Food firms under pressure from input price hikes, consumer pain

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Johannesburg - Shares in South African food makers are being punished as companies struggle with record-high commodity prices and consumers come under pressure from rising interest rates and faster inflation.

The JSE’s food processors and producers index has fallen 5.5 percent this quarter, the second consecutive three-month decline, with eight of the 10 members falling. The retreat compares with a 2 percent gain in the all share index.

RCL Foods and Tiger Brands are among companies facing consumer-price inflation that accelerated for a second month in January and prices for white maize that reached a record high on January 31. The rand has dropped 2.5 percent against the dollar this year, the second-worst among 16 major currencies.

“The consumer is a lot more constrained and looking for a cheaper alternative to get basic goods,” Grace Legodi, an equity analyst at Vunani Securities, said yesterday. “Maize is a commodity and is dollar based. It doesn’t help us from a rand perspective.”

Rising distribution costs for companies have been driven by a petrol price that has climbed 9.6 percent over the past 12 months because of the weaker rand. The Reserve Bank unexpectedly increased the benchmark repo rate by 50 basis points on January 29, citing concern that the rand’s drop may stoke inflation.

“We expect the consumer to continue being under pressure on the back of interest rate hikes and petrol price increases,” Alex Mathole, the group executive for corporate affairs at Tiger Brands, South Africa’s largest food and household-goods firm, said this week.

Tiger Brands gained 1.59 percent to R259.52 yesterday, paring its slide so far this year to 2.8 percent. The company was struggling to “bed down” its acquisition of Lagos-based Dangote Flour Mills, Legodi said. Dangote Flour has dropped 7.3 percent on the Nigerian Stock Exchange so far this year.

Pioneer Foods, South Africa’s second-largest food company by market value, plans to spin off its poultry unit this year as chicken producers battle with high maize costs and cheaper European imports. This would bolster the value of the company’s remaining assets, Legodi said. The stock rose 1.47 percent to R85 yesterday but it has slid 7.5 percent this year.

Lulu Khumalo, a spokeswoman for Pioneer, said cost pressures stemmed from higher fuel prices, an 8 percent annual increase in electricity tariffs and raw material costs that had been affected by dwindling domestic stock levels and the weaker rand.

RCL Foods, controlled by Remgro with a majority stake, has bought New Foodcorp and TSB Sugar since 2012 to bring in cash from sources other than its main business, Rainbow Chicken. The moves had helped revenue, Legodi said. The stock has slumped 12.9 percent this year despite rising 3.67 percent to R15.24 yesterday.

RCL did not respond to requests for comment.

Consumers are increasingly turning to cheaper food as they face an unemployment rate exceeding 24 percent and economic growth of 1.9 percent last year, the slowest pace since the 2009 recession.

“When times are hard for consumers, they are price sensitive,” Legodi said. “They look for bargains.” – Bloomberg


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