Is food price inflation shock all bad?

Unlike Newton’s law of gravity, what goes up, doesn’t always come down – especially when it comes to food prices. And seeing we’re in for tough times, changing your buying behaviour counts more than ever

The barrage of bad news can be overwhelming: hikes in fuel prices, food and electricity; the drought; fluctuating rand; high unemployment; a likely economic downgrade; and almost no economic growth.

It costs more to farm, so food producers are paying more for raw materials, and those costs are passed down the line to retailers (if their suppliers haven’t already been locked into contracts), and at some point absorbed by the consumer.

In particular, food price inflation has hit the country hard: maize meal is up sharply from a few months ago, fresh produce is more costly; and some proteins have become out of reach for a large segment of the population.

And those cheaper options and specials that we rely on are increasingly rare. Little wonder then that traffic to the Mall of Africa in Midrand was backed up along the highway for kilometres last Thursday.

By way of example, in urban areas, a 10kg pocket of potatoes now costs about R90 (if you’re lucky), and they’re noticeably being sold in 7kg or smaller bags.

A popular Italian olive oil has shot up from about a R100 to R190 at a major retailer. Lamb has become almost unaffordable, costing about 40 percent more than a few months ago. Poor rural consumers are much worse off, paying more in their areas because the options are few.

My local greengrocer observed that not only was the quality of fresh produce poorer due to the drought, people were putting far less into their baskets (with most ditching the trolley altogether), so she’s forced to stock less in order to reduce wastage.

A butcher told me he’s had to absorb the costs of rising meat prices because he can’t pass those on to his customers for fear of losing them. But, he says, prices fluctuate and producers are still turning a profit.

Business is far from booming for the small businessperson – competition is tight, so retailers don’t easily push up prices; everybody’s hurting.

Last week, Debt Rescue issued a release, warning that the increases in fuel and food prices are a major blow, with the cost of red meat rising sharply (by an estimated 50 to 60 percent) due to the drought.

The debt management firm quoted Efficiency Group chief economist Dawie Roodt’s projection that food prices will rise about 12 percent by year-end, which is going to have a devastating impact on consumers.

“The prolonged drought is the major factor but there are also other factors at play, such as the massive increase in the price of maize, which is the staple food for fattening beef before going to market,” he said.

Neil Roets, the chief executive of Debt Rescue, said that in addition to the increase in the price of red meat, consumers should also prepare for another increase in the fuel price, which will have a knock-on effect on other commodity prices.

“We are on the eve of a perfect storm which is going to affect everybody, but especially the poorest of the poor, who spend more than 50 percent (of their income) on food.”

Roets said the fact that most consumers owed more than 75 percent of their monthly salary to creditors was a sign of the times and that Debt Rescue had seen double-digit applications for debt relief by overly indebted consumers.

But entrepreneurs are natural optimists, which is why people took such notice of Shoprite Group chief executive Whitey Basson when he said things might seem bad but there were signs of improvement.

“While the drought and weak rand have pushed up food inflation, there are signs that upward pressure on food prices could be starting to ease,” he said last week.

“(The prices of) some foods have stabilised, and while it may take some time for other prices to come down, (some are) attempting to push through unnecessary price increases fuelled by the frenzy emanating from recent reports about spiralling costs.

“Once relief from the current drought occurs, basic commodity prices will normalise again and, combined with the rand’s recent strengthening against the US dollar to levels last seen in August 2015, the price of imported products will also start easing.”

For now, Basson said there were affordable food options available to help stretch one’s budget.

“Consumers could take advantage of alternative, cheaper proteins such as pork – where the price has actually declined 4 percent – rather than beef, which is priced 15 percent higher than a year ago.

“The prices of frozen chicken, UHT milk and canned vegetables overall have actually decreased during March this year.

Starch substitutes such as pasta over potatoes, which are experiencing high inflation due to the drought, haven’t had prices impacted to the same extent and could help consumers’ budgets go further.

“Frozen vegetables, for example, have experienced far lower price inflation of about 2 percent compared to fresh vegetables (carrots for example are up 60 percent due to the drought) because of the lag effect on their price combined with longer-term procurement contracts that have been secured by Shoprite.”

Of course, pork is not eaten by a significant sector of the population and pasta is not as nutritious as potatoes, but Basson has a point: think about your consumption to get over the rough patches.

Shoprite then announced it has locked the price of its own bakery loaves of brown bread at R4.99 – less than they cost a year ago – despite the 34 percent increase in the import duty on wheat.

Not to be outdone, Pick n Pay’s David North, the group executive for strategy and corporate affairs, told me: “We do everything we can to keep food prices as low as possible.

“Over the past year we restricted our selling price inflation to 3.1 percent – well below CPI (consumer price index) of 5.3 percent.

“We achieve this by being more efficient, enabling us to pass on cost savings to our customers through lower prices.

“We work hard with our suppliers to ensure that any price increases are only justified by rising input costs.

“We offer regular promotions and specials to help customers get the best value for their money.

“Our Brand Match programme is a great way to make sure customers are getting the best prices for the most popular items. Our Smart Shopper programme, which now has over 10 million members, also offers customer coupons and vouchers for discounts that are in line with their shopping habits.

“To make their rand go further, customers can be flexible in choosing products which are less affected by price increases as a result of the drought and currency depreciation.

“For example, customers may substitute rice for wheat-based products, or buy more chicken and less beef.

“They can also shift from branded products to better-value private-label alternatives.

“We are committed to helping our customers lead healthy and active lives.

“For example, we always have items of fruit and vegetables on promotion as we know how important this is to helping customers maintain healthy and balanced diets,” according to North.

Last week, Pick n Pay announced its key financial results, which showed their turnover was up 8.2 percent – the highest in six years. Like-for-like turnover was up 3.8 percent and sales from new space rose 4.4 percent.

The retailer’s gross profit margin improved to 17.9 percent; it saw a 24.1 percent increase in other trading income; value-added services were up 35 percent; internal inflation was tightly controlled at 3.1 percent vs CPI food at 5.3 percent; like-for-like trading expenses were contained at 5 percent despite above inflation increases in electricity, utilities and security costs; segmental revenue for the Rest of Africa Division was up 15.9 percent in constant currency terms; and it is planning to expand into the lucrative Nigerian market.

Woolworths hadn’t responded to my query by our deadline, but the major retailers (and small businesses) are all absorbing costs to some extent and holding off on price increases.

Times might be tough but it forces us to rethink the way we are spending and be more conscious of money.

Basson is right: if you change the way you think about your shopping, you won’t feel the impact quite as hard.

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