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US drought

US drought looks ominous for SA food prices

“We are in for a rough ride in terms of food price inflation… food prices will remain at a higher level for a long time,” comments Ernst Janovsky, the head of Absa Agribusiness on the likely local impact of the devastating drought in the US. A number of livestock, poultry and dairy producers that use yellow maize as a significant portion of their feedstock could find themselves in dire straits by the end of the year, leading some to abandon their businesses, as drought in the US fuels a record surge in global maize prices.

Not only will animal production industries be affected by the sudden run-up in the cost of yellow maize, but consumers will also take a hit as white maize prices are also poised to see a spike due to the unrelenting drought in North America.

In addition, wheat prices will increase significantly, which may place added pressure on bread producers.

Industry experts reckon that the preliminary wheat planting estimates for 2012 are down by 60 000 hectares, which will see the wheat using industries import in excess of 1 million tons.

This week the contract for the December delivery of yellow maize shot up by the close on the SA Futures Exchange 1.6 percent to R2 793 a ton, the highest since at least 1996, according to Bloomberg data.

White maize for delivery in the same month rose 1.1 percent to R2 829 a ton, also a record.

Ernst Janovsky, the head of Absa Agribusiness, said the ripple effects were huge and would place profitability in various industries under pressure.

He added that poultry, dairy, feedlots, livestock and pig farmers might struggle, pushing some to scale down production.

The high prices would also result in supply shortages of yellow maize by-products and raise food inflation.

“Food inflation will increase substantially, resulting in higher seed prices, which is a double whammy for farmers,” Janovsky said. “This will also drive prices up for consumers.

“We are in for a rough ride in terms of food price inflation… food prices will remain at a higher level for a long time,” he added.

Janovsky added that the Reserve Bank’s surprise 50 basis point interest rate cut last week augured a lower investment rate of return – something that would result in a negative capital flow.

The exchange rate was also expected to weaken, which would drive prices even higher.

Food price inflation was expected to increase to about 12 percent in the next six months. In a worst case scenario, the figure could be 15 percent….

Business Report: Read the full article

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