Why are South Africa’s food prices rising?

If you thought being a miner was tough, try being a farmer.

South Africa’s food producers are battling drought and rising input costs, thanks to a weak rand. And this spells further pain for consumers as food prices rise.

The drought, which began in earnest in February, has severely affected the country’s 2014-2015 harvest, especially summer crops such as maize (both white and yellow varieties) sunflowers, soya beans, groundnuts, sorghum and dry beans.

According to Wandile Sihlobo, an economist at GrainSA, the drought is expected to result in a 29% decrease of this basket of summer crops from the previous year.

For individual crops such as maize, which is directly linked to staple foods like mealie-meal, the picture is even worse.

Last year’s maize output was about 14.3-million tonnes. This year it is expected to shrink to 9.8-million tonnes, a 31% drop, he said.

The sunflower seed harvest, which provides oil and contributes to animal feed, sees a drop from 832 000 tonnes last year to an expected 656 800 tonnes. Soya bean output reached more than a million tonnes for the first time this season because of an increase in the number of hectares planted, he added.

But, although the hectares planted increased by 37%, the total output only grew by 10%.

“If not for the drought, we would have seen a much larger increase,” Sihlobo said.

The most recent gross domestic product (GDP) figures revealed that the agricultural sector had contracted by more than 17% quarter on quarter, largely because of the drought’s effects.

This is expected to put pressure on food prices, with hikes likely in everything from maize and grains to meat, poultry and dairy products.

There was a lag of about three to four months before increases in prices were seen on retail shelves for foods such as mealie meal and cereals, he said. For items such as meat and dairy, it would take about nine months.

But rising prices had already been seen in some foods as early as April and May this year, with consumer price inflation for items such as bread and cereals increasing 4.8% year on year, he said.

Meanwhile, the latest producer price inflation for grains and other crops had increased steeply by 35% year on year, he said, which suggested that consumers could expect further increases in inflation, if not of the same order of magnitude.

GrainSA expects that South Africa will need to import about 750 000 tonnes of maize to meet the country’s needs. But the weakness of the rand is likely to complicate this picture further. Sihlobo said the country was already paying a premium for maize and now would have to import more of it.

The organisation estimates that about 29% of the import requirement is already in the country. Prices for white maize are trading just under import parity price levels. The price for white maize on the South Africa Futures Exchange (Safex) was, on Wednesday morning, about R3 095 a tonne or roughly 8% below import parity, and the price for yellow maize was R2 781 a tonne, about 17% below import parity.

Although consumers would feel the inflationary effects of the weak currency, the effect was far worse for producers such as farmers, Sihlobo said.

The weaker oil price has helped farmers, with fuel making up 11% of the total variable costs of grain production, but other input costs are being affected by the weak currency. About 70% of all fertilisers and about 98% of agrichemicals have to be imported.

Sihlobo said these items made up a much larger part of the total variable cost of grain production, roughly 30% to 35%

But current high input costs for farmers did not necessarily mean grain prices would be higher next year. That would depend on the size of next year’s crop – if there was a large harvest, grain prices would fall.

“Inflation for consumers depends on the output for next season but this puts farmers under pressure because farmers are price takers,” he said.

Weather forecasters were predicting an El Niño weather pattern, which could lead to lower-than-average rainfall for South Africa. This could compound the effects of the drought, which has left soil moisture levels low, he added.

Should this happen, it would put farmers in a difficult position, Sihlobo said. But there was no certainty that this would be the case.

“We will watch the weather reports but we will remain hopeful,” he said.

According to a recent research note released by Absa, South Africa might still have to import maize during the 2016-2017 year, irrespective of an improvement in rainfall and production.

The past dry season was the fourth-worst year in 29 years, it said. Although the occurrence of an El Niño did not necessarily affect South Africa’s rainfall pattern negatively, “the occurrence of cyclones and low-pressure systems in the Indian Ocean that coincide with the occurrence of an El Niño may have a detrimental impact on the amount of rainfall in South Africa”, Absa said.

Johannes Möller, the president of the agricultural association AgriSA, said higher maize prices would have a knock-on effect throughout the value chain.

South Africa was already experiencing an economic slump.

“People don’t have the money to pay more for food, so the sum of effects will be passed on to farmers, who are already in a difficult position,” said Möller.

It might lead to more marginal land not being planted in the next season, he said, and it might also lead to greater caution on the part of financial institutions, making it difficult for farmers to get further finance.

If the El Niño prediction did result in below-average rainfalls, farmers might be even more conservative, he added, along with the possibility that the lands they did plant would yield less and result in a second below-average crop.

The increasing unpredictability of South Africa’s climate was also affecting the availability of crop insurance for farmers, he said.

“If you can’t predict the risks, it’s very hard to get international companies to underwrite the insurance,” he said. (See below)

Despite these difficulties, the agricultural sector remains competitive and has significant potential to grow the country’s economy and create jobs, according to a report by the McKinsey Global Institute.

It estimated that, by building on current capabilities and growing exports, the sector could add R160-billion to the country’s GDP by 2030 and create 490 000 more jobs in the agricultural chain.

But that would depend on taking steps that focused on “increasing the productivity of existing farmland, improving access to value-added processing, proactively

managing impending supply disrupters, such as drought and water availability, and providing help to control the impact of market volatility in commodity prices on farmers”, it said.

Weather wreaks havoc with crop insurance

Erratic weather patterns have serious implications for crop insurance.

According to Gerhard Diedericks, the head of agribusiness at insurance company Santam, the recent dry spell caused severe losses, especially in the western parts of the country, which led to a sharp increase in claims for drought. Overall, Santam paid out more than double what it earned in premiums, he said.

There were regions where the severity of losses and their frequency were increasing, he said, which was affecting the ability of companies to offer insurance.

Ryno du Toit, the business development executive at Risk Benefit Solutions, said, unlike other assets in the agricultural industry, crop insurance was much more expensive and came with various limitations on which crops could be insured and against what perils.

Only a limited number of companies offered that kind of insurance, and only a handful of reinsurers would underwrite it, further affecting the costs for farmers.

South Africa needed to investigate the creation of a fund for that kind of agricultural risk, he said, possibly modelled on the government-owned South African Special Risk Insurance Association (Sasria), which provides cover for politically motivated acts, political riots and terrorism.

South Africa was the only country in the world that offered multi-peril crop insurance without government support, said Dawie Buys of the South African Insurance Association (SAIA).

But that kind of insurance was not sustainable, given current climate variability and the continued losses experienced by reinsurers, he said. In the interests of sustainable food production, it was critical for the government and insurers to find ways to address this.

The SAIA was working with the department of agriculture, forestry and fisheries, the treasury and the Land Bank to create a legislated agricultural insurance framework, with a sustainable public-private partnership, for multi-peril crop insurance, he said.

This approach would have to be supported by farmers, financiers and formal agriculture, as well as the government and the insurance industry.

“The project is still currently being considered by government, and a lot of work is still to be done, and we are hoping to hear further from the other stakeholders in due course,” he added.

This article is published in collaboration with Mail & Guardian. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Lynley Donnelly is a journalist for Mail & Guardian.

Image: Residents stand outside a spaza convienience shop in Cape Town’s Imizamo Yethu township. REUTERS/Mike Hutchings