Food price shocks
In the last few weeks there have been a flurry of articles on the potential global food price increases in the wake of the US Mid West drought which has affected around 80% of the US corn crop and 11% of the soybean crop. The US accounts for some 35% of global corn and soybean production (source). The role of corn and soybean as animal feed etc means that this drought has ripple effects through the food system as a whole.
“ In 2012, prices have risen across all the non-rice grains - wheat, corn and soybeans:
- Wheat prices are up over 50 percent since mid-June;
- The price for corn has risen more than 45 percent since mid-June; and
- Soybeans are up almost 30 percent since the beginning of June and up almost 60 percent since the end of last year.”
The World Bank has expressed concern about the impacts of these food price hikes on the poor and vulnerable world wide (Source.)
The rumblings have reached SA with COSATU issuing the statement below last week:
“The Congress of South African Trade Unions is outraged that maize prices have risen by 25% in South Africa since the beginning June 2012 and are likely to rise even further. This is particularly worrying as maize is a staple diet for the poor majority of South Africans, millions of whom are already struggling to get food on to the table for their families.
But what COSATU objects to most is that South African maize prices are not determined by market conditions in South Africa but are locked into world cereal prices as fixed at the Chicago Exchange. This latest increase is caused by a drought in the United States which has led to a 36% rise in maize prices around the world.” (link)
The local experience is not, however, solely the result of the US drought. Local markets and local politics continue to play a role.
“In South Africa, maize already costs double its 2010 price and almost 50% more than last year, said Mike Schussler, an economist at Economists.co.za.
Schussler said maize is particularly important because for many South Africans it is a staple.
The price of maize influences the prices of other foods, such as bread and meat.
The poor are especially vulnerable to food price increases because they use a large proportion of their income to buy food.
The very rich spend less than 10% of their income on food but the poor have to cough up almost 40% of their earnings to eat, according to Schussler.
Food inflation of above 10% - which Schussler expects soon - will seriously hurt buying power at a time when economic conditions are deteriorating. Low growth prospects moved the Reserve Bank to cut the key interest rate last month.
Absa head of agribusiness Ernst Janovsky forecast last week that food inflation will increase to between 12% and 15% in the next six to eight months.
If food inflation hits 15%, a 5kg bag of maize, which now costs about R28, would top R32 in a year. International price shocks could make the situation much worse.
The US, a major consumer and producer of maize, is experiencing a drought that has caused prices to skyrocket.
The problem in South Africa might be compounded by an increase in the cost of seed from the US.
A merger between local seed producer Pannar and the US-based Pioneer Hi-Bred could cause more headaches - seed prices might rise 12%.
This is according to the companies’ estimates in a submission to the competition authorities, said Sarah Truen, an economist at DNA Economics.
Seed is the second-biggest cost for maize farmers. It takes a larger share of capital than labour or fuel, and makes up between 12% and 16% of total agricultural input costs, according to Schussler.
He thinks the merger could lead to seed prices soaring by as much as 30% and leave Pioneer Hi-Bred and the US giant Monsanto with 90% of the South African market.
The merger between Pioneer Hi-Bred and Pannar has been approved by the Competition Appeal Court and is going ahead.
The Competition Commission, however, has asked for leave to appeal the ruling at the Supreme Court of Appeal.
”As far as I know, it is the first time the commission has gone this far to stop a merger,” said Nick Altini, head of competition at law firm Cliffe Dekker Hofmeyr.” (Full article here and similar here and here and here).
So, it was good to hear Helen Zille saying: “ Food security must be a priority in any country that wants to deal with economic exclusion and poverty, DA leader Helen Zille said.
“Food security is a vital component of economic liberation,” she said in a speech prepared for delivery.
“Although there are people who are hungry in South Africa, we are still a country that produces enough food to feed all 50-million people and export food.”
She said that land reform should not undermine food security” (link)
University of Cape Town