Recent producer price index data indicates that in September 2016, producer inflation for final manufactured goods decelerated to 6.6% from 7.2% year-on-year (y/y) in the previous month. Food products (producer) inflation eased at 13.1% y/y from 13.4% y/y in August 2016. This suggests that consumer inflation (food) is likely to decelerate over the coming months.

The food products basket consists of four broad categories which include (1) meat, fish, fruit, vegetables, oils and fats, (2) dairy products, (3) grain mill products, starches and starch products, and animal feeds and (4) other food products.

Each of the aforementioned categories within the food products basket is allocated a weight, the largest being “meat, fish, fruit, vegetables, oils and fats” and “other food products”, which make up 37% and 41%, respectively.

Although overall food products inflation has decelerated, some products recorded an upward movement. Notably, increases have been recorded in sugar; fruit and vegetables; dairy products and other foods whereas oil and fats; grain mill products; starches; fish and fish products; bakery products; meat and meat products decelerated (Chart 1).

The increase in sugar products inflation reflects the effects of the 2015/16 drought on sugar cane production. The fruit and vegetables inflation increase coincides with seasonal price trend, normally reaching higher levels due to lower supplies as most fruits are currently in the “out-of-harvest” season. Following the same trend, dairy products inflation is in line with seasonal price behaviour caused by lower domestic supplies.

Looking ahead, we believe that grain mill products inflation could maintain a downward trend in the coming month, due to relatively low grain prices. In addition, recent “intention to plant” data suggests that South Africa’s 2016/17 maize plantings could recover by 27% y/y to 2.46 million hectares.

Dairy products inflation could also slow towards the end of this year when milk production recovers on the back of improving grazing fields. Meat and meat products remain an upward risk in overall food products inflation as the slaughtering rate is set to slow over the coming months which might lift prices (Chart 2).

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ENQUIRIES:
Wandile Sihlobo, Head of Agribusiness Research at Agbiz
E-mail: wandile@agbiz.co.za