Food - inflation, security and the gathering storm | Our current storm is a confluence of the pandemic’s after effects, Russia’s invasion of Ukraine and rolling blackouts, water outages and the Transnet strike.
Economics is boring. Or at least it can be a lot of the time. The global and local macro-economic landscape is always the context for the world that businesses operate in and so, as businesspeople, we use it to paint a picture of the background, headwinds and tailwinds that we face in day-to-day operations. As interesting as this sounds, the reality is that for the most part, the macro economy oscillates within a very tight band.
Our current storm is a confluence of the pandemic’s after effects, coupled with the complex unwinding of government’s stimulus attempts during the pandemic, ignited with Russia’s invasion of Ukraine then intertwined with “load shedding”, “water shedding” and the recent Transnet strike. Part of the side effect of all these factors combined is the high inflation currently being experienced globally and in South Africa.
This is borne out by the fact that the operating profit margin of food producers listed on the JSE averaged 8.4% in the past financial year. The second possibility is that there is worse to come for consumers, with more significant food CPI in the year ahead as producers recover their higher input costs through prices. If food PPI doesn’t reduce sharply, this will almost certainly happen.
The third possibility is that producers will absorb the inflation dislocation. This has happened in the past, with producers becoming more efficient and thereby maintaining a sustainable profit margin. Only time will tell the extent to which food producers can generate efficiencies, but these are not likely to be at the level required to offset the inflation dislocation. To the extent that they can’t, their profit margins will be eroded. And this is the gathering storm.
The first, is that our economic storm, whilst severe, is far more moderate than that being faced in the rest of the world .
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