The cost of living is rising and everyone is feeling the impact. Some are asking why SA exports food when millions live in poverty and prices are surging? Why not cater for South Africans first and block exports? Do we have sufficient food for ourselves before worrying about the global consumer?
These are all fair questions. However, one has to appreciate that the food price increases are not unique to SA. In May 2022, Zambia, Kenya, Brazil, the US and the EU had consumer food price inflation averaging more than 10% year on year. By comparison, SA's consumer food price inflation averaged 7.8%.
There are various events behind price increases. The focus has been on the Russia-Ukraine war and its disruptions to Ukraine's supply chains and grain stocks. But the war came when global food prices were already on an upward trend.
The challenges began with China importing large supplies of grains over the past few years as the country rebuilt its inventories and expanded its pig industry after it was devastated by African swine fever. China's continuous grains and oilseeds purchases added upward pressure to global prices.
The second event was the 2019-2021 drought in South America, which undermined production in Brazil and Argentina, which between them account for an average of 14% of global maize production and 50% of soybean production. Indonesia, which has accounted for 54% of global palm oil exports in value over the past five years, also had weather-related challenges that weighed on the harvest these past few years.
The third and less pronounced issue was the move towards biofuels support by President Joe Biden's administration in the US, which also stimulated demand for grains and oilseeds, thus putting upward pressure on prices. The disruptions in supply chains and the increase in shipping costs due to the pandemic were an additional challenge.
By December 2021, the Food and Agriculture Organization (FAO) Global Food Price Index was up 21% year on year. The comforting point at the time was that we could still rely on the Black Sea region, which contributes a large share of grains and oilseeds exports.
Many people have come to realise that Russia and Ukraine are substantial players in the global agricultural commodities market. Together they account for a quarter of global wheat exports, with Russia having accounted for 18% and Ukraine for 8% in 2020.
Their maize contribution is also significant, accounting for 14% of global exports in 2020. Both countries are among the leading producers and exporters of sunflower oil, with Ukraine accounting for 40% of global exports and Russia 18%.
The disruption caused by the war on production and trade reduced the volume of grains supplied by these countries and increased anxiety in the global agricultural market. Had it not been for the war, agricultural prices would still have been at higher levels, but not as high as we see today.
Amid these developments, SA had good weather conditions, leading to a bumper harvest of key crops and fruits. We have had three consecutive seasons of favourable rains and large agricultural production, starting from 2019-2020. This enabled SA to remain a net exporter of agricultural products.
As production improved, agricultural commodity prices, specifically grains and oilseeds, did not decline as a response to improved supply, which people would ordinarily expect. The reason is that SA is interlinked with the global agricultural market. For instance, the second-largest maize harvest on record in the 2019-2020 production season didn't lead to a notable decline in prices, mainly because of a 20% rise in export parity prices for that season and a further 70% rise in the 2020-2021 season.
As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, which triggers an increase in exports
Simply put, export parity prices are derived from the global maize price multiplied by the exchange rate minus transaction costs and can be regarded as a “floor price” for domestic maize prices. As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, which triggers an increase in exports. This doesn't mean we will run out of grains supply; SA has weekly export reporting mechanisms that allow market players to track domestic stocks and export activity, and price adjustments are triggered when we are nearing the appropriate export volume.
Exports are important for sustaining a competitive agricultural sector from a production perspective. Farmers export or sell to the domestic market to cover their costs so they can produce food again for the next season. Farmers have also experienced increased input costs due to rising fuel, fertiliser and agrochemical prices. So they did not “make a killing” on the back of poor consumers. The fertiliser price increase was triggered by the Russia-Ukraine war, and China's decision to drastically reduce fertiliser exports in 2021 contributed to increasing input costs.
South Africans are feeling the impact of these events as we emerge from a relatively lower food price inflation period. In 2018, domestic consumer food price inflation averaged 3.3% and in 2019, 3.1%. In 2020 this rose to 4.8% and in 2021, 6.5%. The highest consumer food price inflation in recent memory was 10.8% during the drought of 2016.
The past few months have seen a general increase in consumer food price inflation, with May figures reaching 7.8%. While most food products in the inflation basket increased, the next few months could present a mixed picture. I expect the grains-related food products and vegetable oils to remain elevated.
Fruit, vegetable and, to an extent, meat price inflation could soften. Obstacles to our fruit exports to the Black Sea market and the temporary suspension of red meat exports because of foot-and-mouth disease are factors that could play positively for the South African consumer.
Additionally, SA has sufficient food supplies. Even though it imports for rice, wheat and palm oil, it already decent volumes of these goods.
The running theme we all worry about is the impact of rising fuel prices on the costs of consumables. We have a heavy reliance on road freight. Roughly 80% of our staple grains and oilseeds are transported by trucks. These are high costs that food companies might have minimal room to absorb, and remain a major upside risk for food price inflation.
Still, I think SA's general consumer food price inflation will likely be an exception to what we see in the world in the second half of the year, with some moderation on fruits, vegetables and, to a limited extent, meat. Prices of grains-related and vegetable oil products will likely remain elevated. These are, unfortunately, the products in most South African food baskets and their prices will increase faster than other food products.
The appropriate policy response to these difficulties should be through targeted support to poor households and support of subsistence and small-scale farming to improve household food production. Any thoughts of price interventions would have long-term unintended consequences for farmers and ultimately consumers, as we have seen in many African countries that have attempted such policy responses, especially as this is a global challenge and not unique to SA.
• Sihlobo is the chief economist of the Agricultural Business Chamber of SA (Agbiz)
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