News / Local
SA consumers face higher prices in 2022
02 Dec 2021 at 05:25hrs | Views
Various product prices are rising rapidly across the globe as the world opens after months of lockdown. As a result, food prices have been in the headlines, and SA is no exception.
As a case in point, consumer food price inflation averaged 6,6 percent over the past 10 months, compared with 4,5 percent in 2020. For a society like ours, where food constitutes a significant share of spending for poor households, a rise in prices is always concerning. It is therefore critical to understand if the recent increases are temporary or could persist.
It is in this context that we look into the products that have been at the core of the rise in SA food basket prices over the past year. Here, meat, grains and vegetable oils have been the major drivers.
For meat, global prices have been rising since the second half of 2020 and had such a dramatic impact on inflationary effects that some analysts are colloquially referring to the past months as a period of "meatflation". This upward trend was largely underpinned by the global economic recovery and stimulus packages, which coincided with the opening of the hospitality sector and an increase in the demand for meat.
In the case of red-meat trade, disruptions such as beef export restrictions from Argentina and temporary bans on Brazilian beef exports due to traces of bovine spongiform encephalopathy, commonly known as mad cow disease, have further worsened already high global prices. Though SA exports only a small share of local beef production, this share inevitably creates a link to global markets, and hence global effects spilt over to SA price trends.
Locally, the upward trends mentioned above were further amplified by supply constraints such as high feed costs and the ongoing cattle and sheep herd rebuilding process after the 2015-2016 drought. This weighed on slaughter numbers, and in the first nine months of 2021, cattle and sheep slaughterings were down 2 percent and 4 percent respectively compared with the same period in 2020.
In the case of poultry, the link to global dynamics is more pronounced as SA relies on imports for about 20 percent of local consumption. Global production recovered slower than demand due to various disease outbreaks, notably avian influenza (bird flu) in Europe, and persistently high feed costs, which constrained production growth since the beginning of 2020. This lagging supply response was a key factor driving higher global prices. In the local market, global dynamics were amplified by a weaker exchange rate, higher trade and shipping costs, and cost pressures in local production emanating from the higher feed prices.
We expect that many of the fundamental factors that underpinned meat price trends, both in the global and local markets, will persist into 2022, but their effect on further price growth could moderate.
An important contributing factor to this moderation in price growth is the continued expansion in China's meat production volumes after a period of rapid pig herd rebuilding along with growth in poultry production, which should reduce their import demand. The restructuring of China's pork production after the African swine fever outbreak of 2018 can support significant productivity gains in the coming years. As a result, our view is that meat inflation could ease, even if prices remain firm.
Animal feed
In grains and oilseeds, despite the recent two ample domestic crops, SA's grain and oilseed prices have increased since mid-2020. Here, global factors were again at play, with global prices for maize and soya beans surging due to firm demand from the animal feed industry in China owing to the pig herd rebuilding and a relatively poor harvest in the 2020/2021 production season in Brazil and Argentina. The latter was a result of a La Niña system that brought drier conditions to these regions.
In addition to this, strong global demand for ethanol and biodiesel production provided upward pressure on global grains and oilseeds prices since the start of 2020. The demand for biofuels has gained momentum, underpinned by global goals to move away from fossil fuels to more sustainable energy sources. This reaffirmed the link between agricultural commodities and crude oil prices, which have surged as global crude oil production lags behind the rate of global economic recovery and, as a result, pulled agricultural commodity prices along with it.
For oilseeds specifically, demand increases were further worsened by insufficient investment in palm plantations and below optimal harvesting due to constraints in migrant labour availability.
This constrained palm oil supply in Malaysia came at a time when oilseed production in Canada and parts of Europe also declined. The result was a strong surge in vegetable oil prices globally. For example, in October the UN Food & Agriculture Organisation's vegetable oil price index increased 10v month-on-month and 74 percent year on year, to a record high. Because SA is a net importer of vegetable oils and fats (palm and sunflower seed oil), these markets are influenced by global dynamics. Domestically, a depreciating trend in the exchange rate has also contributed to sustained higher prices.
Our view for grains and oilseeds is that most of the factors that resulted in rapid price growth will persist over the medium term. For instance, global crude oil production will continue to trail demand due to insufficient explorations and investments in crude production and supply management by oil cartel Opec. This is likely to sustain strong demand for biofuels and, in turn, grains and oilseeds, which will provide price support. If the weather in key production regions such as South America and the US permits, we could see higher global production in response to favourable commodity prices, and this could start exerting modest downward pressure on prices.
However, we expect this effect to be modest due to relatively low global stock levels and strong demand. It would take more than one production season for sufficient global grain and oilseed supply to normalise prices. We are aware we are in a period of lingering La Niña, which, as seen during 2021, could bring drier conditions in South America, which could influence the global crop. A poor harvest in this major grains and oilseed producing region would provide upward pressure on global prices.
Further broad-based factors that contributed to inflation across most of the subcategories in the food inflation basket include delays and high costs in global shipping, rapid increases in local electricity costs combined with inefficient electricity distribution, and rising fuel costs. Globally, supply challenges related to the pandemic and logistical constraints have resulted in shipping costs more than doubling compared with pre-pandemic rates.
Locally, load-shedding and infrastructure issues have, in turn, affected manufacturing and distribution costs, which resulted in significant cost pressures in local supply chains. Our view is that these challenges will continue to factor into inflation in 2022. Analysts note that increased shipping container capacity is only likely to become available towards the end of 2022, while in SA load-shedding will remain a reality, and another 20 percent hike in electricity tariffs for the coming year is on the cards.
We look to 2022 with a sense of caution that consumer food prices could remain elevated. While the pace of price increases might soften, households could remain under pressure for a while as the world and local supply chains adjust.
As a case in point, consumer food price inflation averaged 6,6 percent over the past 10 months, compared with 4,5 percent in 2020. For a society like ours, where food constitutes a significant share of spending for poor households, a rise in prices is always concerning. It is therefore critical to understand if the recent increases are temporary or could persist.
It is in this context that we look into the products that have been at the core of the rise in SA food basket prices over the past year. Here, meat, grains and vegetable oils have been the major drivers.
For meat, global prices have been rising since the second half of 2020 and had such a dramatic impact on inflationary effects that some analysts are colloquially referring to the past months as a period of "meatflation". This upward trend was largely underpinned by the global economic recovery and stimulus packages, which coincided with the opening of the hospitality sector and an increase in the demand for meat.
In the case of red-meat trade, disruptions such as beef export restrictions from Argentina and temporary bans on Brazilian beef exports due to traces of bovine spongiform encephalopathy, commonly known as mad cow disease, have further worsened already high global prices. Though SA exports only a small share of local beef production, this share inevitably creates a link to global markets, and hence global effects spilt over to SA price trends.
Locally, the upward trends mentioned above were further amplified by supply constraints such as high feed costs and the ongoing cattle and sheep herd rebuilding process after the 2015-2016 drought. This weighed on slaughter numbers, and in the first nine months of 2021, cattle and sheep slaughterings were down 2 percent and 4 percent respectively compared with the same period in 2020.
In the case of poultry, the link to global dynamics is more pronounced as SA relies on imports for about 20 percent of local consumption. Global production recovered slower than demand due to various disease outbreaks, notably avian influenza (bird flu) in Europe, and persistently high feed costs, which constrained production growth since the beginning of 2020. This lagging supply response was a key factor driving higher global prices. In the local market, global dynamics were amplified by a weaker exchange rate, higher trade and shipping costs, and cost pressures in local production emanating from the higher feed prices.
We expect that many of the fundamental factors that underpinned meat price trends, both in the global and local markets, will persist into 2022, but their effect on further price growth could moderate.
An important contributing factor to this moderation in price growth is the continued expansion in China's meat production volumes after a period of rapid pig herd rebuilding along with growth in poultry production, which should reduce their import demand. The restructuring of China's pork production after the African swine fever outbreak of 2018 can support significant productivity gains in the coming years. As a result, our view is that meat inflation could ease, even if prices remain firm.
Animal feed
In grains and oilseeds, despite the recent two ample domestic crops, SA's grain and oilseed prices have increased since mid-2020. Here, global factors were again at play, with global prices for maize and soya beans surging due to firm demand from the animal feed industry in China owing to the pig herd rebuilding and a relatively poor harvest in the 2020/2021 production season in Brazil and Argentina. The latter was a result of a La Niña system that brought drier conditions to these regions.
In addition to this, strong global demand for ethanol and biodiesel production provided upward pressure on global grains and oilseeds prices since the start of 2020. The demand for biofuels has gained momentum, underpinned by global goals to move away from fossil fuels to more sustainable energy sources. This reaffirmed the link between agricultural commodities and crude oil prices, which have surged as global crude oil production lags behind the rate of global economic recovery and, as a result, pulled agricultural commodity prices along with it.
For oilseeds specifically, demand increases were further worsened by insufficient investment in palm plantations and below optimal harvesting due to constraints in migrant labour availability.
This constrained palm oil supply in Malaysia came at a time when oilseed production in Canada and parts of Europe also declined. The result was a strong surge in vegetable oil prices globally. For example, in October the UN Food & Agriculture Organisation's vegetable oil price index increased 10v month-on-month and 74 percent year on year, to a record high. Because SA is a net importer of vegetable oils and fats (palm and sunflower seed oil), these markets are influenced by global dynamics. Domestically, a depreciating trend in the exchange rate has also contributed to sustained higher prices.
Our view for grains and oilseeds is that most of the factors that resulted in rapid price growth will persist over the medium term. For instance, global crude oil production will continue to trail demand due to insufficient explorations and investments in crude production and supply management by oil cartel Opec. This is likely to sustain strong demand for biofuels and, in turn, grains and oilseeds, which will provide price support. If the weather in key production regions such as South America and the US permits, we could see higher global production in response to favourable commodity prices, and this could start exerting modest downward pressure on prices.
However, we expect this effect to be modest due to relatively low global stock levels and strong demand. It would take more than one production season for sufficient global grain and oilseed supply to normalise prices. We are aware we are in a period of lingering La Niña, which, as seen during 2021, could bring drier conditions in South America, which could influence the global crop. A poor harvest in this major grains and oilseed producing region would provide upward pressure on global prices.
Further broad-based factors that contributed to inflation across most of the subcategories in the food inflation basket include delays and high costs in global shipping, rapid increases in local electricity costs combined with inefficient electricity distribution, and rising fuel costs. Globally, supply challenges related to the pandemic and logistical constraints have resulted in shipping costs more than doubling compared with pre-pandemic rates.
Locally, load-shedding and infrastructure issues have, in turn, affected manufacturing and distribution costs, which resulted in significant cost pressures in local supply chains. Our view is that these challenges will continue to factor into inflation in 2022. Analysts note that increased shipping container capacity is only likely to become available towards the end of 2022, while in SA load-shedding will remain a reality, and another 20 percent hike in electricity tariffs for the coming year is on the cards.
We look to 2022 with a sense of caution that consumer food prices could remain elevated. While the pace of price increases might soften, households could remain under pressure for a while as the world and local supply chains adjust.
Source - Business Day.
