Rising food prices put manufacturers in tight spot

By Given Majola 22m in the past

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DURBAN – THE quickly rising agricultural producer value inflation (PPI) resulting in hovering food prices poses has positioned food manufacturers in a tight spot about whether or not to soak up these value will increase or attempt to move them on to financially-constrained customers, says RMB.

John van Tubbergh, the sector head for Consumer, Food and Agri at RMB, mentioned yesterday that many giant food manufacturers had cited hovering prices of key agricultural merchandise used as inputs in the manufacturing of primary client foodstuffs – as an actual menace to margins.

Agricultural producer value inflation accelerated to 12.3 p.c year-on-year in November 2020, earlier than settling at a nonetheless excessive 7.2 p.c in March 2021.

Van Tubbergh mentioned digging deeper into the constituents of this determine, the inflation charges for cereals and different crops, in addition to dairy merchandise have been 17.2 p.c and 12.6 p.c respectively. He mentioned producer value inflation for dwell animals and animal merchandise was 9.8 p.c.

Combined cereals, dairy and animal merchandise made up practically 60 p.c of the agricultural producer value basket. Price pressures on the agricultural degree are additionally starting to drive manufacturing prices up.

From subdued ranges of about 4 p.c final year, manufactured producer food value inflation has quickened from 6.9 p.c year-on-year in February to eight.1 p.c in March. This is claimed to now rate effectively above CPI food value inflation which meant gross margins of food manufacturers have been getting squeezed.

“Amid a still weak economy with households financially under strain this leaves food manufacturers with some difficult decisions to make. Food manufacturers have already responded by cutting internal costs and optimising processes in order to help reduce the pressure on margins. For instance, we are increasingly being asked by clients to hedge against cost increases resulting from soaring agricultural commodity prices,” mentioned Van Tubbergh.

Last week the Household Affordability Index additionally reported that the common value of family food basket in South Africa elevated by 3.9 p.c, or R159.37, in April to R4 198.93 in comparison with a month earlier – the very best degree since September 2020.

In a separate report launched final week, analysis by TransUnion discovered the variety of South African customers in households whose revenue was presently negatively impacted by the Covid-19 pandemic had dropped 20 share factors for the reason that week of November 30.

But Work-from-home dynamics had given food manufacturers some wiggle room.

Ettienne Le Roux, the chief economist at RMB, mentioned because of Covid-19 and up to date lockdown restrictions, many customers have been staying at residence and consuming extra primary groceries. Taking benefit of this elevated demand food manufacturers have been capable of increase promoting prices.“

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