Bagful of cost rises could counteract lower maize price

I recently tweeted a chart showing a long-term trend of South Africa’s maize prices and the message behind it was that the price of a tonne of maize declined by roughly 60% year-on-year in July 2017 - Wandile Sihlobo, Agbiz economist

First appeard as a column in Business Day on 31 August 2017.

I recently tweeted a chart showing a long-term trend of South Africa’s maize prices and the message behind it was that the price of a tonne of maize declined by roughly 60% year-on-year in July 2017. This came thanks to the good summer rainfall which led to a record maize harvest. The question posed by other folks on Twitter was whether the decline in maize prices had been passed to the end consumer.

The answer to this is partially “yes,” because product prices such as one kilogramme of maize meal had only declined by 7% year-on-year during the same period. However, there are a number of compelling reasons behind the stickiness of maize meal prices. The first thing to note is that at most times, farmers do not necessarily produce food products, but agricultural commodities. This means that there is a processing time lag between the farm gate and the retail levels, which includes costs such as labour, transport and processing, amongst others.

This processing chain typically explains the delays in price transmission between agricultural commodity prices and the food products. In the case of maize meal, this lag could vary between three to six months. A recent study published in Agrekon Journal by Marlen Louw, Professor Ferdi Meyer and Professor Johan Kirsten shows that there is roughly 63% price transmission between the prices of white maize and retail maize meal, with a delay of roughly three months. Simply put, this means if the white maize spot price declines by 60%, then consumers can expect a 38% decline in maize meal prices, with a delay of roughly three months.

In some cases, the expected decline in maize meal prices could be reduced by increases in other costs of delivering the final product to the retail shelves, such as transport costs amongst others. Over 80% of South Africa’s maize and maize meal products are transported by road. Therefore, if fuel prices are increasing, while maize prices are declining, this could taper the potential benefits to consumers, which again explains the dissimilarity between the agricultural commodity prices and retail food stuff.

Apart from the aforementioned price transmission discussion, South African consumers will enjoy the benefits of the large crop this year. Food price inflation, which is the rate at which food prices are increasing, had already slowed to 6.8% year-on-year in July 2017, after reaching double digits at the beginning of this year. Food products such as vegetables and fruits, oils and fats are already in deflation. Moreover, food price inflation is expected to be more subdued throughout the year going to 2018 due to robust domestic agricultural production. The South African Reserve Bank forecasts food price inflation at 7.3% this year and 5.1% in 2018, which is the lowest level since November 2015.

With that said, the picture of the food basket is mixed. Most food product prices have decelerated, with the exception of meat which is proving to be stickier than I expected, recording 14.4% year-on-year increase in July 2017, which is the highest level since December 2011. This can be explained by the recent outbreak of avian influenza and cattle restocking process after the 2015-16 El Niño induced drought. Data from the Red Meat Levy Admin shows that South African farmers slaughtered 203 647 head of cattle in July 2017, which is 13% lower than the corresponding period last year.

While both the cattle restocking and bird flu outbreak are key drivers behind higher meat prices, the outbreak of avian influenza could largely be the primary driver, because of poultry’s higher weighting within the food inflation basket. Poultry accounts for a 14% share of the overall food basket, whilst beef accounts for an 8% share.

Overall, the deceleration in grains, fruits, oils and vegetable products will continue to counter the increases in meat inflation and essentially keep food price inflation at relatively lower levels, which is positive for the South African consumer. 

Wandile Sihlobo, Agbiz economist

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