A new economic scourge is stalking markets internationally. It has helped force up interest rates in South Africa already and is likely to bring more rate increases. The scourge is runÂÂaway mealie prices.
Store-bought mealie-meal in metropolitan areas is up 22% since last year, according to the National Agriculture Marketing Council (NAMC). It released a statement earlier this month examining food price trends over the past year. Increases in international maize prices are being driven by United States President George W Bush’s support for bio-fuels, leading corn prices to increase by 50% in neighbouring Mexico.
Maize price increases in South Africa are part of wider food inflation, according to the latest inflation figures released this week. This is only slightly below fuel and power increases.
Fuel and food conspired to push the country’s key CPIX inflation rate to 6,5%, well above what economists had predicted. There are new warnings now that the Reserve Bank will have to push up interest rates again to contain the general increase in prices.
The cost of two litres of fresh milk is up 26% and white bread by 12,89%, says the NAMC.
The council says food prices increased on average by 13,76% between July 2006 and July 2007, well above the Reserve Bank’s upper target inflation rate of 6%. And they point out that as maize prices increase, livestock feed goes up, inflating the cost of meat and milk products.
Food inflation as measured by Stats SA has moved up from 1,3% year on year in 2005 to 8,3% now, says Stanlib’s Kevin Lings. It follows hard on the heels of rising energy costs, in fuel and electricity that have increased to 8,9% year on year.
Reserve Bank Governor Tito Mboweni has hiked interest rates by three percentage points since June last year when the present cycle of rate hikes began. The Reserve Bank’s monetary policy committee has warned that, with oil price volatility, food inflation is likely to remain a threat to rising inflation.
Globally, food prices are on the rise. The US Food Commodities Index, which tracks a dozen raw agricultural products, like wheat, saw inflation of 21% in the past year, says the NAMC. This is the largest increase since the index started 10 years ago. It also points out that the United Kingdom’s consumer price index showed annual inflation of 6%, the highest in six years.
Professor André Jooste, senior manager for market and economic research at the council, says there is a tendency to ”look for culprits” responsible for rising food prices. But he says local food inflation is following international trends. These are spurred on by factors that include increased affluence in developing countries and the emergence of bio-fuels as a player in the food price fluctuations, says Jooste.
Thousands of people gathered in Mexico City at the beginning of the year to protest against a steep rise in the price of corn tortilla. The cost of this dietary staple for many poor Mexicans was reported to have risen 50% by The Guardian. And the chief culprit was named as the increasing demand for bio-ethanol in the US, produced from maize.
Energy costs are not likely to ease off, as geopolitics see oil prices stay erratic. In a bid to curb US dependence on oil, its government has backed the push to use biofuels. This means that its massive grain producing capacity, a major global food source, is geared towards fuelling American cars.
Jooste says that from 2002/03 to 2006/07 the US produced on average 62,8% of the world’s maize exports. Whether it curbs exports or begins importing ingredients for bioÂÂfuels, the global price of maize is only likely to rise, he says.
The council points out that primary commodities like maize and soybeans also form part of the livestock feed markets. With more of these items going into bio-fuel production animal feed costs will rise, causing the price of grain, meat and milk products to escalate.
Rejane Woodroffe, chief economist at Metropolitan Asset Management, says that while supply side pressures, such as inclement weather on crop production, affect grain food prices, bio-fuel consumption is creating a new dimension in the demand side pressures affecting food prices.
”For the first time economists have to include this in their forecasts,” says Woodroffe.
The structural effects of this new phenomenon are difficult to determine at this stage, she says. It is possible, she says, that because of the increased price in maize local farmers could plant more crops and the market surplus could bring prices down. Whether this surplus will be absorbed by a demand for bio-fuel remains to be seen.
But, she says, it is important for government to flag bio-fuel demand as a potential problem, should it not be addressed properly in future policies.
Another factor affecting food inflation is increasing affluence in developing markets, such as China and India. As people move into higher income brackets, the demand for luxury food items like meat rises, placing pressure on supply.
Jooste points to regional dynamics as a factor in local food price increases. With increased immigration, from neighbouring countries like Zimbabwe, and a swell in the population, there is increased demand for food on the domestic market.
