Economic growth slowed down slightly during the first quarter of 2007, to 4,75% compared to 5% for 2006. Despite the doomsayers, however, the longest period of growth in the SA economy since the 1940s continues unabated. The economy seems robust enough to overcome obstacles such as higher oil prices, rising inflation, higher interest rates, new credit legislation and the deteriorating situation in Zimbabwe. Total gross domestic expenditure decreased from 12,25% in the fourth quarter of 2006 to 5,75% in the first quarter of 2007.
Household expenditure remained robust at 7,5%. Growth accelerated in the semidurable and non-durable categories. If consumers spend less on durable goods, chances are they’ll spend more on agricultural products. Figure 1 shows the year-on-year percentage change in total and beverage-based consumer expenditure.
Preliminary indications are that consumer expenditure on non-durable goods, particularly food, may perpetuate current growth. Inflation is in an increasing spiral. Food and fuel prices contributed to an increase in consumer prices of 7,1% for the year up to May 2007. Inflation is expected to run at about 6% for the rest of 2007, though it may soften slightly. Food inflation will result in further increases in the inflation rate in coming months. Food prices are driven by lower production and higher costs for inputs like oil-derived products and grains. The US’s drive towards biofuels has changed the international grain supply and demand situation.
Weaker international grain prices are unlikely. Food demand is growing. As higherincome households increase so will their demand for food, especially for proteinbased foods. Higher food demand at prices that make farmers’ production profitable will persist for 2007/2008 and even up to 2010. Whenever food prices increase, there are warnings about consumer resistance. However, agricultural product prices are a small part of consumers’ total food bill. In many cases the packing material is more expensive than the agricultural products used to make the specific product. Farmers are often blamed for food price increases when the culprits are markups elsewhere in the value chain. Governments are quick to exploit higher food prices for political purposes.
Issues like food security are then debated fiercely and various impractical solutions designed. The best way for government to address higher food prices is to enable local commercial agriculture to produce high-quality food at low prices. This means minimal intervention in the free market, plus support for research and development.
This won’t result in food prices everyone can afford, but it will ensure a stable supply of food at world-competitive prices. Direct intervention, through subsidies, is the best way to ensure food access for the very poor. Even while the economy is performing well there are some risks farmers still have to consider. Current higher product prices may even last for the next decade, but increasing costs will catch up. Input prices always increase faster than producer prices. Farmers will have to keep costs down and improve efficiency to absorb higher costs. If inflation increases above 6% as the result of an external shock, like still-higher oil prices or a meltdown in Zimbabwe, we can expect the Reserve Bank to increase interest rates even more.
Farmers who borrow funds to invest in production capacity must ensure they can service this debt as interest rates increase. Higher interest rates may also lower consumer spending, resulting in lower product prices. The better times won’t last forever – “enjoy responsibly”. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed in this column are his own.