Farm cost pressures frighten investors
AGRICULTURAL cost pressures are darkening the outlook for some food value chains and the affordability of food as producer and retail prices escalate.
This may deter investors who are looking to plough money into the local farming sector to harvest quick profits.
At retail level, the prices of dairy products, bread, mealie meal and cooking oil rose by between 100 and 150 percent in the 10 years to March.
According to Andre Jooste, a senior manager for markets and economic research at the National Agricultural Marketing Council, these price hikes mean many households are struggling to afford basic foods.
In South Africa, the average household in the poorest 30 percent of the population spent about 38.7 percent of its income on food in April, while those in the wealthiest 30 percent of households spent only 3.1 percent of their income on food.
In a presentation at the Agricultural Business Chamber congress in the Champagne Sports Resort in the KwaZuluNatal Drakensberg, Jooste revealed that retailers made a profit margin of 91 percent on a loaf of bread.
Headline consumer price index increased from 4.2 percent in April last year to 6.1 percent this April, while food price inflation rose from 4.8 percent to 8.7 percent.
According to Jooste, food inflation for the most basic food basket, mostly consumed by the poor, stood at 20.2 percent.
At retail level, 1kg of potatoes increased from R3.97 in 2002 to R9.04 this year, a 128 percent increase. A kilogram of tomatoes increased by 122 percent to R13.82.
Jooste said some of the food price increases were driven by input costs such as feed, fertiliser and fuel.
“Projections show that the income for the average grain farmer is around R4 million.
“If this was a bad year based on input shocks for fertiliser, fuel and electricity costs, this can put an average farmer out of business.”
Jooste urged the industry to adopt a method of sustainability for food production, which would see the projected maize surplus for this season, which is in the region of 1.5 million tons, utilised for biofuel and power cogeneration projects, instead of exporting job creation opportunities.
The producer price index for this year shows that costs shot up, according to official research. The farming requisite price index increased by 12.7 percent, with machinery costs increasing by 12.8 percent and fertilisers by 23.5 percent. Animal feed prices went up by 12.5 percent, while fuel prices increased by 5.2 percent.
In addition, the terms of trade at primary agricultural level declined further last year, Jooste said.
“For the small retailer, water and electricity went up by 600 percent in the last 10 years. The indications are that cost pressures will remain, which will result in an increased pressure on profits, resulting in lower returns on investments.
“The ability to create jobs in the sector is hampered by its unattractiveness to investors.”
Maize farmer Anthony Muirhead believes there is a lack of sufficient research to properly assess farmers’ profitability.
He stressed that farmers should work together to limit pressure in the value chain.
Muirhead’s farm produces maize, wheat and soya beans.