‘Commodity on everyone’s lips is that of food prices’

The key risk to residential property from declining agriculture output lies in rural towns‚ but the “we can’t underestimate the potential risks of the drought to the broader national economy and residential market”.

So said FNB analyst John Loos in the bank’s latest Property Barometer.

“Thank goodness the oil prices‚ that other potentially big inflation driver‚ are behaving well‚” said Loos‚ who had said last year “that oil‚ and its major price slump‚ would be a boost to the fortunes of the residential property market”.

This‚ he said at the time would be because of it “providing some support for an energy-guzzling world and domestic economy‚ while also contributing greatly to containing CPI (Consumer Price Index) inflation and thus the magnitude of interest rate hikes”.

Despite the slump‚ Loos said “a host of other negatives” in 2015 prevented “any strengthening in an already weak economy”.

“Starting 2016‚ it seems that the commodity on everyone’s lips is that of food prices and food production levels‚ and the news is not that good‚” said Loos.

The rand’s depreciation last year caused “some modest upward pressure on domestic food price levels from global sources”‚ while the “severe drought ravaging the country” exacerbated this.

“…The Producer Price Index (PPI) for Agriculture had reached double-digits to the tune of 10.75% year-on-year by November 2015‚ having surged rapidly through last year from a deflation rate of -3% as at January 2015‚” said Loos.

“This should be expected to exert upward pressure on the CPI inflation rate for food with a lag‚ which at November was still at a more moderate 4.8% rate.

“Given food’s significant weighting of 15.41% in the overall CPI‚ its influence on the overall CPI inflation rate can be very significant.”

This carried risks‚ he said‚ particularly considering “that South Africa currently experiences significant social tensions‚ which can be further fueled by a rising cost of living especially for the low income groups”.

“Food price surges can thus be devastating for the poor. In that this can potentially fuel social tensions further‚ which can in turn become disruptive to output of the broader economy should they manifest themselves in more extreme industrial action aimed at securing wage increases‚ it can be a further negative for economic growth‚ and thus household disposable income growth which is the purchasing power for homes‚” said Loos.