Food, Agriculture and Natural Resources Policy Analysis Network (FANRPAN) Food, Agriculture and Natural Resources Policy Analysis Network (FANRPAN)

South African Food Cost Review 2009
The National Agricultural Marketing Council (NAMC) and the Department of Agriculture, Forestry and Fisheries

It is evident from statistics pertaining to 2009 that input, commodity and food prices have declined significantly from the highs experienced during 2008. The global Food Price Index (FPI) as measured by the Food and Agricultural Organization (FAO) decreased with 20.77 % from 2008 to 2009. The main reasons for this decline in prices include, amongst others, the following:
  • Significant expansion in world cereal production on the back of high prices; this expansion was mainly in developed countries, while Brazil, China and India also experienced higher production of cereals.
  • The emergence of the financial crises during late 2008 and the subsequent global economic recession in 2009 had a significant negative impact on global economic activity. The result was a significant drop in oil prices, which culminated into lower energy, fertiliser and distribution costs. The economic slowdown also resulted in a weaker demand for agricultural inputs and food.
Although prices have declined significantly, prices for most inputs, commodities and food were still at higher levels in 2009 than before the hike in prices that commenced in 2007. In addition, the significant drop in commodity and food prices measured at a global level have not necessary translated into significantly lower prices at an individual country level. The FAO reports that 80 % to 90 % of all cereal prices monitored by them in 27 countries in Sub-Saharan Africa were more than 25 % higher than before the food price crisis, and similar trends were reported for countries in Asia and Latin America. Reasons provided for the aforementioned include reduced harvests, higher or delayed imports, civil conflict, devaluation of national currencies, changes in food and trade policies, increased incomes and demand, transport constraints and higher transport costs.

There is also increasing concern that commodity and food prices will rise again in the near future. The FAO argues that with the exception of oil prices, the factors that contributed to high food prices remain unchanged, supplies have not increased substantially and stocks remain low. Other factors that could put upward pressure on food prices include, amongst others, an increase in area dedicated for growing crops for biofuels, a growing world population, migration and urbanisation, exchange rate variability (especially the devaluation of the US Dollar), and climate events.

Due to South Africa's liberalised trade policies and deregulated marketing environment price events on the international agricultural commodity and food markets are transmitted to the domestic market relatively fast. For example, a commodity like wheat and food products like rice, palm oil and chicken cuts are among the leading agricultural commodity and food items imported by South Africa due to the fact that South Africa does not produce enough or very little of these items. Prices for these items will therefore almost always reflect import parity prices, which mean that local demand and supply conditions will not have any significant bearing on domestic prices as is the case in the maize industry. In addition, global inflationary pressures will be transmitted much faster onto the local market for these commodities and products. This is in stark contrast to the local maize industry where local maize prices moved more or less sideways when international maize prices were on the increase during 2008 due to local production that exceeded local consumption. If local maize production was deficient to meet local demand for maize, the local price of maize would have been approximately R1 500 per ton higher during mid-2008, which would have resulted in even higher food inflation in South Africa during 2008. This is a clear indication that conditions could be created where local consumers are shielded against international price shocks, i.e. the expansion of local production to force prices to move lower than import parity. There is however limited room for import substitution due to the type of products that are imported.

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