Governments all over the world are attempting to curb the adverse supply shocks that resulted in high food prices, the recent example being the ban that India placed on rice exports in an attempt to keep their local prices at affordable levels.
This past week, the South African government voiced concerns about the higher food prices and instructed the Cabinet’s economic cluster to implement a food security plan to cushion consumers.
Dr Marlene Louw, senior economist at Absa AgriBusiness, said although these measures could provide some relief to consumers, research showed they could have a disruptive effect on markets, keeping supply low(er) and prices high over the medium to long term.
“These measures can also be costly to the fiscus if it takes the form of storage or reserve programmes. Scientific research has therefore mostly advocated for short-term support measures aimed directly at consumers, such as food stamps or extended school feeding programmes,” she said.
She said it was key to strike a balance to provide support to struggling consumers while keeping market forces intact.
Agricultural Business Chamber (Agbiz) chief economist Wandile Sihlobo said while they were yet to see the government’s strategy and approach, it was worth highlighting that South Africa’s consumer food price inflation has started to decelerate from the high levels of 14.4% seen in March this year.
“In July 2023, consumer food inflation was recorded at 10%, from 11.1% in the previous month,” Sihlobo said.
Agbiz said as the Cabinet’s economic cluster prepared to start its work, it was vital to have a common understanding of the key drivers of food prices in recent years and an appreciation that this was a global challenge, not unique to South Africa.
The organisation said that, for example, two primary drivers of global food prices existed before the Covid-19 pandemic.
“First, the drought in South America in the 2019/20 season reduced the harvest notably, primarily in Brazil and Argentina. These countries collectively account for 14% and 50% of global maize and soybean production. The drought has spread for roughly three seasons since 2019/20, further exacerbating the grain price increases from 2020 to the end of 2022.
“Secondly, China’s continuous imports of grains and oilseed as the country was rebuilding its pork industry after a devastating African swine fever also added to the surge in demand at a period when global stocks were tight,” it said.
“China’s growing demand had a consequential impact on global grain prices because of its share size of imports – for example, the country imports about 60% of globally traded soybeans.
“As Covid-19 spread in early 2020, several major grain producers, such as India, Kazakhstan and Vietnam, worsened global price increases by temporarily banning exports. As this unfolded, shipping costs soared, increasing grain prices. In sum, a combination of trade policy actions by other countries, logistics and weather conditions placed upward pressure on food prices.”
Sihlobo said these all-important fundamentals challenge food supplies, further worsened by the Russia-Ukraine war. He said Russia and Ukraine were substantial players in the grains and oilseeds market.
The former produces about 10% of global wheat, while Ukraine accounted for 4%. “Together, the two countries account for a quarter of global wheat exports.
“Moreover, Russia and Ukraine are notable players in maize, responsible for 4% of production combined. However, their contribution is even more significant in exports, accounting for an average of 14%. Both countries are also among the leading producers and exporters of sunflower oil. Pre-war, Ukraine’s global product exports accounted for 40%, with Russia accounting for 18%. Thus, the war led to a surge in grains and oilseeds prices for much of 2022.”
The chief economist said as a small, open economy, South Africa, interlinked with the world, was not insulated from these agricultural and food price shocks. “Admittedly, South Africa was in a reasonably better place, with abundant supplies, as the La Niña weather event brought good rains across the country and supported agricultural activity. Still, the prices did not reflect the increased domestic supplies as the global shocks mainly underpinned them.”
Sihlobo said over this period of higher global commodity prices, the food producers and processors had to deal with higher agricultural commodity prices, and process such commodities further to produce the food products available at the retail level.
He said the activities between the producer (or importing country) and retailer did not happen without costs as the food value chain first depended on expansive logistical systems and networks, while processing involved labour, energy, packaging and finance costs.
He said once the food was processed, it must be distributed to retail outlets, bearing these costs. “On top of that, we can add inflation-related wage increases and the dramatic costs of load shedding and crime.”
He said that, however, this was not the case in South Africa as food prices increased at a moderate pace, having averaged 9.5% last year compared with 6.5% year on year in 2021 and 4.8% in 2020.
“Countries such as the US, Kenya and Brazil, and those in the EU, saw much higher consumer food price inflation rates than South Africa.”
Sihlobo said this meant food processors and retailers, if anything, absorbed the costs and did not pass them entirely on to the consumer.
“These are all fundamental realities that need to be appreciated as the Cabinet looks into the food price issues in South Africa,” he said.