Major threat to food prices in South Africa

Several emerging markets, including South Africa, could see food inflation start ticking up as the weather experiences significant changes.

Many emerging markets are seeing steep inflation declines, partly due to the decline in food inflation.

According to Stats SA, South Africa is no exception, with Consumer Price Inflation dropping from 6.8% in April to 6.3% in May.

Although this remained above the South African Reserve Bank’s target range of 3% to 6%, it was the lowest reading since April 2022 – when the rate was 5.9%.

The annual rate for food and non-alcoholic beverages also dropped from 13.9% in April to 11.8% in May.

The price index in the category also only increased by 0.3% between April and May, the lowest reading since the 0.1% recorded in November 2021.

The Bureau for Food and Agricultural Policy (BFAP) said that while food inflation remains high, the sharp decline in May should indicate a tide change.

“This momentum is expected to persist over the coming months, with food inflation expected to continue trending downwards, reflecting strain on consumer budgets, high base effects, the relative recovery in the value of the rand over the past month and the filtering through of recent lower producer prices to the retail level,” the BFAP said.

“The relative strength of the Rand remains a key factor to watch, as the high-risk environment, both domestically and globally, could trigger sharp movements that affect price levels. Another sharp depreciating cycle will again drive food prices higher.”

Dry conditions

However, according to Equity Fund Schroders, there are some significant risks ahead.

The world could soon enter an El Niño period which will have a knock-on effect on food production and prices, the group said.

El Niño is a periodic weather pattern typically seen every two to seven years, where warming sea waters in the Pacific Ocean disrupt rainfall on different continents, especially in the Southern Hemisphere.

Although the impact of El Niño varies per area, it generally leads to drier conditions in Southern Africa.

David Rees, Senior Emerging Markets Economist at Schroders, said there are already tell-tale signs that 2023 will see a strong El Niño developing.

Rees said that the more-than-normal rainfall in South Africa this winter should give rise to higher temperatures and lower rainfall during summer. Drought conditions would likely stunt production.

He noted that the change in weather conditions, especially drought conditions in South Africa’s case, should affect the supply of food both locally and globally, which could push prices significantly higher.

“While leading indicators imply that food inflation in South Africa should still fall significantly in the near term, the effects of El Nino could cause it to rebound in 2024, leaving the SARB (South African Reserve Bank) with less room to lower interest rates,” the economist said.

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