As El Niño develops in the Pacific, the prospect of below-average rainfall across parts of Southern Africa could put pressure on maize and other summer crops.
The consequences could extend beyond agriculture, affecting food manufacturers, retailers, livestock producers and consumers already managing constrained household budgets.
However, the impact on businesses will depend on their exposure to agricultural commodities, the strength of their supply chains and their ability to absorb or pass on higher costs.
In an investment analysis, portfolio manager Mike Townshend and analyst Dhersan Chetty examine how prepared South Africa and selected food businesses are for a potentially difficult growing season.
El Niño occurs when sea surface temperatures in the central and eastern tropical Pacific become unusually warm, influencing weather patterns around the world. In Southern Africa, the phenomenon is commonly associated with hotter and drier conditions, although its severity and local effects vary.
The timing is significant for South Africa, where maize and other summer crops depend on rainfall during the planting and growing months. Prolonged heat and insufficient moisture can reduce yields, while higher fuel and fertiliser costs add to farmers’ financial risks.
South Africa enters the season with some buffers, however. Recent harvests have replenished grain stocks, soil moisture levels are relatively high and dams are reasonably well supplied. These factors could soften the initial impact of poor rainfall, although they would offer less protection if drought conditions persisted.
The regional picture also matters. Poor harvests in neighbouring countries could place additional pressure on food supplies and prices, particularly in markets with less irrigation capacity.
Maize is a key ingredient in South Africa’s food system, serving as both a staple for households and an important component of animal feed.
A decline in local production could therefore have a ripple effect across the food value chain. Higher maize prices can increase the cost of maize meal and animal feed, potentially pushing up the price of poultry and other livestock products. Disruptions to harvests in other countries could also raise the cost of imported food.
For food manufacturers, the effect will depend on their exposure to different commodities. Businesses that rely heavily on locally sourced maize may face different cost pressures from producers whose main inputs include wheat or other internationally traded agricultural products.
The impact on profitability will also depend on inventory levels, purchasing strategies and how quickly businesses can adjust selling prices.
Townshend and Chetty point to Premier and Tiger Brands as examples of businesses with some protection against a more difficult agricultural environment.
Both companies have significant exposure to wheat, where global supply conditions provide a different risk profile from the domestic maize outlook. Their established brands may also support pricing power, while cost-saving initiatives offer opportunities to protect margins.
Tiger Brands has exited maize milling, reducing its direct exposure to that part of the value chain. Premier, meanwhile, has increased stock levels to provide a degree of protection against potential input price increases.
These measures do not eliminate commodity risk, but they can influence when and how higher prices affect operating costs.
The distinction is important for investors assessing food manufacturers: exposure to the same broad sector does not necessarily translate into the same earnings outlook.
For Astral Foods, the main exposure is through the cost of feeding its poultry operations.
The company has hedged its key maize feed costs through the coming summer, according to the investment analysis. This should limit the immediate effect of rising maize prices on profitability during the period covered by those arrangements.
However, hedging provides time rather than permanent protection. Costs beyond the hedge period will depend on subsequent harvests and prevailing market prices.
For poultry producers, feed costs are a significant consideration because they influence production economics and the pricing of chicken, an important source of protein for South African consumers.
A sustained increase in feed costs could place pressure on margins if producers are unable to pass those increases on without weakening demand.
Food retailers may have more flexibility to adjust selling prices as supplier costs rise, but their ability to protect profitability is not unlimited.
Moderate food inflation can increase nominal sales, particularly if retailers’ operating costs rise more slowly. Yet higher shelf prices can also place pressure on household budgets, prompting shoppers to reduce volumes, trade down to cheaper alternatives or shift spending between product categories.
This creates a potential tension for retailers: passing on higher costs may protect margins in the short term, but it can also affect affordability and purchasing behaviour.
The wider consumer environment is relevant, too. If food inflation remains elevated, households may have less disposable income for discretionary purchases, potentially affecting retailers and businesses outside the food sector.
Higher food prices could also complicate the inflation outlook and monetary policy, although the broader effect would depend on the duration and spread of price pressures.
For South African businesses, the developing El Niño risk highlights the importance of commodity exposure, inventory management and supply-chain resilience.
Existing grain stocks, hedging strategies and cost-saving initiatives may help some companies absorb an initial shock. But these protections differ across businesses and cannot fully insulate the sector from a prolonged drought or a significant decline in agricultural production.
As the summer season progresses, the key indicators will include rainfall patterns, crop conditions, grain availability and commodity prices — alongside evidence of how higher food costs affect consumer demand.
For investors and the wider FMCG industry, the central question is not simply whether food prices will rise, but which businesses are best positioned to manage the consequences.
The strength of the harvest will ultimately determine how much pressure moves through South Africa’s food value chain, while each company’s ability to manage costs and protect demand will shape the effect on earnings.
