Watchdog: Food prices signal inadequate competition
Sticky prices in South Africa’s food value chains suggest there is inadequate competition among producers and retailers, according to the Competition Commission.
In its latest essential food pricing monitoring report, the competition watchdog notes that although inflationary pressures have eased, consumers are still feeling the pinch of high prices. This is amid the “rocket and feather” effects, which cause prices to shoot up quickly but come down very slowly.
Inflation recently fell to its lowest level in two years, as high food prices have started to come unstuck.
Generally, it is assumed that in markets with few but large players, price pass-through — which indicates the responsiveness of producers and retailers to falling costs — will be lower than in more competitive markets, the report states.
The Competition Commission has found evidence of rocket and feather effects in the bread, maize meal, sunflower oil and beef value chains.
There are several explanations for this, including adjustment costs and the nature of contracts in food chains. But the one that is most salient for competition regulators is that these effects signal “competition may not be functioning optimally throughout food value chains”.
This is because, when markets are competitive, high mark-ups will be lowered through that competition.
The report points out that Shoprite’s profit margin grew from 2019 to 2023, but has returned to where it was in 2019. Woolworths has fallen consistently since 2020. Pick n Pay’s has remained stable, although well below its two competitors.
Although their weighted profit margin has fallen from 6% in 2022 to 5.3% in 2023, this is still higher than the profit margins among retailers in the UK. This slower decline may be explained by load-shedding, which economists have flagged as a risk to food price inflation.
The Competition Commission’s latest analysis shows that margins earned by bread and maize meal producers continue to grow in 2023, despite some easing cost pressures.
“Listed producers of bread and maize meal have all reported that they increased prices to compensate for higher costs,” the report notes. “However, in some cases margins have expanded which suggests price increases more than costs among other factors … Load-shedding costs have been reported by most food companies, but, with the exception of poultry, these do not appear to be major cost drivers.”
While retail spreads for bread and maize meal have remained constant — implying that retailers have not raised prices by more than their cost of sales — retailers may have earned more in absolute rand terms.
On cooking oil prices, the report notes that these have been on the decline for a year. “However, while retailers cut their margins during the period of rising prices, they have been slower to reduce prices resulting in expanding margins.”
Beef carcass prices have been falling since September 2022. “It is evident that the increase in retail prices ... was not due to pressure from farmers, feedlots or abattoirs. Rather, this is due to retailers applying more margin to meat than they did before.”
Clearly, the report states, consumers are not benefitting from lower producer prices. But this may be the result of the lag effects between when retailers pay for the meat and when it is sold, and bids to hold on to profits in the face of load-shedding costs.