Brace for food price crunch

Brace yourself for big food price increases in the next few months.

A lighter wallet or an emptier belly is the choice facing most people.

Some analysts, such as British investor Jeremy Grantham, are already saying that there is a global food crisis that is being ''badly underestimated by almost everybody''.

''The price of maize, wheat, and soya in just the last five weeks rallied 30% to 50% to reach and exceed the 2008 crisis levels, this time despite enormously increased planting,'' Grantham said in a July newsletter.

In South Africa, maize already costs double its 2010 price and almost 50% more than last year, said Mike Schussler, an economist at Economists.co.za.

Schussler said maize is particularly important because for many South Africans it is a staple.

The price of maize influences the prices of other foods, such as bread and meat.

The poor are especially vulnerable to food price increases because they use a large proportion of their income to buy food.

The very rich spend less than 10% of their income on food but the poor have to cough up almost 40% of their earnings to eat, according to Schussler.

Food inflation of above 10% - which Schussler expects soon - will seriously hurt buying power at a time when economic conditions are deteriorating. Low growth prospects moved the Reserve Bank to cut the key interest rate last month.

Absa head of agribusiness Ernst Janovsky forecast last week that food inflation will increase to between 12% and 15% in the next six to eight months.

If food inflation hits 15%, a 5kg bag of maize, which now costs about R28, would top R32 in a year. International price shocks could make the situation much worse.

The US, a major consumer and producer of maize, is experiencing a drought that has caused prices to skyrocket.

The problem in South Africa might be compounded by an increase in the cost of seed from the US.

A merger between local seed producer Pannar and the US-based Pioneer Hi-Bred could cause more headaches - seed prices might rise 12%.

This is according to the companies' estimates in a submission to the competition authorities, said Sarah Truen, an economist at DNA Economics.

Seed is the second-biggest cost for maize farmers. It takes a larger share of capital than labour or fuel, and makes up between 12% and 16% of total agricultural input costs, according to Schussler.

He thinks the merger could lead to seed prices soaring by as much as 30% and leave Pioneer Hi-Bred and the US giant Monsanto with 90% of the South African market.

The merger between Pioneer Hi-Bred and Pannar has been approved by the Competition Appeal Court and is going ahead.

The Competition Commission, however, has asked for leave to appeal the ruling at the Supreme Court of Appeal.

''As far as I know, it is the first time the commission has gone this far to stop a merger,'' said Nick Altini, head of competition at law firm Cliffe Dekker Hofmeyr.

Farmers operate on very thin profit margins and will recover their increased costs from consumers.

The pain will not be restricted to consumers. Meat producers will also be hit hard because maize is an important stock feed.

Even when the drought in the US lifts and maize prices stabilise, Schussler thinks there is a risk that maize prices will not come down easily here.

''South African consumers will not receive the full benefit from improved growing conditions and declines in global maize prices if our costs rise quicker than those of other countries,'' said Schussler.

Among the other rising input costs farmers have to contend with are those for electricity, wages (at more than the inflation rate), fuel and fertiliser.

''International food prices are likely to rise over the next few months regardless of what we do in South Africa [but] there is one part that we can control and that is the increase in seed prices as a result of the merger,'' said Schussler.