South Africa

Food price warning for South Africa

South African farmers are facing mounting pressure as South Africa’s fuel prices were hiked again on Wednesday, and they will soon be unable to absorb further cost pressures.

This is a warning to FNB Commercial’s senior agricultural economist, Paul Makube.

On Wednesday, 4 September, South Africa saw another round of fuel price hikes.

The price of Petrol 93 increased by R1.08 per litre, while the price of Petrol 95 increased by R1.14 per litre.

The price of Diesel 0.05% Sulphur increased by R1.97 per litre, and the price of Diesel 0.005% Sulphur increased by R1.94.

Illuminating paraffin now costs R1.51 more, and the price of LPGas rose by R2.50 per kilogram.

Makube said these increases brought the cumulative increases in the price of the two grades of diesel to a whopping R4.81 per litre and R4.70 per litre in just two consecutive months.

“This comes at the onset of heightened activity and consumption of fuel in the agriculture calendar as planting of summer crops begin followed by harvesting of winter crops towards the end of the year,” he said.

Fuel accounts for around 10% of the annual grain and oilseed variable costs. 

In the livestock and horticulture subsectors, fuel is critical for the transportation of produce to markets.

It has also recently become a huge input in farm operations and cold storage facilities due to load-shedding.

Load-shedding has forced farmers to deploy generators in farming operations such as irrigation, milking, abattoirs, and cold storage at huge costs during higher levels of load-shedding. 

“Fresh produce always requires maintenance of a cold chain, and any breakage of the process compromises the quality and safety of perishables such as fruit, vegetables, and meat, resulting in potential huge financial losses for farmers,” Makube explained.

“With the poultry sector hit by the avian flu and the consequent disruption to operations in the industry, further fuel hikes are an additional financial strain for producers.”

Paul Makube

Makube said the short-term outlook for fuel prices remains uncertain given the increased volatility of the international Brent crude oil prices and the ZAR/USD exchange rate. 

While the Brent crude oil price has eased lately from an average of $92.45/bbl in September to $91.12/bbl so far, this is still above $90/bbl. 

There is, therefore, further upside potential given the increased appetite for production cuts by major producers and exporters such as Saudi Arabia and Russia.

The rand recently extended losses and topped R19.32/USD, posing an upside risk to fuel prices. 

Higher fuel prices might dampen the consumer inflation outlook, thus forcing the South African Reserve Bank to maintain elevated interest rates for longer, Makube warned.

“Elevated debt serving costs for farmers have been a constraint for potential agriculture production expansion,” he said.

“Tight profit margins will limit the producers and processors’ capacity to absorb further cost pressures.”

Mounting pressure

Agri SA has also previously warned that the pressure on the agriculture sector is beginning to show. 

The sector grew by 17.8% in 2020 but only 7.4% in 2021 and a marginal 0.9% in 2022. 

This slower pace of growth is reflected in the labour statistics recently released by Stats SA, which showed only a 0.8% quarter-on-quarter increase in employment in the agricultural sector. 

Agri SA said the decline in the agricultural sector’s profitability is the result of rising input costs, including load-shedding costs and labour.

All these pressures have led to a rapid increase in the total farming debt burden on farmers. 

In 2006, farming debt stood at R37.7 billion. By 2022, the debt stood at R205 billion. This is a 442% increase over 15 years.

Agri SA explained that this debt burden has risen due to one fundamentally misunderstood dynamic in the sector – Farmers are price takers with no control over prices beyond the farm gate. 

Therefore, local and international retailers set the prices, and cost increases such as the national minimum wage are not part of their considerations. 

Farmers are forced to absorb those additional costs if retailers do not increase prices as input costs rise. 

Agri SA said this dynamic is exacerbated by market access challenges that result in a greater surplus of produce on the local market, lowering the price producers can obtain. 

Therefore, the result of these accumulated challenges is greater pressure on South Africa’s food production. 


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