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SA will have to weather high meat prices into next year
SA will have to weather high meat prices into next year

SA will have to weather high meat prices into next year

ECONOMIC NEWS - Oct 14th 2016, 08:59

According to the Food and Agriculture Organisation of the UN (FAO), food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life. 

An adequate supply of food does not in itself guarantee household-level food security. Concerns about insufficient food access have resulted in a greater policy focus on incomes, expenditure, markets and prices — in a nutshell, economic access to food.

Economic access to food, in particular, food prices, is a topical issue in SA. This is understandable considering the 2015-16 El Niño-induced drought led to a 23% year-on-year decline in total summer crop production, to 9.2-million tonnes in 2016.

This is exacerbated by the fact that our food security situation was coming from a low base, since 2015 crop production was already 28% lower year-on-year, a decrease of 11.9-million tonnes from the more normal level of about 16.5-million tonnes in 2014.

As a result, food inflation has maintained an upward trend, with the August 2016 reading at 11.6% year on year, according to data from Statistics SA. Agbiz estimates this could peak at 12% year on year in the fourth quarter and then decelerate in 2017 to a single digit. This is based on the assumption that agricultural production will recover in the 2016-17 production season, as weather forecasters continue to suggest a possibility of above-normal rainfall this summer.

If this materialises, the International Grains Council estimates that crops such as maize could recover to roughly 12.9-million tonnes, which would be a 72% year-on-year rebound. In addition, industry estimates for SA’s 2016-17 maize production vary between 11.8-million and 13-million tonnes, all underpinned by an assumption that climatic conditions could normalise.

With the early harvest expected in about April 2017, consumers could start to see the real benefits of expected crop recovery roughly in the third quarter of 2017.

Contrary to plant food products, meat prices could increase or remain high next year. In fact, meat prices could remain high throughout and beyond 2017 as farmers continue to rebuild their herds. This comes after slaughtering rates doubled in 2016. According to data from the Red Meat Abattoir Association, in 2014 the average weekly slaughtering rate in SA was about 6,500 head of cattle, and this went up to an average of 15,000 head per week in 2016.

The increase in the slaughtering rate created a supply glut that kept prices under pressure throughout 2015 and for most of 2016. The yellow maize price, as a key feed ingredient for the livestock industry, usually serves as a guide for potential meat price trends — that is, a decline in yellow maize prices suggests that meat prices would probably follow a similar trend, albeit with a lag.

Yellow maize prices increased by 60% year on year for most of 2016, whereas meat prices saw only a moderate increase mainly due to the supply glut.

However, prices are expected to increase strongly in the last quarter of 2016 and they could get support for the next two or three years as farmers rebuild their herds.

The expected decrease in plant food prices would, ideally, lower the overall food inflation. However, meat could overshadow some benefits of this expected decrease because of its higher weighting. Meat constitutes about a third of the general consumer price index headline food basket.

Due to the high weighting of meat in the food basket, it is of particular concern to what extent the 2015-16 drought caused permanent damage to the industry. More information on this will become available as the season progresses.

Weather forecasts present a promising picture for the coming season and crop production is expected to recover. However, the aftermath of the drought will be with us for years to come.

For those participating in the food retail sector, higher meat prices are expected to cause a greater challenge over the coming months and compromise household-level food security.

Overall, weather remains a key risk factor. If the expected normalisation or above-normal rainfall does not materialise, the outcome would be disastrous for the agricultural sector and household food security.

• Sihlobo (@WandileSihlobo) is head of economic and agribusiness research at the Agricultural Business ChamberFrom DFM Publishers (Pty) Ltd. 

Read more about: price hikes | meat | fao | economy

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