The average South African eats less in winter as they spend more on heating, which is a frightening statistic but explains why food producer stocks are performing poorly.
Independent financial analyst Anthony Clark, who has covered food stocks for years, says there is generally a decline in food sales in winter. “It has been that way for decades in SA.”
As winter comes, food producers including Libstar, Tiger Brands, Rhodes Food Group and Astral face exorbitant input costs as prices of maize, vegetable oil, electricity, petrol, and plastic, paper and glass packaging have risen. But if food suppliers up their prices, consumers buy less.
It is no surprise then that the food producers’ index representing the main listed players is down 10.64% since the start of 2022. In 2021 the index fell 3.38%. By contrast, the JSE all share index rose 24%.
The war in Ukraine, a large maize and vegetable oil producer, has increased edible oil and maize prices, which also puts pressure on chicken, egg and beef farmers, as maize is a big input in animal food.
Shipping delays and costs more than doubled in 2021, increasing the costs of imported material, while in SA bakeries and milk producers face steep petrol costs, making daily deliveries hugely expensive.
Before the war in Ukraine prices were already rising. Rhodes Food Group, when it updated the market on its 22-week sales until February 22, says it faced higher costs in 2021.
“Margins came under further pressure due to big increases in input costs, notably tin plate used in food cans, global commodities, raw materials such as meat and fats, as well as international freight costs,” Rhodes says.
But the food supplier cannot raise prices too much. “In the constrained consumer spending environment, it is proving particularly challenging to recover the higher input costs through price increases, with resistance from both retailers and consumers.”
Clark explains: “The consumer and mass market in SA are the poor who have a finite pool of money to spend. They have to reallocate that money they have on a daily or weekly basis to either heating or eating.”
They cut back on food in winter because they have to buy paraffin to keep warm and they buy more [winter] clothing, he says.
But with prices rising so high, producers will be forced to raise prices at some point, which retailers will pass through, but it will mean consumers shop less, says Gryphon analyst Casparus Treurnicht.
Retailers push back at supplier price increases, which explains why Pick n Pay reported in the six months to August that store prices increased an average 3.5% while food inflation was at 6.5%.
Treurnicht says: “This is not a demand-push inflationary environment where consumers usually experience good growth in wages as the economy overheats. This is inflation in a bad way.”
Clark says retailers still do fine in the inflationary environment because consumers buy food even if it is less. Retailers also store huge amounts of food in warehouses before prices increase and then make extra profit when prices rise.
Treurnicht adds that food producers and packaging companies will be in the worst position to deal with the inflation problem we are experiencing. It’s the food producers in the middle that get squeezed and it has always been that way, says Clark.
Treurnicht says while retailers are squeezing producers hard, specialist producers like Tiger Brands face a double whammy as consumers are trading down to cheaper brands.
Tiger Brands sells branded commodity products such as Tastic rice and Jungle Oats at higher prices, but constrained consumers will not pay more for premium brands of rice, bread or mielie meal.
It is something Tongaat reported last week in its most recent trading update, citing the difficulty of selling branded sugar. “Cash-strapped consumers turned to house brands rather than the miller brands,” it says.
Private label and house brands are growing, which puts further pressure on food producers like Tiger Brands that sell brands like Koo and All Gold, but could benefit companies such as Libstar that produce many private label brands for Pick n Pay, Checkers and Woolworths.
The share of private labels in terms of groceries is the highest it has been for years, says Clark.
Though certain food producers are considered good investments, it is a sector many investors are wary of.
Prices of petrol, electricity and basic foodstuff are skyrocketing and wages and grants are not.
Clark says at least half the country is battling just to survive with basic social grants. “Cooking oil has doubled and everything is up and there hasn’t been a commensurate rise in the underlying grants at the consumer.”
So something has to give, he says. “The poor end up buying less.”
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