A hotter, drier summer threatens South Africa’s crops and could push up food prices. But the effects on company profits will vary. Portfolio Manager MIKE TOWNSHEND and Analyst DHERSAN CHETTY examine how prepared the country — and the businesses in our portfolios — are for El Niño.

South Africa’s summer planting season approaches with an unwelcome forecast. The South African Weather Service warns that the El Niño developing in the Pacific could become the strongest in living memory. It expects hotter and drier conditions across much of the country, just as farmers sow their summer crops. 

El Niño occurs when unusually warm water in the central and eastern tropical Pacific changes atmospheric circulation. The effects reach far beyond the ocean. Southern Africa generally becomes hotter and drier, while other regions experience heavier rain. But the strength of the event does not determine the severity of drought in any one country — local conditions and other ocean temperatures also matter.

For South Africa, the timing is unwelcome. Maize and other summer crops need rain during the coming months. Prolonged heat can damage plants already short of water. Farmers must also contend with higher fuel and fertiliser costs, making planting decisions harder before the first seeds go into the ground.

The country does, however, enter this season with some protection. Two decent harvests have replenished grain stocks. Soil moisture is relatively high and dams are reasonably well supplied. These reserves should soften the initial impact of poor rainfall, although they cannot protect every farm or sustain crops through a prolonged period of drought. Neighbouring countries with less irrigation may be more exposed.

The consequences extend well beyond farming. Maize is both a staple food and an important ingredient in animal feed. Higher prices can therefore reach households through a bag of maize meal or the price of a chicken. Dry pastures also put more pressure on livestock farmers. Meanwhile, disrupted harvests elsewhere can raise the cost of imported foods even where local supplies are adequate.

For consumers, dearer food leaves less money for other purchases. Retailers selling discretionary goods may feel the effects of a drought without buying a single tonne of grain. A sustained rise in food inflation could also complicate the outlook for interest rates, although much would depend on whether price pressures spread through the wider economy.

For investors, this makes the details of each business important. Food producers differ in the ingredients they buy, the stocks they hold and their ability to recover costs through selling prices. Higher food inflation can squeeze one company’s profits while leaving another relatively well protected.

Our holdings in Premier and Tiger Brands illustrate this distinction. Both have substantial exposure to wheat, for which global supplies offer a better cushion than the local maize outlook suggests. Strong brands help support their businesses, while cost savings offer scope to improve margins. Tiger Brands has exited maize milling, and Premier has increased stocks to provide some protection against rising input prices.

Astral Foods has taken a different precaution. The chicken producer has hedged its crucial maize feed costs through the coming summer. That should limit the immediate effect of a further rise in maize prices on its profitability. The protection has a time limit, however, since costs beyond the hedge period will depend on subsequent harvests and market prices.

Food retailers can generally pass higher purchase costs on to shoppers. Moderate food inflation may support sales and profits if their own operating costs rise more slowly. But there are limits. Stretched households can buy less or switch to cheaper products, so rising shelf prices alone do not guarantee better earnings.

Our food holdings have some defences against a difficult summer. As the season unfolds, we will watch how long those protections last and whether higher costs begin to weaken demand. Grain stocks and hedges can buy time. The eventual harvest will determine how much of that time businesses need.