South Africa’s food price inflation softened to 5,6% y/y in January 2021, from 6,2% y/y in the previous month. The deceleration applied to most product prices in the food basket, except for bread and cereals, which accelerated from the levels seen in December 2020. Nevertheless, this was overshadowed by the slowing price inflation in meat, fish, milk, eggs, cheese, and fruit and vegetables.

The bread and cereals products price inflation mirrors the increases observed in grain prices over the past few months. The current slightly elevated price inflation for these product prices will likely prevail for most of the first quarter, as grain prices have continued to surge since the beginning of the year. While South Africa had its second-largest grain harvest in history in the 2019/20 production season, and ordinarily one would have expected prices to soften, we have experienced the opposite.

As indicated in previous notes, domestic grain prices remained elevated because of the strong demand for South African maize across Southern Africa and markets in the Far East. The weaker domestic currency also added to the price increase and spillovers from higher global grain prices. The global grain market was primarily driven by the growing demand for grain in China.

Nevertheless we expect South Africa’s grain prices to soften from the second quarter on the back of an expected sizeable domestic maize harvest of 16,6 million tons, from 15,4 million tons in the 2019/20 production season. This is all against South Africa’s annual consumption of approximately 11,4 million tons.

Meat, which has a higher weighting of 35% in the food basket, saw food price inflation decelerating in January 2021, in part due to increased supply following slightly higher slaughtering activity in December 2020. Cattle slaughtering was up by 1% in December 2020, at 281 043 head. This slight increase, combined with relatively depressed household incomes, has partly contributed to softening the product’s price inflation. In terms of fruit and vegetables, the domestic supply recovery is the main contributing factor to easing price inflation.

Inflation to remain at slightly elevated levels

From now on, we still expect South Africa’s food price inflation to remain at slightly elevated levels in the first quarter of the year because of higher grain prices and the imported vegetable oils and fats. But from the second quarter of the year, grain prices could soften and filter through with a lag on the bread and cereals products prices.

This product category also has a higher weighting of 21% in the food basket, and changes in its price inflation will be noticeable. In terms of meat, we expect a sideways price movement for the coming months. Slaughtering of cattle could slightly improve in 2021, and the base effects on poultry meat, which increased in 2020 partly as a result of an import tariff hike, could also bode well for food price inflation.

Agbiz believes South Africa’s food price inflation could remain relatively higher in the first quarter of 2021, being primarily underpinned by bread and cereals products (the pass-through of current higher grain prices will persist for the first quarter). But from the second quarter, we could see food price inflation decelerating somewhat. Our baseline view is for food price inflation to average around 5% y/y in 2021. – Press release, Agbiz