While trying to keep up with consumer demand for on-trend, nutritious and cost-effective products, food producers in SA have had to contend with increasing production costs, supply chain challenges, strict quality and compliance standards and a string of inflationary pressures.
The upcoming reporting season will be an interesting reflection of the effect of soaring commodity prices, high energy inflation and supply chain issues as well as the choices that cash-strapped consumers made in the period.
Higher prices of agricultural commodities due to Russia’s invasion of Ukraine have been fuelled by lower global crop estimates and increased demand.
But the recent grain deal signed by Moscow and Kyiv has thrown consumers a lifeline and is forecast to stabilise global food prices.
Pundits warn it will not be a blanket reprieve, and it is unclear when local consumers will begin to feel the expected relief out of that deal that will see the export of 22-million tonnes of Ukrainian wheat, maize and other cereals that have accumulated in the ports.
Meanwhile, the extent to which manufacturers can pass on price hikes to tight-pocketed consumers is a fine balancing act for manufacturers.
“The bigger labels have better pricing power than perhaps some of the smaller labels,” analyst David Shapiro told Business Day.
He said few envied food manufacturers as they have to decide on both the input pricing and the price of their goods in the market in a strategic balancing act.
“And that’s very difficult. How far can they go?” he said, pointing out that fast food companies faced the same conundrum.
“How far do they pass it on and what are consumers prepared to pay for a burger and chips?”
In the prior reporting season, JSE-listed food producers reported a mixed bag of results that reflected squeezed margins affected by the vast array of supply and raw material challenges and procuring strategies deployed by each player.
Tiger Brands was frank in its outlook at the beginning of the year, saying headwinds were likely to persist for the rest of the year as input costs were expected to remain elevated for longer than originally thought. The inconsistent availability of key inputs as well as recent rand weakness added further headwinds.
Margin pressure
RCL Foods said an underlying ebitda (earnings before interest, taxes, depreciation and amortisation) growth of only 2.5% highlighted the significant margin pressure all business units experienced in the trading period. In this volatile context, RCL said its approach was to focus on the variables within its control by zoning in on scale and efficiency to minimise the effect of price increases necessitated by agricultural commodity prices.
It highlighted that its grocery segment was expected to remain resilient despite the likelihood of higher costs dampening demand in upcoming months.
Despite headwinds, food manufacturers still managed to tally significant profits during the previous reporting period, attributing the good tidings to volume growth rather than price increases.
However, consumers also altered their shopping lists to accommodate their decreasing buying power. This was reflected in the declining sales volumes of bread, where producers had implemented price increases.
“People stop eating, they literally eat less if they can’t afford to buy food,” noted Shapiro.
Tiger Brands acknowledged its strategy to implement price increases in the segment driven by the Albany brand, amid intense competitor activity that had significantly affected volumes.
But it was not the only one that pushed up its bread prices. Close competitor Sunbake, which is owned by RCL, reported volume growth coupled with margin pressure arising from high costs that necessitated a price increase in the period.
The cost of basic commodities including sunflower oil, flour, bread and maize meal has shot up in recent months as SA, which imported 150,000-250,000 tonnes of sunflower oil a year over the past five years, is heavily influenced by global prices.
The latest data shows that annual consumer price inflation surged to a 13-year high in June, to 7.4% from 6.5% in May, driven mainly by rising transport and food prices.
Inflation in the grain mill products, starches and starch products and animal feeds group climbed to 16.9% year on year from 13.7% in May, while the Food and Agricultural Organization of the UN’s (FAO) cereal price index was up 27.6% year on year in June.
Investec chief economist Annabel Bishop said Russia and Ukraine’s signing of a deal to allow a “de facto ceasefire” on grain ships has aided in stabilising global food prices, while lower grain prices also helped to lower animal feed costs.
She said food price inflation at the commodity level has also started to turn lower than in previous months, and this is likely to feed through into more modest producer inflation by the end of the third quarter, and so into more modest consumer inflation in the fourth quarter. She said the moderation in inflation at the end of this year and into next was already expected by the Reserve Bank.
Shapiro was less optimistic on inflation, saying he was expecting to continue seeing squeezed margins right across the value chain.
“I think in the next two months we could see inflation up to 8%, pushed mainly by food,” he warned.
The International Grains Council said in a recent update that grain production was at a record 2.290-billion tonnes for 2021/2022 but total grains output in 2022/2023 was projected to drop by 2% year on year.
Locally, producers are anticipating a record maize harvest owing to good rains, with the surplus likely to help ease prices.
Results season in the sector kicks off in September and runs until mid-December.
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