price index series began in 2009.

Additionally, both Russia and Ukraine are major suppliers of key agricultural commodities. The conflict has, therefore, adversely affected international supply and consequently the prices of various commodities, including wheat, which is a staple food in many countries.

Russia is also a leading exporter of chemical fertiliser. South Africa is a net importer of fertiliser and, therefore, heavily impacted by global pricing pressures.

South Africa has seen a 60% increase in fertiliser prices this year to date – on top of a 50% increase that had already been absorbed in 2021 owing to Covid-19-related factors.

The war has affected shipping routes as many major shipping lines stopped routing produce to Russia, furthering supply chain and logistics issues and disrupting international trade. Some trade to Russia has since resumed, including from South Africa, but significantly reduced volumes are expected.

Other challenges unique to South Africa include uncertainty and upside risk to energy and labour costs, with State-owned power utility Eskom having applied to increase its tariffs by 32% in April next year, and with the country suffering from particularly weak transport and logistics infrastructure.

Futuregrowth elaborates that South Africa’s ports reflect productivity levels that are far below international benchmarks, owing to ageing port infrastructure and equipment, theft and vandalism, and flood damage having occurred in KwaZulu-Natal in April.

South African producers also have to pay high shipping costs, with the global container freight rate index having increased by more than 100% in 2021, with prices remaining far above historical levels at present.

This while the biggest agricultural funder in the country – the Land Bank – is suffering a liquidity challenge. The Land Bank once funded close to 30% of agricultural debt in the country.

Futuregrowth explains that the large, commercial agricultural operations are easily able to obtain alternative funding from commercial banks, but the smaller agricultural producers do not have this option.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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