Rising global commodities not a threat to SA CPI

The latest UN Food and Agricultural Organization (FAO) food price index indicates a 34 point gain since the previous Food Outlook report in June.

FAO says the index averaged 197 points in October, only 16 points short of its peak in June 2008.

Import effects

But Frost and Sullivan analyst Craig Parker says the higher the dependence a country has on imports to satisfy its food requirements, the higher the relative effect international food prices for staple commodities will have on domestic food prices.

These prices will then in turn be affected by the strength of the local currency.

In the South African context, the rand is relatively strong at the moment and this has minimised the effect of international food prices. We have also recently had strong maize crops, which have kept price increases low, Parker said.

International cost drivers

International food prices have been most affected by natural disasters and speculation on international markets, which has driven prices up, he added.

Parker explains that a recent study by the International Food Policy Research Institute has found that food price transmission to the South African market was relatively weak in the long run.

At present our food price inflation is below total inflation and this is in contrast to the relationship between food price inflation and total inflation in other countries at the moment. If you look at China their inflation rate is 4.4% and their food inflation is about 10%.

Rising energy costs

The rand and strong agricultural production have kept prices low. But the major concern for food prices in the next 1 to 2 years should be the rise in energy costs.

Increases in electricity and fuel costs will translate into higher food prices. If South Africa were to experience lower levels of agricultural production and the prices of energy place upward pressure on producer prices, price increases will definitely be transferred to the consumer, he says.

Dr Ayodele Akambi, senior economist at Pan African Capital Holdings, says food inflation will remain subdued for the foreseeable future.

The food inflation component has a 15.7% weighting in the overall Consumer Price Index, which is quite substantial, and has contributed to the lower consumer inflation that we have encountered thus far, Akambi says.

The increase CPI data in October was mainly the result of a pick up in transport inflation, which has an 18.8% weighting in the overall CPI basket.

Connecting increases

FAO says the upward movement of prices are connected to several factors, the most important of which are a worsening in the outlook for crops in key producing countries, which is likely to require large drawdowns of stocks and result in tighter global supply and demand balances in 2010-2011.

Another leading factor has been the weakening of the US dollar from mid-September, which continues to sustain the prices of nearly all-agricultural and non-agricultural traded commodities.

The increase in international prices of food commodities, all of which accrued in the second half of 2010, is boosting the overall food import bill in 2010 closer to the peak reached in 2008, the report indicates.

Vulnerability

Nicky Weimar, senior economist Nedbank, says the world economy, including SA, remains vulnerable, hence the anaemic demand.

In addition, she says SA had a good crop in the past season.

"SA will be able withstand cost push pressures for the rest of 2011, partly due to a firmer rand. Food retailers have borne the brunt of this lower demand, as their margins came under pressure. We might see some impact of the international prices beginning to filter through in 2012.

The pressure on prices was first felt in the cereal market, most notably for wheat and barley, in August. Everyone is holding thumbs a new food crisis is not emerging.