Drought poses inflation risk

Crop damage due to warm, dry conditions in the main summer grain regions of SA, such as the North West, could accelerate food price inflation, which has consistently outpaced the headline consumer inflation rate for the last two years. SA’s crop estimates committee issued its first seasonal outlook for the summer grain production regions at the end of February. It indicated that despite a slight increase in the area expected to be planted to maize, there was likely to be a 13% decrease in production.

At a projected level of 14.4-million tonnes, 2024 will yield the smallest maize harvest since 2019, when the country produced 11.3-million tonnes. Similar to the 2019 season, current drought conditions can be attributed to the effects of El Niño, which is associated with higher-than-normal temperatures and lower rainfall in the summer rainfall regions.

However, as pointed out by the chief economist for the Agricultural Business Chamber of SA, Wandile Sihlobo, and the Bureau for Food and Agricultural Policy (BFAP), the first crop estimate was done before the crucial period from end-February to mid-March. A second crop estimate, to be released at the end of March, will provide a clearer picture of what the season will yield. There are some reports grain harvests have deteriorated faster than expected.

According to the bureau, SA requires about 12-million tonnes of maize for domestic consumption. If output drops below that, maize will trade at import parity levels. In a weak exchange rate environment, this could cause a huge jump in maize prices.

If there was sufficient local supply to keep maize prices closer to export parity levels, consumers would pay about 20% less for maize compared with a scenario in which the market switched to import parity prices, BFAP said in its latest Food Inflation Brief.

High maize prices also drive up the price of animal feed, which in turn drives up meat and egg prices.

Inflation of staple food products such as maize meal has a much larger impact on poorer households, which rely heavily on such products to meet their basic food needs. The cost of a basic food basket for a family of four tracked by BFAP was up 7.4% year on year in January to R3,737. The basket price has increased by 24% over the past two years.

Poor households spend a third or more of their total income on food. With little wiggle room, high food prices drive them to include more staples such as maize meal in their diet. But when the prices of these staples start to increase at an even faster pace than more expensive options, the last resort is to buy less food — a daunting prospect in a country where about a quarter of the population already suffer from dire food insecurity.

Last month was the warmest February on record globally. As the effect of climate change intensifies, leading to harsher and more frequent droughts in parts of Southern Africa, governments will have to show some urgent and practical responses to the high food prices and food shortages that can result from more frequent crop failures. This is something SA’s government must keep in mind as it sets up the climate change response fund.