Food prices soar without affecting demand

‘As more people enter the formal economy, the demand for food and especially protein-based food will increase
Issue date 5 October 2007

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‘As more people enter the formal economy, the demand for food and especially protein-based food will increase. Higher food prices may not, therefore, result in a significant decrease in the demand for food.’

Food prices have increased sharply since the last quarter of 2006, causing much concern. The increase is one of the main reasons for the inflation rate rising above the 6% target set by the Reserve Bank, another reason being the sharp increase in fuel prices. S tats SA measures food prices on the agricultural and manufactured levels in the producer price index (PPI) and on the retail price level in the consumer price index (CPI). If the price of an agricultural product increases, the increase finds its way into the consumer’s pocket after a lag of a few months. The same is not always true if agricultural product prices decrease. Food price inflation on the agricultural, manufacturing and consumer levels is shown in Figure 1. Agricultural food product prices increased from July 2005 to July 2007 by 44,3%. The price of processed food increased by 24,9% and on the retail level prices increased by 18,4% over this period. Clearly, not all the inflation on farm and processing levels has reached the consumer yet. Trends in the prices of individual food products The latest food price report of the National Agricultural Marketing Council (NAMC) was published in August 2007.

It showed the national average price of food increased by 13,7% between July 2006 and July 2007. This is higher than the food inflation of 7,6% reported by Stats – the difference is caused by the difference in composition of the two different baskets of food. P rices in various food categories increased by more than the average of 13,7%. The price of maize products increased by 21%, meat by 19,7% and dairy products and eggs by 20%. The price of fresh vegetables and fresh fruit increased only marginally. Table 1 shows the real impact of higher food prices will vary vastly between different consumers, depending on the composition of their food basket. A typical food basket, developed by the NAMC, cost R260 in January 2007, increased to R281 by January 2007 and reached R288 by July 2007. Will higher food prices result in a drop in consumption? The key question for farmers, processors and retailers remains to what extent higher food prices will result in a decrease in demand. The disposable (spendable) income of households has increased steadily since 1994. In nominal terms, the per capita disposable income of households increased in annualised real terms by 7,5% to the first quarter of 2007 – the highest increase since 2002.

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Household debt also increased to a record 75,9%. While the average disposable income increased by 7,5%, the increase in income in the emerging middle class is much higher. The impact of debt on the consumer’s spendable income depends largely on the interest rate. In 2002 consumers owed 50% of their disposable income and the prime interest rate reached 17%. On each R100 of disposable income owed, households had to pay R8,50 in interest. Currently consumers owe 76% at an interest rate of 13,5% – their interest repayment per disposable income owed is now R10,26. Thus, while the debt ratio has increased by 52%, the cost of interest has only increased by 21%. Recently, however, the increase in interest rates and the new National Credit Act have made it more difficult for consumers to access credit. s far as retail sales are concerned, these increased in June in real terms by 6,4%, lower than May’s 9,2%. Retail sales increased