While data from the Food and Agricultural Organisation (FAO) indicates that world food prices declined by 18.5% last year, South African food prices are still increasing, with Statistics South Africa (StatsSA) measuring a 5% increase in the cost of its benchmark food basket during 2015. The increasing prices of electricity and water, as well as the weak rand, are in part to blame. Christie Viljoen‚ Manager in Financial Risk Manager at KPMG in South Africa, provides an analysis of the situation.
For this year‚ the South African Reserve Bank (SARB) said in late-January that local food price inflation is expected to rise to 11% y-o-y (year-on-year) in 2016-Q4 – the highest in five years – from 5.9% y-o-y recorded in December 2015. A significant upward revision in its forecast for food price inflation played a big role in the central bank deciding to raise its benchmark lending rate by 50 bps on January 28 to the highest level in five years.
The SARB attributed a build-up in food price pressures to a depreciation in the value of the rand as well as the impact of El Niño on the local and regional agricultural sector. The South African Weather Service (SAWS) measured an average country-wide rainfall of 403 mm during 2015: at only two-thirds of the long-term average and the lowest recorded in a century.
This level of precipitation will‚ according to the South African government’s Crop Estimates Committee (CEC)‚ result in a near 25% decline in the country’s grain harvest during the 2015/16 agricultural season. Farmers’ organisation Grain SA expects the decline to be even larger due to the lateness of planting in some areas due to a moisture deficit.
Meanwhile‚ South Africa will have to import up to half of its grain needs this year‚ which is a big problem considering the recent record-low valuation of the rand.
