Mazi - Asset Management

Food Inflation: There's no such thing as a free lunch

Food Inflation

There is a saying in finance that “there is no such thing as a free lunch.”  No pun intended but this rings especially true for the current dynamics playing out in global soft-commodity price increases (food input costs) that we have witnessed lately. Whether you care to measure food input costs in nominal or real (inflation adjusted) terms, a broad basket of food input costs including Meat, Dairy, Cereals, Oils and Sugar are at very elevated levels (Figure 1). There will be those in the supply chain – from the primary producers to the end consumer – who stand to gain from this dynamic which by implication means that there will be those who stand to lose. 

This article sets out who we at Mazi see as the winners and losers in this equation.

Food Inflation

Very simplistically, the food supply chain is made up of the following four constituents – (1) primary producers or farmers, (2) food manufacturers, (3) retail and wholesale trade, and (4) the end consumer.

It is clear to us, that farmers are the prime beneficiaries of higher soft-commodity prices that are currently being experienced. Within the South African context, not only are realized prices at elevated levels, but good rains have also meant bumper crops. Expect to see sales of farm equipment and Toyota Hilux bakkies pick up if this dynamic continues.

We estimate that raw materials make up circa 65 – 75% of total operating costs for most of the FMCG (“Fast Moving Consumer Goods”) companies listed on the JSE. In a rising input cost regime these participants in the supply chain really only have three levers available to them to maintain their profitability. They can either (1) raise prices on the basket of products they produce to recoup input costs, (2) increase output thus improving factory capacity utilization and increasing the contribution to overhead cost recovery, and (3) reduce and or optimize fixed operating costs. In reality, it is probably a combination of all three with the most precarious being the ability to sustainably push through price increases to the retail/wholesale trade.

In our view, the retail/wholesale trade in South Africa has become more concentrated with the large players – Shoprite, Pick ‘n Pay, Spar to name a few – entrenching their positions in the formal market and making significant inroads into the informal market. The upshot of this is that the balance of power between producer and retailer has moved significantly in favour of the latter thus the ability of producers to simply pass on prices to cover input cost pressure is no longer a given. To compound matters, there has been a swathe of productive capacity  that has come on stream over the past five years (especially in the grains sector) thus intensifying competitive pressure between the producers.

Given this dynamic between the producer and retailer, it is our view that the brunt of rising input costs especially in the grains sector will be borne by the producers. This is already evident in the margin pressure many of the large, listed producers are currently experiencing.

What of the end consumer – the man in the street – you may ask? The interplay between producer and retailer has shielded the end consumer to some extent. The oligopolistic nature of the retail trade has meant that the price concessions and improved terms of trade with the producers has benefited the end consumer as retailers may have been able to pass these on to the end consumer. However, it is inevitable that persistently higher input costs will necessitate higher consumer prices in due course.


[1] The Food and Agricultural Organization of the United Nations (“FAO”) Food Price Index is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices (Meat, Dairy, Cereals, Oils, Sugar) weighted by the average export shares of each of the groups over 2014-2016.