By Marleny Arnoldi for Creamer Media
Rand Merchant Bank (RMB) says rapidly rising agricultural producer price inflation poses a conundrum for food manufacturers about whether to absorb these cost increases or pass them on to already financially constrained consumers.
The bank’s commentary follows figures released in the Producer Price Inflation for March, which showed that agricultural producer price inflation accelerated to 12.3% year-on-year in November 2020, before settling at a still high 7.2% in March.
RMB consumer, food and agrisector head John van Tubbergh says many of the large food manufacturers have cited soaring prices of key agricultural products as a real threat to margins.
“Digging deeper into the constituents of this figure, the inflation rates for cereals and other crops, as well as dairy products are 17.2% and 12.6%, respectively. Producer price inflation for live animals and animal products is 9.8%,” explains Van Tubbergh.
Combined cereals, dairy and animal products make up nearly 60% of the agricultural producer price basket.
Price pressures at the agricultural level are also beginning to drive manufacturing costs up.
From subdued levels of around 4% last year, manufactured producer food price inflation has quickened from 6.9% year-on-year in February to 8.1% in March. This rate now well exceeds Consumer Price Index food price inflation, which means gross margins of food manufacturers are getting squeezed.
“Amid a still weak economy with households financially under strain this leaves food manufacturers with some difficult decisions to make,” Van Tubbergh notes.
He adds that food manufacturers have already responded by cutting internal costs and optimising processes to help reduce the pressure on margins. For example, RMB is being requested to hedge against cost increases resulting from soaring agricultural commodity prices.
Work-from-home dynamics have given food manufacturers some wiggle room, RMB chief economist Ettiene le Roux puts forward.
“Owing to Covid-19 and lockdown restrictions, many consumers are staying at home and consuming more basic groceries. Taking advantage of this increased demand food manufacturers have been able to raise selling prices.
“But even so, it will be difficult for them to continue hiking prices as much as they would like,” he says.
RMB is convinced that South African consumers face many headwinds, including high fuel prices and increased municipal rates and taxes and this at a time when salary increases are scarce and pay cuts abundant.
“Consumers will, therefore, be very sensitive to any further sharp price increases, a dynamic food manufacturers no doubt would be aware of in today’s ever more competitive corporate landscape,” Le Roux laments.