Factoring in the costs

“There is a historical lag effect between agricultural, manufacturing and consumer price inflation,” says Pick n Pay food director Kevin Korb. “The potatoes we are buying now are the ones planted at a time when the input costs were at excessively high levels. Farmers have to factor in these costs.”

How then does one justify the 41% increase in a jar of Ricoffy between January 2008 and January 2009; spaghetti going up 28.8%; and margarine and sunflower oil up 53% and 29% respectively?

The discussion over food price inflation has waxed and waned since the latter part of 2007, when the global economic boom put pressure on resources and drove up commodities like wheat, rice and sunflower seeds. At the same time, surging oil prices sent input costs — transportation fuel, fertiliser, plastic — into orbit.

Since the last quarter of 2008 there has been a correction. Between January 2008 and January 2009, international maize and wheat prices decreased by 13% and 32% respectively, according to the National Agricultural Marketing Council (NAMC).

Oil dropped to US43/barrel from $140 the year before, and in SA the price of petrol dropped from R10.40/l in July to R6.62/l in February.

Consumers grew impatient. Food inflation, they heard, was coming down, but it didn't seem like it. But in the consumer price index (CPI), food inflation was 17.1% in January and 16.1% in February. Retailers say it is declining by a percentage point a month.

But then trade union Solidarity came out with research that said that between January and March, the price of a basket of basic foodstuffs from Shoprite, Spar and Pick n Pay had actually increased.

A week later, union spokesman Jaco Kleynhans fuelled the debate by saying that SA's food inflation rate was consistently higher than that of similar countries. He pointed a finger at the retailers.

They were outraged. “There are a lot of spooks out there,” said Spar CEO Wayne Hook “The retailers don't talk and do not co-operate. We negotiate with Tiger or Nestlé independently. It's a war out there.”

“We are not cosy with our suppliers,” says Pick n Pay chairman Raymond Ackerman “We negotiate flat out, and the reality is that prices are coming down.”

Shoprite spokesman Sarita van Wyk says prices are down from their highs in 2008. For instance 750ml of sunflower oil is down 61%, brown bread 15%, 10kg of cake flour 24%, 2l of milk 6% and rice 1.4%.

A closer analysis of price increases shows that food pricing is a complex matter. A decline in one input does not automatically translate into cheaper food.

Take fuel: there are four major cost drivers to owning and operating a vehicle: depreciation, cost of capital, fuel and maintenance. These cost drivers account for between 60% and 85% of vehicle operating costs, says the NAMC report. “Fuel prices have dropped,” says the agricultural economist who edited the report, Andre Jooste “But wages, tyres and the capital cost of that truck have gone up.”

The rand's 30% decline in the past year against major currencies has delayed the benefits of international commodity price decreases. “There is a larger proportion of imported raw materials and packaging components in SA goods than we realise,” says Korb. “It's up to 60% in some cases.”

But, he adds, with the rand strengthening against the dollar, “the majority of commodity prices have decreased or at least stabilised. Where coffee and household goods have increased above 20% on rand/dollar packaging increases, Pick n Pay will now put pressure on suppliers.”

Electricity is another big input cost. This affects producers and retailers of chilled and frozen foods.

Food producers have also not passed on the price decreases as quickly, as they try to make back margin losses brought on by the very sudden price increases. For instance, “in 2007/2008 the wheat price increased by 80%, but bread increased by 20%,” says Jooste.

Government and consumer groups also do not always factor in other input costs like packaging, says Massmart channel executive Graham Rebello. “The cost of tin, paper, plastic and glass increased by 50%-plus in 2008.”

While some prices remain high (tin), others (plastic) are coming down.

The big three retailers say they are working aggressively with suppliers on prices. In some cases they walk a fine line. Says Korb: “We've had one or two major SA companies refuse to supply us because we would not accept their price increases. How far do you push your investigation into their pricing?"

Of the roughly 18000 products that the large supermarkets carry, about 5000 generate 75% of sales.

Some suppliers are coming to the party, with the likes of Reckitt Benckiser and Mars saying they will cut into their own margins to stabilise price increases.

Food inflation is high in SA. But Solidarity's direct comparisons with the likes of Italy or Spain are not constructive.

Consumer price inflation in SA was 9% in January, while food price inflation was 15%. Yet, “Food inflation in China is four times CPI,” says Rebello. “And it is six times CPI in Canada.”

“We have a unique set of circumstances in SA,” adds Korb. “We are at the foot of Africa and have currency issues, shipping and freight costs to contend with. Direct comparisons are not helpful.”

SA is now a net importer of food which, combined with issues of food security in the SADC region, may also push prices up in the medium term.

Source: Financial Mail

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