JOHANNESBURG – Surging grain prices could dash hopes that South African inflation will be contained, with the brunt felt next year just when mining houses and unions sit down for wage talks.
Domestic maize and wheat futures scaled fresh peaks on Monday as a global grains rally sparked by drought in the United States heated up.
The stakes are high for Africa’s largest economy as food prices account for about 14 percent of the inflation basket monitored by the central bank for monetary policy.
Because of time lags from grain futures prices, inflation may not immediately bubble back above the central bank’s 3 to 6 percent target range, but current red-hot global and domestic prices could push it well beyond that next year.
Local wheat prices for example are sizzling with the December contract hitting a record peak of 3, 4 40 rand a tonne on Monday.
“There is a good relationship between the price of the front-month wheat futures and food inflation with a 9-month lag,” said George Glynos, managing director of financial consultancy ETM.
“The lag is typically explained by the time in takes to harvest the crop, refine it for food production purposes, the packaging and then the storing in inventory. Food inflation will appear to remain under control over the next 6 months only to reverse higher 3 or so months after that,” he said.
South Africa imports half of the wheat needed for domestic consumption, adding to the cost pressures from the price.
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Annual food inflation slowed to 6.8 percent in May from 10.7 percent in January, helping to brake the headline number to 5.7 percent from 6.1 percent in April.
This has raised hopes domestic interest rates will remain near 3-decade lows but the U.S. drought has seen key grain prices hitting highs which caused food crises in vulnerable parts of the globe in 2007/2008.
PRICE PRESSURES RISE DOWN INCOME LADDER
In South Africa, inflation pressures 9 months hence could have wide consequences as mine workers and platinum, gold and coal bosses will start sitting down around then to hammer out new wage deals after 2-year contracts expire.
The importance of food rises as you go down the income ladder, so sharply higher prices for bread or the staple maize will fuel demands from lower wage workers who typically have several dependents to feed.
Miners and other employers have been forking out above-average inflation pay hikes for several years, adding to cost pressures and pushing inflation higher in turn.
The Reserve Bank sees inflation staying within target until the end of 2014, but has warned of an upside risk from a weaker rand currency which drives dollar-linked grain prices higher.
Grain prices are on the upswing across the board. Domestic maize futures have doubled in the last 18 months and the most active December white maize contract was trading 3 percent higher on Monday at a record 2,700 rand a tonne.
“With the current development around maize and corn crops there’s definitely a risk going forward that you have a big turn around in food prices,” said Adriaan du Toit, an analyst at Standard Bank.
Globally, grains continued their weather-driven rally on Monday, as Chicago new-crop corn jumped 4 percent and soybeans gained about 2.5 percent, with both markets climbing to contract highs on forecasts of further supply tightness, dragging wheat higher as well.
South African traders are also watching the local crop amid concerns late-season dry weather affected yields.
The government left unchanged its maize output forecast for 2012 at 11.056 million tonnes in June saying it expected to have a better picture of the crop this month.
