Drought hurts food firms that battle to keep prices affordable
SOUTH Africa’s worst drought on record, a plunging currency and debt-burdened consumers are weighing on the country’s biggest food producers, who may sacrifice profits in order to keep prices affordable and preserve market share.
The shares of food producers, including Pioneer Foods Group and RCL Foods, have this month fallen to the lowest in more than a year as local prices of key staples such as white maize doubled over the same period, while wheat increased by 25 percent.
As the worst drought since records started in 1904 decimates food crops, import costs are surging, with the rand losing 30 percent against the dollar since the start of last year, the worst performer among 16 major currencies tracked by Bloomberg after Brazil’s real.
“The prices of soft commodities have gone through the roof,” Ron Klipin, an analyst at Cratos Capital, said yesterday, referring to the grains.
“It’s very difficult to pass on and claw back those prices, so the companies are going to have to absorb it.”
Spending power
Apart from rising food prices, consumers’ spending power would be curbed by probable rate increases in a country where debt exceeded 78 percent of households’ disposable income, Lullu Krugel, an economist at KPMG, said.
Forward rate agreements starting in six months, used to speculate on borrowing costs, show investors are pricing in 100 basis points of increases by the Reserve Bank in the first half of the year.
Tiger Brands, the largest producer of foods by market value, last week declined to the lowest level since June, while Pioneer Foods, the secondbiggest, dropped to the lowest since December 2014 on Friday. RCL Foods, a chicken producer, fell to the weakest since November 2012.
“We will probably see a significant pick-up in food inflation,” Jiten Bechoo, an analyst at Avior Capital Markets, said. Even then, it might still mean margin pressure because it was going to be insufficient to cover costs.
Food inflation would probably exceed 10 percent by the middle of this year, Krugel said. It was 4.8 percent in November, Statistics SA data show.
Food prices were expected to increase by as much as 25 percent in the year to April 2017, Ronald Ramabulana, the chief executive of the National Agricultural Marketing Council, said.
Higher input costs did not necessarily imply sacrificing margins, Phil Roux, the chief executive of Pioneer Food, said. The company is the largest seller of maize meal.
While the price movements of grains had been extreme, the company had a wide product portfolio, “which in times like these goes some way to preserving profitability”, Roux said.
Tiger Brands was investing in its operations to reduce the cost of manufacturing food, which would help offset the effect of pricier ingredients, said Nikki Catrakilis-Wagner, the head of investor relations. This year “will be tough”, she added. RCL Foods was not available for comment.
Smaller food producers such as Rhodes Food may perform better than their peers because they are not as dependent on drought-hit grains. – Bloomberg