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Economists have warned that drier weather conditions and recent developments in international trade could lead to food price increases.
According to Stats SA, annual inflation for food and non-alcoholic beverages – a central reason for high headline inflation – dropped from 11.9% in May to 11.0% in June.
Although food price inflation is expected to continue dropping in the near term, drier weather conditions may hurt agricultural production – leading to further price increases.
South Africa is currently in an El Nino period, an uncommon weather pattern that happens every two to seven years, which results in drier weather conditions in South Africa.
In their Q3 Quarterly Perspective, economists at Absa said that the drier conditions could hurt food prices and the overall growth of South Africa’s economy.
“South Africa is currently experiencing El Nino for the first time since 2015/16. Expectations are that the weather pattern’s damage will be limited, given healthier soil moisture from the past four seasons of La Niña. But El Nino remains a downside growth risk worth monitoring in the months ahead,” the economists at Absa said.
Despite acknowledging the four prior rainy seasons, Investec Chief Economist Annabel Bishop also noted that El Nino could negatively impact food prices.
“In combination with the effects of climate change, which have been very marked this year in the northern hemisphere summer, South Africa’s summer crop production does hold some uncertainty and could see stickiness in food price inflation,” Bishop said.
David Rees, Senior Emerging Markets Economist at Schroders, also noted that drier conditions in South Africa could have a disastrous effect on both local and global food supply chains, pushing prices higher.
“While leading indicators imply that food inflation in South Africa should still fall significantly in the near term, the effects of El Nino could cause it to rebound in 2024,” Rees said.
Although Chief Economist of the Agricultural Business Chamber of South Africa Wandile Sihlobo admitted that the El Nino period could hurt agricultural production, he said it is unlikely to be as harsh as the El Nino event seen in 2015/2016.
“We come from four consecutive rainy seasons that have significantly improved soil moisture. Hence, we remain positive that the upcoming season will likely be decent, although down from the current large harvest,” Sihlobo said.
Despite the expectations that this El Nino period will be less severe than prior events, Absa economists noted that weather conditions are difficult to predict.
“While the El Niño effect is expected to be mild and brief, weather events are inherently uncertain, and a more severe and protracted period of dryer weather conditions would be damaging to the agricultural sector’s output and could generate inflationary pressures,” Absa’s economists said.
BRICS members not helping
In addition, recent development in India and Ukraine have increased the potential risk for food price increases.
The economists at Absa said that Russia exiting the Black Sea grain deal with Ukraine creates uncertainty over the region’s ability to supply – with Ukraine a major grain exporter.
In addition, India has recently banned the export of some rice varieties.
Sihlobo said these developments pose a risk to “bread and cereals” product prices, with South Africa importing millions of tonnes of rice and wheat.
Despite no notable immediate price increase for domestic maize and wheat products, Sihlobo said that it might take time for these developments in Ukraine and India to affect prices.
“Whether these price gains are sustained depends on the developments of the Black Sea Grain Initiative and India’s rice exports. Importantly, there is roughly a lag between three to five months between the price changes at farm and retail levels,” he said.
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