Food makers in tight spot over soaring input costs
RAPIDLY rising agricultural producer price inflation (PPI) leading to soaring food prices has placed food manufacturers in a tight spot about whether to absorb these cost increases or to try and pass them on to financially constrained consumers, says RMB.
John van Tubbergh, the sector head for consumer, food and agri at RMB, said yesterday that many large food manufacturers had recently cited the soaring prices of key agricultural products used as inputs in the manufacturing of basic consumer foodstuffs as a real threat to their margins.
Agricultural PPI accelerated to 12.3 percent year-on-year in November 2020, before settling at a still high 7.2 percent in March.
Van Tubbergh said digging deeper into the constituents of this figure, the inflation rates for cereals and other crops, as well as dairy products, were 17.2 percent and 12.6 percent respectively.
He said PPI for live animals and animal products was 9.8 percent.
Combined, cereals, dairy and animal products made up nearly 60 percent of the agricultural producer price basket. Price pressures at the agricultural level were also beginning to drive up manufacturing costs.
From subdued levels of about 4 percent last year, manufactured food producer price inflation has quickened from 6.9 percent year-on-year in February to 8.1 percent in March. This rate was well above Consumer Price Index food price inflation, which meant gross margins of food manufacturers were being squeezed.
“Amid a still weak economy with households financially under strain, this leaves food manufacturers with some difficult decisions to make. Food manufacturers have already responded by cutting internal costs and optimising processes in order to help reduce the pressure on margins. For instance, we are increasingly being asked by clients to hedge against cost increases resulting from soaring agricultural commodity prices,” said Van Tubbergh.
Last week, the Household Affordability Index reported that the average cost of a household food basket in South Africa increased by 3.9 percent, or R159.37, in April to R4 198.93 compared with a month earlier – the highest level since September last year.
In a separate report released last week, research by TransUnion found the number of South African consumers in households whose income was currently negatively impacted by the Covid-19 pandemic had dropped 20 percentage points since the week of November 30.
But work-from-home dynamics had given food manufacturers some wiggle room.
Ettienne le Roux, the chief economist at RMB, said many consumers were staying at home and consuming more basic groceries because of Covid-19 and the recent lockdown restrictions. Taking advantage of this increased demand, food manufacturers have been able to raise selling prices.