Food inflation entrenched in southern Africa

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Food inflation is becoming entrenched in southern Africa and there is little policy makers can do in the face of global markets, demographic pressures and soaring input costs. The price of putting bread on the table is headline news again because a scorching drought in the U.S. Midwest has driven corn prices to historic peaks. South African maize and wheat futures are also at or near record highs.

Food price pressures are bubbling in Africa and while inflation remains below peaks scaled in 2008, there are worrying signs prices might not subside as quickly as they did in 2009. Southern Africa is one of the few regions where corn is mostly grown for human consumption instead of livestock, and so the crop’s price is felt across the food chain. Wheat also has a big impact as countries here import most of what they need.

In South Africa, the continent’s biggest economy and no. 1 maize or corn producer, inflation was 5.5 percent in June compared to 11.6 percent at the same point in 2008. It accelerated to 13.6 percent in August that year. In Zambia, inflation ended 2008 at almost 17 percent but is currently 6.2 percent, a trend mirrored elsewhere in the region. South African inflation is not seen racing to 13 percent next year but food price pressures — which account for 14 percent of the inflation basket — are seen remaining in place.

Local wheat prices for example are sizzling with the December contract hitting record highs in July. There is a strong-nine month tie lag between South African consumer inflation and domestic wheat futures. And inflation pressures 9 months hence could have wide consequences as mine workers and platinum, gold and coal bosses will start sitting down then to hammer out new wage deals. This in turn could keep the pedal on overall prices in the economy if the settlements far exceed inflation.

INPUT COSTS

Even if grain futures suddenly fall back to earth, the prices consumers pay in South Africa and elsewhere in the region may not follow suit because of ballooning input costs. According to Mike Schussler, director of economists.co.za, South African seed prices have been rising at almost 18 percent per year since 1999, almost triple the average inflation rate over the same period, because there are so few distributors. “Regionally I think food inflation is likely to be higher for the next 18 months to two years,” Schussler said.
“I think the whole costs base here in southern Africa is under pressure as diverse costs such as rail fees and port fees and seeds all are increasing above the rate of inflation.” With inputs so high, commercial and peasant farmers alike will have no incentives to plant big crops if global grain futures do cool off and domestic prices fall with them. This in turn could push domestic prices back up.

And in the longer run, the outlook for regional food prices can only be skyward because of demography, which will lift demand, and also possibly climate change, which may hit supply if events such as the current U.S. drought become frequent. Take Zambia and Malawi. Both countries have been reaping bumper harvests in recent years, helping to contain inflation. Zambia needs around 2.5 million tonnes of maize for human consumption and output has been topping that. The 2010/2011 season saw a record crop of over 3 million tonnes. But this 500,000-tonne surplus could get snapped up by population growth if harvests don’t continue to grow.

According to the U.N. Population Fund, 46 percent of Zambia and Malawi’s populations are under the age of 15, a trend seen in other countries in the region such as Angola. In South Africa the number is lower but still high at 30 percent. Such a demographic profile can only mean demand for maize will continue to rise briskly for the foreseeable future. It also points to an economy where dependents far outnumber breadwinners, a scenario that further feeds into labour wage demands in the most unionised region on the continent.



Southern Africa also has a growing middle class that will rely less on maize as a staple but trends in other emerging markets suggest this shift in diet will boost consumption of meat products such as beef which also rely heavily on corn. It all points to growing demand amid uncertain supply: the key ingredients for a food inflation recipe.