SA Food Inflation Why all the fuss?

Transcription

1 SA Food Inflation Why all the fuss? Gina Schoeman Lead SA Economist February/March 211

2 The Food Map SA CPI Global EM SA CPI Food The Food Story SA SA Retail SA Manu SA Agri 2

3 Global food inflation Global commodity prices are back up to 28 levels, bringing global food inflation fears back onto the table Global grain price growth is nearing 28 levels World stocks of corn are down (wheat is up) 14 % y/ y Million metric tonnes Yellow Corn No 2 Wheat Corn Wheat No 2, Hard (Kansas) Soyabeans, No 1 Yellow 28/ 9 29/ 1 21/ 11 Dec 21/ 11 Jan 33

4 Global food inflation Easy money is not easy for all EM why commodity inflation could result in different policy responses Commodity prices are up in USD terms AND EUR terms Index 1/ 1/ 5 = 1, USD 32 Index 1/ 1/ 5 = 1, EUR Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 CRB Spot Index Food CRB Spot Index Metals WTI Oil Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 CRB Spot Index Food CRB Spot Index Metals Oil 44

5 Emerging markets Greater incidence of food in EM inflation is a natural consequence of the average larger weight of food in the CPI basket (people spend proportionately less money on food as income rises) Incidence US 25-present Incidence EM 25-present Commodity contribution to the CPI % y/ y increase in US Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Ex food and energy Food Energy Commodity contribution to the CPI % y/ y increase in EM Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Ex food and energy Food Energy 55

6 South Africa Across the 56-month period that headline CPI was on the rise (.1% y/y Jan % y/y Aug 8), food contribution rose.5pp to 4.4pp. With 28 s food-led inflation spike still fresh in the memory of investors, it is easy to understand why the topic of food is at the top of the inflation agenda Food inflation accounted for one-third of the peak of CPI in Aug ppt cont ribut ion CPI Excl food CPI food 66

7 South Africa: on the farms SA faces yet another bumper crop of maize in 1/11 harvest season but plantings have already declined and more cutback can be expected.. Exacerbating to the corn surplus situation is (1) loss of S. Africa export market, (2) transport difficulties, (3) weather Bumper crops going into a fourth year Maize at export parity in surplus season 2 R 1,915 R 2, 4, 13.2m 15 R 1,773 R 1,8 3,5 3, 2,5 2, 12.6m 11m 1 5 R 1,684 R 1,26 R 1,417 6/ 7 7/ 8 8/ 9 9/ 1 1/ 11 Beginning stocks Production Consumption Exports Price R 1,6 R 1,4 R 1,2 1,5 1, 5 7.3m Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Yellow Maize, lhs, R/ton Export Parity, lhs, R/ton Import Parity, lhs, R/ton 12.8m 77

8 South Africa: in the factories Non-food inputs costs make up as much as 55% of the overall cost of manufactured food. As input costs rise, this will be passed through to the retail level. Input costs have risen at manufacturing level Jan 8 Jan 9 Jan 1 Jan 11 PPI Pulp, paper, cardboard % y/ y lhs PPI Plastic products % y/ y lhs PPI Electricity, % y/ y, rhs PPI Diesel, % y/ y, rhs Manufacturers are signaling higher prices 12 Net balance Raw material costs, lhs Manu. selling price lhs PPI Manu. food % y/ y rhs 88

9 South Africa: on the shelves On top of substantial non-food input costs at the manufacturing level, retailers report that non-food costs make up an additional 25% of total costs. Non-food costs pass through to retail prices A ¼ of food retail costs are non-food related Employee 1 Other Rental costs Rm 9 3% 2% 9% Farm Manu Retail Non-food Food Cost of goods sold 85% Depr. / amort. 1% 99

10 South Africa: Retailers & producers Shoprite: H1 11 (July-Dec 1) -1.2% internal food inflation..substantially high cost inflation.. Pick n Pay: H1 11 (Mar-Aug 1) +.1% internal food inflation We expect food inflation to peak at around 9% Suppliers are signaling double-digit food inflation on its way Spar: FY1 (Sept 9 Sept 1) +1.% internal food inflation Food inflation of 4-5% is healthy due to inefficiencies in the supply chain Listed retailers / producers Woolworths: H1 11 (July-Dec 1) +3.% internal food inflation (value-add!) 8% food inflation this year Tigerbrands Results 21: Pioneer Foods Results Nov 21: raw material prices increasing significant packaging cost push (citing utilities) Above inflation cost push inflation: wages, electricity & transport 1

11 South Africa: base effects are strong Our calculations show 3 months from soft commodity prices to PPI agri food, 6 months from farms to factories and 3 months from manufacturers to retailers Plus, base effects are strong in month lag exists between PPI and CPI food Base effects are strong in 211 (assume flat m/m growth) 1.6 % y/ y PPI Agri Food % y/ y PPI Manu Food % y/ y CPI Food % y/ y.2. Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Base effects: food (assuming % m/ m increase) 11

12 South Africa: CPI food to end 211 at 7.5% y/y Higher input costs to food production, the above-mentioned grain price forecast, and cost challenges at the manufacturing and retail levels have led us to push up our CPI food forecast to 7.5% for end-211 (from 3.5% y/y currently), peak just below 1% in Q2 12 and taper off to 6.3% y/y by end-212. Food inflation to rise to 7.5% by end Ave.8% 2 16 Ave 7.6% Ave 4.7% Actual CPI Food % y/ y Model-fit: CPI food plus forecast % y/ y 12

13 South Africa: volatility a risk Keep in mind that SA CPI food is notoriously volatile, spending most of its time since 2 either above 9% y/y or below 3% y/y Scenario analysis shows a peak in Q2 11 ranging 8.1% y/y 11.9% y/y CPI food is mostly below 3% y/y or above 9% y/y Scenarios for CPI food 5 # of occurances Curr. food CPI -3 % y/ y 3-6 % y/ y 6-9 % y/ y > 9 % y/ y 2 Peak Q2 12: 18 Low 8.1% 16 Base: 9.7% 14 High 11.9% 12 1 Absa Capital 8 forecast Actual CPI Food Low case scenario Central probability High case scenario 13

14 South Africa: more moderate than 28 & EMs The coming cycle will likely be more moderate than 28 because the direct weight of food within headline CPI has fallen from 23% to 14.3%. This has helped South Africa avoid the same food price pressures hitting EMEA headline inflation rates at present SA s food weight is relatively low SA recording lower food pressure than EM Phillipines Russia Thailand China Poland Turkey Indonesia Mexico Brazil Hungary South Africa Euro zone Korea Food weight in CPI, % % 16% 14% 12% 1% 8% 6% 4% 2% % Jan- 6 Sep- 6 May- 7 Jan- 8 Sep- 8 May- 9 Average EMEA CPI % y/ y Average EMEA Food CPI % y/ y SA CPI % y/ y SA Food CPI % y/ y Jan- 1 Sep- 1 14

15 South Africa: CPI food to end 211 at 7.5% y/y Food, petrol and ZAR weakness will push headline CPI higher through 211/12 After being the 5th strongest currency in 21, the ZAR is now the worst performing currency since the start of 211 (against expanded majors) Food inflation will add to headline CPI 1 p p t c o n t r i b u t i o n 9 A b s a C a p i t a l fo r ec a s t D ec 8 D ec 9 D ec 1 D ec 1 1 D ec 1 2 C PI ex c l fo o d C PI fo o d 15

16 South Africa: Headline CPI & Rates We forecast headline CPI to rise to 5.7% y/y by year-end and 6.1% by end-212, averaging 4.6% in 211 and 6.% in 212 We think the hiking cycle starts in January the MPC remains concerned about below-potential GDP growth and is willing to tolerate first-round external supply-side shocks. We think a hiking cycle in 5bp increments will leave the repo rate 25bp higher by September 212 We are above Reuters consensus We expect an above-6% print by end CPI %y/ y Range Reuters average Abcap (old) Abcap (new) Q1 11 Q2 Q3 Q4 Q1 12 Q : Up 25bp at 14 5bp 12 increments 1 211: 8 On hold % target floor 6% target ceiling Headline CPI (%, y/ y) Repo rate (%) 16

17 Thank you & until next time, Gina Gina Schoeman Lead SA Economist Macro Research, Absa Capital Tel: