Why is food so expensive in South Africa? For one, the devaluing rand hasn't helped, and secondly commodities prices have rocketed, also causing food price inflation. Then there's also the wheat shortage in the country... which all in all puts a lot of pressure on SA's farmers.
Bruce Whitfield: You would have heard about the Big Mac index as a way of measuring a thing called purchasing power parity. It measures what it costs in different countries to buy one of the world's most famous burgers and then says whether or not the currency is overvalued or undervalued. Well it could soon be replaced by the iPod index.
An Australian bank has taken to assessing whether or not a currency is fairly valued by measuring the price of iPods in different territories and just in case you're wondering, Brazil at the moment has got the world's most expensive iPods, Canada the cheapest and South Africa pretty much bang in between those two.
Well inflation very much a part of our reality, something that we as South Africans probably have learned to live with much to our detriment, but forecasts today suggesting the consensus is that CPIX next week will come in at 5.1 percent. Still a bit on the high side but a big component of the inflation picture is determined by food price inflation, the official statistics there saying that food price inflation around a fraction under eight percent.
Well we discussed the issue at length on Monday and to help us understand the driving forces behind inflation welcome to David Smith on the line to us from Cape Town, the general manager of Food Buying at Pick ‘n Pay. And David, food inflation; is it considerably higher now than say it was a year ago?
David Smith: Good evening Bruce, yes it is higher. The last two and a half, three years we have had very stable prices in the food industry in South Africa but in the last six months particularly we have started to see some prices move and there is going to be more inflation now than we have been accustomed to in the last three years.
Bruce Whitfield: What are the main drivers then of food price inflation? Why can food price inflation be fairly steady for two and a half to three years and then suddenly in six months that picture changes?
David Smith: There are a number of things Bruce; there are all the components that food prices are made up of. Maize is a big contributor, maize at the moment is up 60 odd percent from what it was a year ago, the wheat prices are up about 15 to 18 percent and obviously those are components of the food index.
There are other commodities that are much less than that; overall at the moment our food inflation in our business is tracking at about 5.5 percent. So it depends on what a person is buying, so overall the average basket is about 5.5 percent up. However, there are some big increases in that and there are some products that haven't gone up, milk for argument's sake today is slightly lower than it was one year ago.
Bruce Whitfield: So which are the big ticket items, which are the ones actually raising the average? Are these luxury goods? Are these imported items?
David Smith: Well obviously all imports are faced with the exchange rate, we are talking about a rand today at around 7.20 to the dollar and last year this time it was R6.10, that is an 18 percent increase. The pound is 31 percent stronger against the rand today, it was R14.11 today, it was R10.78 last year and the euro is similar, a 15 percent increase.
So if you come in and buy in those currencies we are going to have just an increase just purely on the inflation and if commodities have been increasing overseas you are faced with that as well. So imports a bit of inflation because of the rand devaluing a bit as well as some local products, meat, maize, wheat, a huge shortage in wheat in this country at the moment so we have to import wheat and based on the exchange rate we are already in the 18 percent increase just on the imports on wheat.
Bruce Whitfield: If one looks at the two ends of the supply chain, farmers at the production end often claim that they don't get a fair shake, they claim to be short-changed quite often, retailers like yourself say you have got small mark-ups and you try and keep things as cheap as possible for consumers. In between there is quite a complex chain of events that happens between the production and the sale of produce. Does the Competition Commission have a point when it says that there are some fairly big monopolies in South Africa that are causing unrealistic price inflation?
David Smith: I don't entirely believe that is correct. You know it is a free market out there and sometimes the market may be to free and if you take the milk scenario at the moment. Milk, from being a completely regulated market and I am not proposing to go to a regulated market, but it was a very regulated market 10 to 15 years ago and today is a free market so there is a lot of milk in the market that is not controlled quality etc etc.
So that has an effect on the whole market because it is unregulated and I am not proposing we have it regulated for one second. Maize falls into the same category: you've got four of the major players in maize, four major maize producers in the country control 73 percent of the maize and you've got 27 percent of the balance in the informal market.
Now the maize prices going up 68 percent, that is going to have an effect, if the farmers are not making enough money we understand that but it is a free market out there and it is not easy for both the farmers and I don’t think it is easier for the manufacturer or the retailer. I think everybody is under serious pressure when it comes to margins.
Bruce Whitfield: It is quite interesting though because maize is an important input cost when it comes to meat, whether it be poultry for red meat. Surely maize is an important input cost when it comes to milk production as well, so although farmers are benefiting on the meat side, they are not benefiting on the milk side. It is quite an interesting dichotomy
David Smith: I think the milk producers in this country are under incredible pressure. Milk farmers today are getting less than what they got a year ago for their milk. They are under serious pressure and we understand that, however, the selling price to the consumer at retail level is less than a year ago so it is not as if the retailer or the farmer, and I'm not saying the middleman, I think everybody is under serious pressure but the milk farmer in this country is getting less today than what he did a year ago, that's the bottom line.
Bruce Whitfield: Dave, very briefly if you can, you mentioned wheat shortages in South Africa and we're having to import. Do we have a serious food supply problem in South Africa? Is there a danger of a serious shortage developing in our food supply?
David Smith: No I don't think so. I think wheat is commodity that on many occasions in the past has to have been imported because South Africa just doesn't produce enough wheat. So I don't think that is a thing that we have to worry about, there is certainly not a food shortage in South Africa.
Bruce Whitfield: David Smith thank you very much indeed, we have to leave it there, the national general manager of Food Buying for Pick ‘n Pay.
