Bagful of cost rises could counteract lower maize price
Irecently tweeted a chart showing the long-term trend of South African maize prices. The message was that the price of a tonne of maize was about 60% lower year on year in July. This was thanks to good summer rain, which led to a record maize harvest.
The question by folks on Twitter was whether the price decline had been passed on to the end-consumer.
The answer is only partially yes, since the price of a product such as 1kg of maize meal has declined only about 7% year on year. There are a number of reasons for the stickiness of maize meal prices. Farmers do not necessarily produce food products, but agricultural commodities. There is, therefore, a processing time lag between the farm gate and the retail level that includes costs such as labour, transport and processing.
This processing chain typically explains the delays in price transmission between agricultural commodity prices and the food products. Regarding maize meal, the lag could be three to six months. A study published in Agrekon Journal by Marlene Louw, Ferdi Meyer and Johan Kirsten shows that there is a roughly 63% price transmission between the prices of white maize and retail maize meal, with a delay of about three months. If the white maize spot price declines 60%, consumers can expect a 38% decline in maize meal prices three months later.
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 shelves, such as transport. More than 80% of SA’s maize and maize meal products are transported by road. If fuel prices are increasing while maize prices are declining, this will reduce the potential benefit to consumers, which again explains the dissimilarity between the agricultural commodity prices and retail foodstuffs.
Apart from the aforementioned price transmission discussion, South African consumers will enjoy the benefits of the large crop in 2017. Food price inflation slowed to 6.8% year on year in July after reaching double digits at the beginning of the year. Food products such as vegetables and fruits, oils and fats are already in deflation. Food price inflation is expected to be more subdued through the rest of the year going into 2018 due to robust domestic agricultural production. The Reserve Bank forecasts food price inflation at 7.3% in 2017 and 5.1% in 2018 — it’s the lowest level since November 2015.
The picture of the food basket is mixed. Most food product prices have decelerated, with the exception of meat, which is proving stickier than I expected, recording a 14.4% year-on-year increase in July, the highest level since December 2011. This can be explained by the recent outbreak of avian influenza and the 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, 13% lower than the corresponding period in 2016.
While cattle restocking and the bird flu outbreak are key drivers behind higher meat prices, the outbreak of avian influenza could be the primary driver because of poultry’s higher weighting in the food inflation basket. Poultry accounts for a 14% share of the overall food basket, while beef accounts for an 8% share.
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.