Food producers signal more tough times to come

It has been a horrid year for SA’s food producers, with many having to face the severe drought around the country and a volatile rand – all threatening higher food prices for hard-pressed consumers.

Already food inflation has accelerated to double-digit territory, 11.7% for October, while benchmark consumer price inflation has risen t0 6.4%.

Efficient Group chief economist Dawie Roodt says its house view is that food inflation will accelerate to about 12% in the next six months depending on the rand exchange movements.

He expects food inflation to moderate to below 9% in the second half of next year in light of the recent rand strength. Underscoring this is that the local unit has strengthened by 11.2% in the year to December 6.

A stronger local unit is good news given that the sustained El Niño drought – believed to be one of the worst on record – has pushed SA to import commodity wheat and maize given faltering harvest rates.

Estimates for crop harvests are bleak. Latest figures from the Department of Agriculture’s Crop Estimates Committee (CEC) indicate that the final white and yellow maize production estimate for 2016 summer crops dropped by 24% compared with 2015 (7.5 million tons vs 9.9 million tons).

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Source: Crop Estimates Committee

White and yellow maize is typically used in staple household items such as maize meal, flour and animal feed.

Final crop figures for 2016 – compiled by the CEC using farmer’s harvest number submissions and its own site visits to farms and others methods – will only be available in February.

On Tuesday, the Department of Agriculture, Forestry and Fisheries approved the import of genetically modified white and yellow maize from the US for the first time as the country grapples with shortages.

Already the country is a net importer of maize. Agricultural Business Chamber estimates that SA will import 3 million tons of maize in 2016. The chamber’s head of economics and agribusiness intelligence Wandile Sihlobo says 60% of the 3 million tons has already been imported mainly from Mexico, with the bulk being white maize.

The 2017/18 agricultural season looks promising with the total maize area planting expected to increase by 27% year-on-year. “We won’t need imports then but it all depends on weather patterns,” Sihlobo tells Moneyweb.

Food producers

Judging from the bearish outlook offered by two of SA’s major food producers Tiger Brands and Pioneer Foods, 2017 will be a year of more pain.

While their annual financial results last month were surprisingly resilient, both companies have warned of maize shortages in the country, sky-high input costs (mainly raw material such as wheat and maize), limited room for passing on higher costs to retailers which means that margins (a key metric for profitability) will come under pressure and weigh on earnings.

White maize spot prices rose from R2 875/ton in July to R 4 155/ton by December 5 as shortages persist and hopes for much-needed rainfall in recent months have been dashed. During the same comparable period, the price of yellow maize increased from R2 535/ton to R3 230/ton. Wheat prices declined from R4 100/ton to R3 854/ton.

The swings in maize and wheat spot prices are starting to bite Pioneer Foods, the producer of well-known products Bokomo Weet-Bix, Sasko Flour, Spekko rice and others.

Pioneer delivered operating profit growth of 6% to R2.3 billion on the back of revenue growth of 10% to R20.6 billion in the year to September. However, gross profit margins fell to 29.5% from last years’ 31.9% due to rising raw material costs.

“The drought has not only affected maize and other crops in SA but severely impacted on our organisation and continues to be prevalent. It will be with us for the next financial year,” says CEO Phil Roux.

In anticipation of a short crop harvest this year, Pioneer has secured maize for the first half of next year, says Roux.

Tiger Brands is also feeling the pinch. The company saw raw material costs increasing by 22% in its grains division, with brands Jungle Oats, Tastic rice, Ace Maize Meal and others affected. CFO Noel Doyle says in other segments such as sorghum and maize raw material inflation grew by 15%.

“There will be a higher level of inflation in the second-half. Hopefully, with good crops, we can see a reduction in raw material costs in sorghum and maize,” says Doyle.  Although group turnover grew by 11% to R31.7 billion, operating margins fell from 14.1% to 12.4%.

Implications on food prices

Despite a difficult environment, both companies were unable to pass on costs to retailers, who would inevitably increase food prices for consumers. Cratos Capital senior analyst Ron Klipin says it could take six to nine months before food producers pass on costs. “Any rise or drop in maize production costs and the strength of the rand generally takes long to feed through to retail prices. It’s not going to be immediate,” says Klipin.

After all, food producers are the first to feel inflation pressures. Over the past three years, grocery retailers Shoprite, Pick n Pay, Spar and Woolworths have been investing in price (limiting food prices while accepting lower margins) to drive more feet in store, drum up sales and grow market share.

However, SA’s retail sector is in the doldrums with the growth in consumer spending and confidence remaining subdued as rising living costs and interest rates continue to erode their disposable income. To maintain healthy balance sheets, some retailers might increase food prices.

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