In line with market expectations, headline consumer and food price inflation eased during October, largely due to lower agricultural commodity prices and marginal fuel price increases. The headline consumer price inflation fell to 4.8% year-on-year (y/y) in October, from 5.1% y/y in September.
Food inflation, on the other hand, decelerated to 5.3% y/y in October 2017, from 5.5% y/y in the previous month. This is the lowest level recorded in 23-months since November 2015, when food products inflation was measured at 4.8%. The recent food inflation deceleration is largely due to lower agricultural commodity prices as well as slower price increases of majority of agricultural commodities following a good harvest in 2016/17 production season. The Crop Estimate Committee (CEC)’s final summer crop estimates reveal that South Africa is set to harvest its biggest summer crop on record in 2017 at 19.2 million tons, which is double the previous season’s volumes.
While annual inflation rate in the majority of food and beverage products across categories has slowed further from their September’s annual levels, there are exceptions. The annual price inflation of unprocessed food products increased in October relative to September’s annual levels. On the other hand, the annual price deflation of oil and fats; fruits and vegetables has also contracted in October compared to the September’s annual levels, with vegetable products recording an annual inflation of 0.8% in October relative to a deflation of 0.5% y/y in September 2017.
The annual meat price inflation, which remained the key driver of food inflation over the past few months given meat’s weight of almost a third of the food basket, eased for the first time in 2017. Meat products price inflation decelerated slightly to 15.5% y/y in October 2017, from 15.6% y/y in the previous month on the back of minor decrease in production costs as the producer price inflation (PPI) for meat products eased from 16.8% y/y in August to 16.5% y/y in September 2017. In addition, the continuous imports of poultry meat also serve to soften the pace of an increase in overall meat inflation. Data from the South African Poultry Association (SAPA) shows that 51,915 tons of poultry meat were imported in September 2017, 5,944 tons more than in the previous month.
Although meat products price inflation is decelerating, it remains higher than all products in the food inflation basket, as it is the only food product at double digits inflation rate (i.e. 15.5%). The shortage of cattle herds as a result of stock rebuilding following the drought has led to a limited red meat supplies and higher prices, especially for beef. It is worth noting that the rebuilding of cattle herds normally takes anything between two and five years. The cattle restocking process is proving to be slower than expected as the slaughtering activity declined in September 2017. After showing a 12% month-on-month (m/m) increase in August 2017, the cattle slaughtering activity declined by 12% m/m in September 2017, with 209 322 head of cattle slaughtered, according to data from the Red Meat Levy Admin.
Milk, eggs and cheese food basket price inflation, on the other hand, increased by slower pace of 2.7% y/y in October 2017 compared to 2.8% y/y in September largely as a result of bird flu, which continued to impact the egg price inflation. The bird flu has been spreading across the country, and according to data from the South African Poultry Association (SAPA), approximately 4.8 million birds have been culled due to this flu. A majority of birds that were culled were the egg layers, while broiler meat only constituted 8% of the culled birds. As a result of this bird flu impact on egg layers, the average egg price of a container of 18 eggs climbed from R38.42 in September 2017 to R42.66 in October 2017, according to Stats SA and the National Agricultural Marketing Council (NAMC).
The consensus is that food inflation should continue to ease in the coming months due to promising upcoming production season and expected recovery in the livestock industry. With the aid of bumper maize crop of 16.7 million tons in 2017, a further decrease in the production costs (feed) for beef and poultry is expected in the coming months, and this is likely to result in meat products inflation easing further in the next few months.
In addition, with the South African Weather Service forecasting widespread rainfall until February 2018, prospects for the upcoming summer crop production season look very positive. Farmers intend to increase the summer crop area plantings by 43 400 hectares (or 1.1%) from 3.98 million hectares (ha) in the previous season to 4.03 million ha in 2018 season, according to the CEC. This is expected to result in increased production, which should keep agricultural commodity prices at relatively lower levels for some time.
Impact on South African consumers
Food prices are one of the key drivers of food security in the country. The recent drought has had a major impact on the affordability of staple food, with the cost of the staple food basket increasing significantly over the past 18 to 24 months. While the rate of staple food price inflation is decelerating, this decline is measured from a higher base and as such staple food prices still remain high.
Nevertheless, the recent easing of food products inflation will come as a relief to a majority of consumers who spend most of their income on food. Poor households spend almost one-third of their income on food, so the easing of food products inflation will become a relief to them.
Poor households spend 33.9% of their income mainly on starch or breads and cereals, followed by meat and fish (24.5%), fruits and vegetables (11.8%) and milk, cheese and eggs (8.1%), thus according the Stats SA. Consumers will welcome the recent expansion of starch products (i.e. bread and cereals) deflation as well as minor easing of protein products inflation, such as meat and fish, though still at higher levels.
Tebogo Mashabela and Wanga Pholi are Agricultural Economists at Land Bank