Low economic growth has a negative impact on food sector

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This is according to Herman Marais, managing partner at Agri-Vie, a food & agribusiness private equity investment fund, who says that the prices of essential goods and services are escalating at a higher rate than consumers are earning.

Marais says that most South African consumers are under pressure financially, struggling to make ends meet. "Consumers' living standards are declining as their spending power decreases, and the prices of essential goods and services are escalating at a higher rate than consumer earnings, resulting in decreased affordability for luxury items and increased price comparison behaviour."

He says that retailers are feeling the impact of dwindling consumer spending power. "The average grocery trolley in the supermarket cost just over R400 in December 2013, which was up by only 1.6% from the previous period. This indicates that consumers are cutting back, as this increase is more than four percentage points below the inflation rate."

Labour and energy costs

Marais says that food processors are being pressurised by price resistance at retail level, with labour and energy costs rising dramatically in the recent past. "Traditionally, the South African food manufacturing sector, like the rest of manufacturing in SA, was to a large extent built on the basis of competitively priced energy (electricity) and labour costs, however, South Africa's increased labour and energy costs have become less competitive in comparison to global peers."

"Cost and availability of labour and materials are the highest rated factors by South African manufacturers contributing towards competitiveness. Unit labour costs (the ratio of wages to labour productivity) in the manufacturing sector rose by an average of 5.8% per year from 1998 to 2012. Over the same period, unit labour costs in many European countries have fallen due to productivity gains. In addition, man-days lost to a surge in industrial action since 2012, particularly in the mining, agricultural and transport sectors, are likely to have had a negative impact on manufacturing productivity," Marais explains.

Farmers bear the brunt

"The all Farm Requisites Price Index, which is the official measure of the increases in prices of farming inputs, has more than doubled in the period since 2005, while the Producer Price Index has experienced a materially smaller increase. The input costs that have mainly contributed to this increase have been fertilizers, herbicides, pesticides, energy and equipment, to name but a few. Therefore farmers, who by nature stand at the back of the local food value chain, are currently in the weakest position as they bear the brunt of rises in input costs while having little leeway to pass on higher prices to food processors and retailers."

Marais says that Agri-Vie is invested in a portfolio of food & agribusiness companies who share many of the above challenges. "The Agri-Vie team works actively with its investee shareholders and company management on proven strategies to contend and overcome these challenges."