Recent data from Statistics South Africa indicates that in May 2016, headline inflation eased to 6.1% year-on-year (y/y) from 6.2% y/y in the previous month. This was well below the market expectations of 6.4% y/y. This decrease was largely on the back of a fall in food and non-alcoholic beverages[1] inflation to 10.5% y/y, from 11.0% y/y in April 2016.

The food and non-alcoholic beverages basket consists of “bread and cereals”, “meat”, “fish”, “milk, eggs and cheese”, “oils and fats”, “fruit”, “vegetables”, “sugar, sweets and deserts”, “non-alcoholic beverages” and “other foods”. Each of these products is allocated a weight, with the largest being “meat” and “bread and cereal”, which make up 30% and 23%, respectively (figure 1).


Figure 1: Weights of products in the food and non-alcoholic beverages basket
Source: Statistics South Africa, Agbiz Research   

The largest year-on-year percentage decreases were recorded in “fruit”, “fish” and “other food”, which eased at 12.8%, 6.3% and 7.1%, respectively (figure 2). This decrease was to some extend due to statistical base effect.  Agricultural commodity prices are still at higher levels on the back of tight supplies caused by the El Nino induced drought. Moreover, this year, South Africa is a net importer of grains, therefore a weaker Rand has added inflationary pressures on soft commodity prices, which in turn is translating to higher food prices.

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Figure 2: April and May 2016 y/y percentage growth
Source: Statistics South Africa, Agbiz Research        

Some sectors within the fruit industry, such as citrus, are at the harvesting stages, which to some extent, might ease pressure on prices. On grain related food stuffs, the pass through of high prices from high raw commodity side is already apparent on the retail food prices (figure 3 and 4).


Figure 3: South African white maize price
Source: Grain SA, Agbiz Research  
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Figure 4: South African basic food prices
Source: Statistics South Africa, Agbiz Research

Looking ahead

We expect food prices to remain at higher levels, at least until mid-2017, assuming that there will be favourable weather conditions in the 2016/17 production year to replenish market supplies.  There are indications that the current El Nino is transiting to La Nina.

In fact, the US National Ocean and Atmospheric Administration indicates that the possibility of La Nina occurrence towards the end of this year has increased from 50% to 75%. This weather event might lead to above-normal rainfall, consequently replenish soil moisture which is favourable for livestock and crop production. That said, the lag-effect could keep food prices elevated for an extended period of time.

[1] In the overall Consumer Price Index measure, the food and non-alcoholic beverages basket is allocated a weight of 15.41 index points out of 100.

Agricultural economists:

Wandile Sihlobo
wandile@agbiz.co.za

Tinashe Kapuya
tinashe@agbiz.co.za

www.agbiz.co.za