Bearish Food Price Outlook

The latest annual rate of inflation, as measured by the Consumer Price Index (CPI), has increased to 7.3% recorded in June from 7.0% recorded in May 2013 says the Central Statistics Office.

Following its publication, I asserted that food prices were home grown rather than imported. This a story is worth unfolding further.

Dearer food leads CPI higher

Central Statistics Office (CSO) said food products accounted for 3.8% (up 0.5% over May) of the 7.3% CPI figure in June while non-food products accounted for 3.5% (down 0.2% over May).

Annual food inflation rate was recorded at 7.1% in June compared to 6.3% in May, and 6.1% in April having begun the year at 7%.

We can see an example of food inflation in the price of mealie meal (see chart). Prices have risen steadily since September last year despite price regulation and cheap maize being offloaded to the millers.

The removal of subsidies on fuel undoubtedly contributed to the 1% rise in food prices over the last two months. The country ended fuel subsidies from May 1st, leading to a 21% increase in gasoline prices and 22% jump in the cost of diesel.

Outlook for Food Prices

World food prices are below their 2011 highs and in line with 2012 prices according to the United Nations Food and Agriculture Organisation (see chart). 

UNFAO says higher prices for fish and livestock products are anticipated to offset lower prices on most other commodities, especially sugar.

Domestic crop production is expected to be above 2008-12 average this year though lower than 2012 bumper crops according to UNFAO.

“Maize production in 2013 is forecast at 2.6 million tonnes, 11% lower than last year but above the average.

Production of rice, sorghum and millet are also estimated to be lower than 2012, due to reduced yields; however, increased plantings for rice will help off-set a larger reduction in the rice output. Soybean production increased significantly by 30%.”

“Domestic grain supplies, including carryover stocks, for the 2013/14 marketing year (May/April) are estimated to be sufficient for national requirements, except rice, with imports forecast between 15 000 to 20 000 tonnes. However, the lower maize production has decreased the exportable surplus,” says UNFAO.

“Overall, food security conditions are improving as supplies from the 2013 harvest increases food availability. However, the higher maize meal prices are expected to affect households’ access, particularly in urban areas where there is limited productive capacity,” the UNFAO report says. 

Reform Agenda

The Government has initiated several reforms aimed at changing the marketing arrangements of the Food Reserve Agency (FRA) in 2013/14. Unlike previous years, the FRA will focus on maize purchasing primarily for the strategic grains reserves, while maintaining the previously established floor price of ZMW 65 per 50 kg. In addition, it will remove the subsidy of its sell-on price to millers, which is expected to put upward pressure on maize meal prices.

The Farm Input Support Programme (FISP) will continue to subsidise production costs for over 900 000 farmers, the modalities of the programme will change, including the introduction of an e-voucher scheme next year and an increase in the contribution by the farmer from ZMW 50 to ZMW 100.

Conclusion: nothing to slow food inflation on the horizon

The outlook for the food component of CPI appears unfavourable compounded by a prospective tighter monetary policy that may push up the cost of finance for farmers. The government has gone quiet on its budget 2013 pledges to increase R&D into livestock diseases and crop productivity and farmer training that would help boost supplies and cut or slow prices.

Domestic food price inflation will be spurned on by increased farm costs (not supply issues) due to state plans to reduce subsidies on fertilizer and changes to its practice of buying the country’s staple food at higher prices than it sells to private millers. Exports will fall but will keep supplies tight and put a floor under prices.

Imported inflation will flat-line at best due to increased costs for imported fish and livestock offset by lower prices on most other imported commodities. Also a weakened kwacha, at its worst since 2009, continues to make all imports dearer.

The government’s target for inflation as measured by CPI of 6% is under threat from bearish food prices underscored by adverse domestic dynamics.

David Ryder MA MBA

Consultant. Commentator. Entrepreneur.

www.Viewonzambia.blogspot.com