A study by National Treasury economists has called for the strengthening of South Africa’s social protection mechanisms, including expanding food vouchers, targeted subsidies or cash transfer programmes to help shield the poor from food inflation.
The research paper, penned by Natalie van Reenen, Luyanda Matomane and Cassandra Dunstan, said price changes from food manufacturers have a much stronger effect on consumer food prices than those from farmers.
One of the main findings of the study is that consumer food prices are driven by changes in input costs and the partial pass-through of intermediate producer price changes.
It finds that the pass-through of manufacturing producer prices is higher, or more complete, than that of agriculture producer prices. This, it says, is likely to be due to the smaller number of intermediaries between producers and consumers — compared with farmers and consumers — allowing for the cost pressures to be more fully passed on to consumers as manufacturers protect their margins.
Farmers, therefore, have a smaller effect on food inflation than food manufacturers further down the supply chain, the study finds.
“The impact of role players further down the supply chain is also evident when comparing the size of the agricultural sector— 3.1% of gross value added — to total households spending on food consumption, which accounts for 14.9% of gross value added in 2024,” it said.
“The difference of 11.8% is the contribution of the supply chain once products leave the agricultural sector or are imported and not bought from the agricultural sector.”
The findings suggest that policy responses to food inflation should extend beyond the agricultural sector and address the broader food value chain. For example, rising energy prices, particularly electricity, have a direct impact on food inflation.
The research, “Southern Africa — Towards Inclusive Economic Development (SA-TIED)”, says there is a need to look beyond the farm level and address costs throughout the value chain, especially in manufacturing and retail, while strengthening social protection for the most vulnerable.
Cost structures
“Given that manufacturing producer prices exhibit a stronger pass-through to consumer prices than agricultural prices, interventions should target cost structures and pricing behaviour at the processing, manufacturing and retail levels,” the study reads.
“This includes promoting transparency and competition across the food supply chain to prevent excessive mark-ups and ensure fair pricing.
“To mitigate cost-push inflation, the government should consider measures to reduce input costs, particularly electricity and fuel, which significantly affect production and distribution expenses. One such measure is the temporary suspension or reduction of the fuel levy during periods of high fuel prices, as seen most recently in 2022 when fuel prices surged.”
Van Reenen and Matomane are senior economist and economist at the National Treasury, respectively, while Dunstan, a former National Treasury economist, is now with the Development Bank of Southern Africa.
SA-TIED is a collaboration between local and international research institutes and the government of South Africa to provide research outputs that assist in the formulation of evidence-based economic policy.
The price of electricity has eroded the disposable income of cash-strapped consumers. Household electrical costs have risen 60% since 2017.
However, the fuel price is set to reach a four-year low on Wednesday.
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