Two tales of food prices point to lag in inflation
September 26, 2008
Statistics often raise more questions than they answer. Data on food prices from different sources apparently tell two very different stories on inflation.
Standard Bank says The Economist food price index shows international food prices "have pulled back", with the dollar and rand price increases down to 39 percent year on year and 47 percent last month, from 67 percent and 81 percent in March and April, respectively.
But figures from South Africa's National Agricultural Marketing Council (NAMC) show spectacular increases in a wide range of food prices between July last year and July this year.
The biggest increases included medium fat spread, up a whopping 66 percent. Cake flour has climbed 61 percent, rice 60 percent, cabbage 38 percent, sweet potatoes 34 percent, pears 25 percent … and it goes on.
The apparent anomaly is explained by the fact that The Economist's indices reflect spot prices on global commodity markets, while NAMC figures relate to retail goods that have gone through the processing, distribution and packaging phases. The latter would be captured by the consumer price index, which reflects historic costs for longer.
Normally there is a lag of several months between producer and consumer inflation, but on this occasion it may take even longer, because retailers have had to absorb some of the higher agricultural prices for about two years.
In a competitive market, they have not been free to pass on the full cost to consumers. They will take this opportunity to recoup some of the lost revenue.
A comparison of grain prices at agricultural level, at the manufacturing stage and on store shelves gives some insight into the difference.
The grain component of the consumer price index last month was up 36.5 percent year on year. On the producer price index, at the manufacturing level, grain products were up 34 percent. However, food prices at the agricultural level of the producer price index fell 2.6 percent.
The NAMC says the "significant price increases for the maize product reported over the last year slowed down significantly and even declined in some instances". For instance, special maize meal declined 2.98 percent year on year.
Lambs to the slaughter
To what extent livestock farmers are able to achieve selling price increases before Christmas matters, but it matters less than the fact that a significant number are in financial distress.
Those facing the biggest margin squeeze as a result of maize prices that remain high, even if they have stabilised, are those who rely directly on grains for feed.
Small farmers, who inevitably have little opportunity to take on more debt, are hardest hit. This is hurting chicken, egg and pig farmers, as well as the owners of cattle feedlots, also known as beef fattening farms, which prepare animals for slaughter.
Beef farmers, who sit higher up the production process, may have some protection if enough rain has fallen in their area to give them grazing.
The situation for those totally reliant on grains will inevitably lead to consolidation.
While this will have horrible socioeconomic effects, not to mention cultural impacts, on the small farming landscape, bigger farming businesses may lead to a stronger agriculture sector. Economies of scale are vital to improve competitiveness, particularly if the country is to take advantage of export opportunities that will arise as China continues to eat more meat.
It is ironic that livestock farmers are under pressure at a time when prospects for grain farmers have improved. Unfortunately for livestock farmers, the high grain prices have coincided with soft consumer demand. Meat is a luxury and is more vulnerable to the slowdown than grain.
The jury may be out on when meat prices will rise, but rise they eventually will. Consumers will hope this happens after this year's Christmas braais, but if it doesn't hit this year, it will do so next year or in 2010.
ArcelorMittal steels itself
The big and possibly final showdown between Harmony Gold and ArcelorMittal South Africa will take place a month from now in Cape Town, when the competition appeal court hears argument regarding the appeal ArcelorMittal has brought against a R692 million fine for charging excessive steel prices.
In many ways, the case that Harmony brought against ArcelorMittal is a test case and has helped to extend local competition law jurisprudence.
It is common cause that ArcelorMittal has a dominant position in the South African market, producing about 75 percent of local steel output, and many believe that the group has abused that position.
The fight against ArcelorMittal was championed by former Harmony chief executive Bernard Swanepoel. The first time Harmony referred the matter to the competition commission, the commission said the gold mining company had no case.
Swanepoel then decided to take the matter directly to the competition tribunal and convinced the watchdog that ArcelorMittal had been charging excessive prices for its flat steel products.
Under Graham Briggs, who took the helm at Harmony last year, the mining company has not regarded the case as a priority.
In June Briggs appeared to be backing off in the battle to ensure that ArcelorMittal pays its fine when he said Harmony was likely to be "less aggressive".
But Briggs said he believed that the argument that Harmony previously made - that ArcelorMittal charged excessive prices for its flat steel - was valid.
ArcelorMittal is likely to put its all into the case to ensure that it overturns the ruling and the fine. If the ruling and the fine are upheld, there are likely to be severe consequences for the group in the long term, including possible civil claims and class action lawsuits.
Edited by Samantha Enslin-Payne. With contributions by Ethel Hazelhurst, Tom Robbins and Justin Brown
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