The impact of food prices

When I was a child, there were adverts on TV saying that “sugar gives you life”. Back then, carbo-loading was encouraged. Fast-forward a few decades and the current wisdom is that carbohydrates in general, and sugar specifically, are the source of much of the world’s obesity and health issues. The leading contender for the Dr. Evil crown is high-fructose corn sugar, which is prevalent in lots of synthetic foods, especially soft drinks.

Retailers operating in higher income neighbourhoods report running out of cauliflower – as people make cauliflower mash instead of potato mash! Quinoa (pronounced ‘keen-wa’) has become the new super-food.

In case you are wondering what the changing dietary patterns have to do with economics, the most likely answer is: “Not a whole lot”. It is not because some 5% of the world’s population has decided to reduce its carbohydrate consumption that grain prices have been plunging in 2014.

US corn (maize) prices are down 24% since the peak in April 2014, while wheat prices have fallen 27%. The latest US Department of Agriculture (USDA) stocks and plantings report is good news for food inflation going forward.

The report showed corn and bean stocks exceeding expectations, soybean plantings substantially above consensus and even the US wheat area planted was higher than expected. The clear takeaway from the latest report is that farmers are planting a lot more than they have in almost two decades. There will be 330.5 million acres of total field crops planted – the highest level since 1997.

International grain prices are key for South African maize and wheat prices. Since South Africa imports a large portion of the wheat consumed, the local price equates to the import parity price (international price plus the cost of transporting the goods to South Africa). Though SA will have a maize surplus in 2014, the export parity price (international price less the cost of transporting the goods to South Africa) will provide a floor for local prices.

In addition, maize is the main feedstock for most animals, and thus this has a big influence on the price of meat. Therefore falling international prices are good news for South African food inflation.

Food inflation matters for several reasons. Firstly, food prices contribute directly to overall consumer inflation – and thus will impact interest rates. This is particularly pertinent when the inflation rate is expected to fluctuate between 6.3% and 6.7% until January 2015.

Secondly, surging food prices contribute to social unrest. Every major revolution in the world (barring perhaps the American Revolution) has been precipitated by food shortages.

Lastly, higher food prices increase wage demands. Private sector wage discussions have already been volatile this year – with the prolonged platinum sector strike doing significant damage to the economy. Numsa is now on strike with a demand of at least a double-digit wage hike.

The government is due to enter negotiations with the public sector unions later this year on the next three-year wage agreement that will run from 2015-2017. They were generously compensated in the 2009-2011 period, when the inept Minister Richard Baloyi inked a deal that resulted in annual increases in the government wage bill of 14% per annum between 2009 and early 2013. This time around, South Africa cannot afford to grant public sector workers wage increases of much beyond the inflation rate in the coming years.

If they are more generous, the government will breach its self-imposed expenditure ceiling. This will almost certainly trigger further ratings downgrades. Therefore, a more benign food inflation outlook is good news for almost everyone, except perhaps food producers.

One negative effect of falling grain prices is that it makes maize and wheat products cheaper relative to vegetables or protein. I’m doubtful that we should eschew all carbohydrates, but I do think that a balanced diet with limited carb intake is optimal for me.

Unfortunately, this is also a more expensive option. In a country like South Africa, healthy eating is a luxury that many cannot afford.

A version of this article will be published in the Financial Mail of 18 July 2014.

Tagged with: , ,
Posted in News, Press Room

Subscribe to Our Newsletter



The investment objective of the STANLIB Global Property Feeder Fund is to maximise long term total return, both capital and income growth.