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SA food prices firmly on the up

A trusty proxy for SA food inflation – the price of a can of tomatoes – has increased sharply in recent months. So it was not surprising to see Statistics SA report that food inflation surged to 11% in October, up from an annual increase of 2,9% in January, writes Nazmeera Moola, director of Macquarie First South, in the Financial Mail.

Though SA is still a net exporter of white maize there are growing concerns that yellow maize may need to be imported next year. Therefore while white maize is still priced at the lower export parity price, yellow maize is heading towards the import parity price. This leaves the risk to SA food prices firmly on the upside.

Locally, both yellow and white maize prices are up 80%-90% in the past year, driven by higher global prices and lower closing stocks. This is quite worrying as the surge resembles the one we saw in late 2006 and early 2007, which pushed food inflation up to 17% in 2008. As a result, average 2012 food inflation could be far closer to 11% than the 8% previously forecast. And it could easily be higher. This has important implications for the SA macroeconomic outlook, local fiscal policy, investment decisions, competition policy and long-term land reform.

Starting with the macroeconomic outlook and fiscal policy, food inflation in the mid- teens will push overall CPI from 6% towards 8% in the next few months. Even if CPI peaks at 7%, this would make national treasury’s need to achieve a 5% wage increase for public-sector employees in each of the next three years virtually impossible. A wage increase of 5% will mean a negative real wage increase — in sharp contrast to the 2,5% real wage hike they received in 2011. Even if government accedes to a 7% increase, this will mean a zero real wage hike. Either way it doesn’t bode well for discretionary spending.

If treasury is forced to accede to a 7% increase, this will result in lower capital spending (which is desperately required to raise the potential growth rate) and higher bond issuance.

Rising inflation and higher issuance will also push up government borrowing costs. It also doesn’t help that foreign investors have turned net sellers in the past three months. In the past 18 months, foreign investors have poured R105bn into the local bond market. As European wobbles have begun to resemble earthquakes, this inflow has halted. Therefore government is increasingly dependent on local pension funds to buy its bonds.

Moving on to the equity investment implications, food inflation in the mid-teens could mean food retailer earnings growth ending up a fair bit higher than current consensus forecasts. Add to this my concerns about discretionary spending and it does seem like owning a food retailer makes sense — despite current valuations.

If a food retailer manages to achieve a net margin of 5% he or she is doing well. Therefore food retailers love food inflation. It pushes up their topline growth and boosts profits. Consequently, SA food retailers offered little push-back to food producers’ price hikes in 2008. As a result, Tiger Brands managed to expand its grain milling margin to 23% at the peak.

Therefore Massmart’s very price-competitive new food offering should be welcomed with open arms by government. After all, lower food prices are surely of greater benefit to the whole population rather than the bogeyman fears of unions over Walmart’s entry into SA?

Lastly, the prospect of SA importing yellow maize is a sobering indictment on government’s painfully slow and so far ineffective land reform programme. An ineffective policy which offered little post-handover support to communities is leaving arable land fallow and driving up SA food prices. And it is the poorest that will suffer most from the surge in food prices.

Source: Financial Mail

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