Fewer farming pressures will benefit consumers
This year promises to be a fairly good one for South African consumers, particularly from a food cost perspective. The deceleration in food inflation that was observed in 2017 could again prevail in 2018 as large grain stocks and the expected good harvest in the current production season continue to underpin the market. In 2017, food inflation decelerated to 7% from 10.5% in 2016, thanks to a robust agricultural output.
Indeed, the slowdown in price increases has continued into 2018, with food price inflation reaching a multiyear low of 3.5% year on year in March. The deceleration in 2018 could, however, be broader compared to 2017, when the price inflation of most food products slowed with the exception of meat.
Meat price inflation was quite sticky, averaging 12.8% from 5.8% in 2016, which was characterised by higher slaughtering activity amid higher feed costs coupled with drier pastures.
In that year, South African farmers slaughtered 3.6-million head of cattle, which is a 5% increase year on year, according to data from the Department of Agriculture, Forestry and Fisheries.
This damped meat price inflation even as other parts of the food basket were rising. I highlight meat not only because of its price dynamic but also its share of the food inflation basket at 35.3%.
In 2017, lower maize and soya bean prices after a record harvest, as well as a good recovery in pastures, provided a conducive environment for farmers to start rebuilding their herds. This process then led to a decline in slaughtering activity of cattle, to about 3.4-million head in the year. Other subsectors such as piggery and sheep faced similar dynamics.
More recent data have shown a reversal in livestock slaughtering. This is evident from data from the Red Meat Levy, which shows that cattle slaughtering activity had softened 4.6% month on month and 11.3% year on year in February, with 185,262 head of cattle slaughtered.
This has raised some concern that meat price inflation could rise again as supply comes under pressure.
However, some analysts suggest this is only temporary and could soon bottom out, particularly with regard to cattle slaughtering. Case in point is the recent report from the US Department of Agriculture, which suggests that the number of cattle to be slaughtered in 2018 could increase by 4% from the previous year to 3.5-million head. This is largely driven by the expected increase in demand and a general recovery in the industry performance.
Other food products that have a relatively large share of the food inflation basket are bread and cereals, as well as milk, eggs and cheese.
The prices of these food products could remain relatively low for some time, owing to favourable weather conditions, which supported crops.
In the case of eggs, however, prices could remain elevated as the sector continues to recover from the 2017 avian influenza outbreak, which led to the culling of about 4.8-million birds, of which more than twothirds were egg-layers.
Above all, meat price inflation was the key upside risk to food inflation in 2017. Fortunately, the outlook is fairly positive as the US Department of Agriculture has hinted at a rise in slaughtering.
That said, the effects of the tax hikes announced in SA’s February budget including a percentage-point increase in value-added tax, will affect a significant part of the food basket outside the zero-rated items. However, in the absence of underlying upside price pressures, the outlook for food price inflation remains favourable. Consumers should be in a better place in 2018 than they were in 2017.