Rising food prices put manufacturers in tight spot

Rising food prices put manufacturers in tight spot

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DURBAN – THE rapidly rising agricultural producer price inflation (PPI) leading to soaring food prices poses has placed food manufacturers in a tight spot about whether to absorb these cost increases or try and pass them on to financially-constrained consumers, says RMB.

John van Tubbergh, the sector head for Consumer, Food and Agri at RMB, said yesterday that many large food manufacturers had cited soaring prices of key agricultural products used as inputs in the manufacturing of basic consumer foodstuffs – as a real threat to margins.

Agricultural producer price inflation accelerated to 12.3 percent year-on-year in November 2020, before settling at a still high 7.2 percent in March 2021.

Van Tubbergh said digging deeper into the constituents of this figure, the inflation rates for cereals and other crops, as well as dairy products were 17.2 percent and 12.6 percent respectively. He said producer price inflation for live animals and animal products was 9.8 percent.

Combined cereals, dairy and animal products made up nearly 60 percent of the agricultural producer price basket. Price pressures at the agricultural level are also beginning to drive manufacturing costs up.

From subdued levels of about 4 percent last year, manufactured producer food price inflation has quickened from 6.9 percent year-on-year in February to 8.1 percent in March. This is said to now rate well above CPI food price inflation which meant gross margins of food manufacturers were getting squeezed.

“Amid a still weak economy with households financially under strain this leaves food manufacturers with some difficult decisions to make. Food manufacturers have already responded by cutting internal costs and optimising processes in order to help reduce the pressure on margins. For instance, we are increasingly being asked by clients to hedge against cost increases resulting from soaring agricultural commodity prices,” said Van Tubbergh.

Last week the Household Affordability Index also reported that the average cost of household food basket in South Africa increased by 3.9 percent, or R159.37, in April to R4 198.93 compared to a month earlier – the highest level since September 2020.

In a separate report released last week, research by TransUnion found the number of South African consumers in households whose income was currently negatively impacted by the Covid-19 pandemic had dropped 20 percentage points since the week of November 30.

But Work-from-home dynamics had given food manufacturers some wiggle room.

Ettienne Le Roux, the chief economist at RMB, said due to Covid-19 and recent lockdown restrictions, many consumers were staying at home and consuming more basic groceries. Taking advantage of this increased demand food manufacturers have been able to raise selling prices.“

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