US drought puts pressure on SA food prices

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Maize

Reuters.

The ripple effect of the drought in the US has led to record high grain prices domestically, casting doubt on future interest rate cuts owing to higher food inflation, economists said on Friday.

Grain SA economist Wessel Lemmer said since the second week of June grain prices had risen as much as 36 percent in the US, while maize increased by 25 percent domestically

International soya bean prices went up by 21 percent in the same period, while local prices increased by 18 percent. International wheat prices rose 32 percent while they increased by 17 percent domestically.

Lemmer explained that the US drought was so severe because maize was in its sensitive pollination phase, which was critical for the crop.

“We don’t see a good forecast for rain in the corn belt, that’s why the prices are so high,” he said.

Maize for September delivery jumped to a record $8.2875 a bushel (R2 697 a ton) in Chicago on Friday. It was expected to reach about $8.50 a bushel but if the drought conditions persisted it might even reach $9, which was “unthinkable”.

The price hikes cast doubt over future interest rate cuts as food contributes significantly to the consumer price index. Consumer price inflation was at 5.7 percent in June, near the ceiling of the target range.

Food inflation pressures might push headline inflation to exceed the 6 percent upper limit of the target band, which meant that further decreases in the repo rate might not happen because no relief was in sight for grain prices, Lemmer said.

Reserve Bank governor Gill Marcus cut the bank’s repo rate by 50 basis points to 5 percent on Thursday last week.

While the move took the markets by surprise, Marcus explained that monetary policy was being eased in many countries as slow economic growth globally was limiting inflation.

September yellow maize rose by R80 to R2 711 a ton on the SA Futures Exchange on Friday. September white maize was at R2 757 a ton.

“Prices are at record high levels for yellow and white maize… In future months they may rise due to additional carry costs,” Lemmer said.

The good news is that the local maize harvest is currently 700 000 tons more than what was harvested last year.

The surplus available for export during the new marketing year may reach 1 million tons.

Last year, about 440 000 tons of maize was exported. In the current marketing year South Africa has already exported about 264 000 tons to Mexico.

On Friday, the Financial Times reported that maize and soya bean prices had surpassed the levels of the 2007-2008 crisis, which resulted in unrest in 30 countries.

Also, the US Department of Agriculture slashed its maize production forecast to levels last seen 25 years ago.

The report said conditions would continue to deteriorate in the worst drought since 1956.

South African grain producers are price takers and prices for local grain commodities are strongly influenced by prices on the Chicago Board of Trade.

Mike Schussler of Economists.co.za said the US had a “huge problem” which could have a negative effect on South Africa’s economic growth rate. However, the current high prices were good news for farmers, he added.


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