Shoppers in South Africa should expect the trend of rising food prices to continue in the coming months, as rapidly rising agricultural producer price inflation could feed the higher cost of production onto consumers.
John van Tubbergh, sector head for Consumer, Food and Agri at financial services firm RMB, said that a number of the large food manufacturers have recently cited soaring prices of key agricultural products – used as inputs in the manufacturing of basic consumer foodstuffs – as a real threat to margins.
“(This) poses a conundrum for food manufacturers about whether to absorb these cost increases or try and pass them on to financially constrained consumers, fanning inflation worries,” he said.
Agricultural producer price inflation accelerated to 12.3% year-on-year in November 2020, before settling at a still high 7.2% in March 2021. The inflation rates for cereals and other crops, a along with dairy products are 17.2% and 12.6% respectively – while producer price inflation for live animals and animal products is 9.8%.
Combined, cereals, dairy and animal products make up nearly 60% of the agricultural producer price basket, van Tubbergh said, adding that price pressures at the agricultural level are also beginning to drive manufacturing costs up.
“From subdued levels of around 4% last year, manufactured producer food price inflation has quickened from 6.9% year-on-year in February to 8.1% in March. This rate now well exceeds CPI food price inflation which means gross margins of food manufacturers are getting squeezed.
“Amid a still weak economy with households financially under strain this leaves food manufacturers with some difficult decisions to make,” he said.
Food manufacturers have already responded to rising production costs by cutting internal costs and optimising processes in order to help reduce the pressure on margins, van Tubbergh said.
Work-from-home dynamics have also given food manufacturers some wiggle room – with increased food demand giving manufacturers space to raise selling prices.
“But even so, it will be difficult for them to continue hiking prices as much as they would like,” he said.
Simply hiking prices may not be the answer, however, as consumers are extremely sensitive to price hikes at present – something manufacturers will be bearing in mind.
Consumers have had to face many financial challenges, including higher fuel prices, increased municipal rates and taxes, and many who had to accept zero salary increases or pay cuts because of the Covid-19 lockdowns.
Food prices have already increased significantly over the past year, with several industry reports pointing to food inflation far above CPI.
- For South Africa in general – Statistics South Africa’s Consumer Price Index in February 2021 shows that inflation on food & non-alcoholic beverages is 5.2%
- In urban areas – the National Agricultural Marketing Council’s Food Price Monitor shows that inflation on their basic urban food basket is 9.8%
- For poor households – PMBEJD data off from Pietermaritzburg Household Affordability Index, annualised for March 2021, shows that inflation on Household Food Basket is 12.6%
The PMBEJD in particular has warned consumers to expect food prices to increase even further, likely to be up by 10% for the year.
This is because recent fuel price hikes and a run of electricity price hikes through July impact the entire economy and all along the food value chain. And even when these prices decrease slightly – as is the case with fuel prices in May – these savings are rarely passed on to consumers.
“The full impact of these increases has yet to come through. Based on the current upward trend in food prices, we predict that with the increases in fuel and electricity, that food prices will increase beyond 10% for the 2021 term,” it said.