Food producers face the risks of margin erosion because of higher raw material packaging and conversion costs, revealing the tangible effect of Russia’s invasion of Ukraine, which has driven commodity prices to historic highs.
Food producers require an estimated 9% price increases just to offset the current spot input costs, said John Morris, SA investment strategist at Bank of America Securities (BofA) during a media briefing that reflected on its 23rd annual investor conference held in late March.
This level of price increases may not be able to be priced through and is likely to come with some volume loss as consumers trade down or seek cheaper private label alternatives,” Morris said.
Tiger Brands, SA’s biggest food producer in Africa, has lost 10% of its value since the war started on February 24, taking its losses to 57% over a five-year rolling basis, according to Infront data.
The consumer goods company owns a suite of household brands including Albany bread, Tastic rice and Jungle Oats cereals.
SA imports half of its yearly wheat consumption, making it vulnerable to the vagaries of the international market that determine grain prices. The actively traded wheat contract was up 34% since the start of the year, according to Bloomberg data, having risen by as much as 50% at one point during the initial stages of the Russia-Ukraine war.
Russia and Ukraine collectively account for a quarter of global wheat exports, which are inputs in the production of bread and cereals.
For SA companies in general, Morris said investors were trying to weigh up the trade-off between positive impetus from the economic recovery and headwinds from rising input prices and interest rates.
“So it’s key for investors to look at companies that have pricing power to offset these high input prices,” he said.
Mining companies also attracted attention during the conference, with investors fielding questions to management teams about the state of poor rail infrastructure operated by Transnet Freight Rail, which has resulted in miners not being able to capitalise on higher prices.
“Unfortunately, SA is struggling to match the kind of recent performance in terms of coal rail availability and volume. There was quite a lot of investor frustration here ... that SA is not taking taking advantage of the current situation and we are unable to maximise the volumes through Richards Bay Coal Terminal at the time when coal prices are at an unprecedented levels,” said Patrick Mann, commodities analyst at BofA.
Exxaro, the largest supplier of coal to Eskom, reported earlier in 2022 that it suffered about R5bn in lost export sales due to inefficiencies at state-owned rail network.
BofA raised the forecast for benchmark thermal coal prices to $250 per tonne for 2022 and $175 per tonne in 2023, respectively, citing the positive outlook for the commodity that is used to generate electricity. This was against the long running price of $100 per tonne, said Mann.
While elevated, other commodity prices have come off the boil after hitting record highs in March as stiff sanctions against Russia raised supply concerns.
Palladium was up 2.44% to $2,247/oz in late trade on Thursday, after reaching record level just about $3,000/oz in March.
SA banks were likely to benefit from the rising interest rates environment, after their strong recovery from the effects of Covid-19, BofA said.
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