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High food prices here to stay for now, say economists

ECONOMISTS say the second half of the year should see further deceleration in food prices. Henk Kruger, ANA.

ECONOMISTS say the second half of the year should see further deceleration in food prices. Henk Kruger, ANA.

Published May 11, 2022


WHILE the rate at which food prices are increasing is expected to slow, prices are not expected to ease significantly, says Absa Agribusiness senior agricultural economist Dr Marlene Louw.

According to Absa’s outlook, food inflation is likely to peak towards the middle of the year, but there is some upside risk associated with this.

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Louw said a key factor to watch was how grain and oilseed production would fare in the northern hemisphere in the coming season.

“At the moment, grain and oilseed plantings in the US are behind the annual long-term average plant rate due to adverse weather conditions. If this persists, and production is adversely affected, we could see another commodity price shock on top of all the other disruptions that 2022 has already had,” Louw said.

This would cause food inflation to rise throughout the rest of the year. According to Louw, the progression of grain and oilseed production in the northern hemisphere will therefore be key to watch to anticipate what could happen locally in the second half of this year.

Last week, the FAO Global Food Price Index eased from an all-time high level reached in March this year, declining by 1 percent to 159 points. This was still up by 30 percent from the corresponding period last year.

The easing in prices in April was on the back of a slight decline in vegetable oil prices. The recent decision by Indonesia to ban the export of palm oil meant that global export volumes have reduced significantly, and prices would have surged since then.

The FAO data probably did not account for the Indonesia decision, with these price increases likely to be reflected in the data for May, which will be released in June. Other food prices such as grains, dairy, meat and sugar remained elevated.

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Absa Agribusiness said high global food inflation was also likely to affect South Africa.

Louw said the local food and agricultural sector was fully integrated into global markets. Consequently, high prices due to geopolitical disruptions or drought in key global production regions also affected local commodity and product prices. She said recent local price increases were further exacerbated by a depreciation of the rand.

FNB Agribusiness senior agricultural economist Paul Makube said the decline in the food price index was just a brief reprieve.

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The fundamentals were still tilted to the upside, with escalation in the Russia-Ukraine war causing obvious disruptions to global wheat and sunflower oil supplies, limited availability of fertiliser in some parts of the northern hemisphere and the consequent delays or contraction in planted area, as well as incidental drought conditions in parts of South America, the US and Indonesia.

He said South Africa remained a net importer of vegetable oils, particularly palm oil, and the recent decision by Indonesia, which accounts for 55 percent of the total world palm oil exports, would tighten supplies and maintain the elevated trend in prices.

“Consequently, manufacturers and consumers are expected to feel the pinch at the tills as they will have to pay more for cooking oil and other products which were producing palm oil as an input,” Makube said.

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According to FNB Agri-Business, a further escalation of the Russian-Ukraine war would be disruptive to international trade, causing oil prices to remain elevated, which would push freight costs higher.

The higher agricultural commodity prices and the consequent inflationary pressures might force some exporting nations to employ measures to curb rising domestic costs of living by imposing export restrictions, thus accelerating the situation (higher food inflation).

Makube said that consumers would continue to feel the pain as they have limited options since food was generally price inelastic.

“The near-term price outlook remains biased on the upside, but the second half of the year should see further deceleration in prices. Smart purchases – through taking advantage of bulk purchases, as well as change in consumption patterns – will help consumers navigate the current tough environment,” Makube said.

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