Food price pressures

Johannesburg/Lusaka - A tight grain supply outlook after several bumper harvests is set to fan food price pressures in southern Africa, fuelling salary demands and threatening to knock the region's fragile economies out of kilter.

Erratic rains have delayed the planting of the crucial maize crop in Zambia, pushing inflation towards double digits, while bread basket South Africa is importing the staple despite abundant harvests because of worries it has exported too much.

With a high proportion of households in the region spending much of their limited income feeding themselves, rising food inflation is likely to further stoke union demands in wage negotiations.

It will also make it tougher for South Africa's central bank to refrain from hiking interest rates as it grapples with sluggishness in the region's dominant economy.

Bumper crops in recent years, including in Zambia and Malawi, have helped contain food inflation.

"In the case of southern Africa, it would appear that the success story of recent years is increasingly becoming more of a threat to the inflation picture," said Razia Khan, head of Africa research at Standard Chartered.

"Zambia ...had seen record grain harvests. While the new government will devote even more attention to boosting agriculture, it may not be sufficient to hold food prices - and inflation - down, if the rains are less favourable."

Zambia's big yields have been attributed to government subsidies to peasant farmers in the form of fertiliser and seeds but the crop ultimately depends on rain and the country's agriculture minister told Reuters things had gotten off to a bad start because of erratic weather.

Zambian inflation slowed to 7.2% in December from 8.1% in November but the trend is seen reversing.

"If the rainfall pattern continues like this and we have a bad crop then we are definitely going back to double-digit inflation," said Chibamba Kanyama, an analyst with the think-tank Economics Association of Zambia.

Warnings from East Africa

High oil and food inflation last year in east Africa demonstrated the potential knock-on effects on developing economies of a spike in prices of staple goods.

The region suffered from drought in late 2010 and the start of 2011, sending the prices of basic commodities like wheat, maize and sugar through the roof.

In Kenya last year, where inflation peaked at 19.7% in November, the shilling dipped sharply against the dollar, bank lending rates and debt servicing costs hovered close to 20% and the stock market fell 30% as many foreign investors pulled out.

Zambia, meanwhile, does still have around 600 000 tonnes of maize in reserve but a poor crop this growing season will fan price pressures.

"While non-food inflation has stubbornly remained in low-double digits, with the currency weakening there is certainly upside risk to non-food inflation and if the harvest disappoints food inflation will accelerate as well," said Leon Myburgh, Citi's Sub-Saharan Africa Strategist.

In Zimbabwe, late rains mean the total maize area planted is 35% less than it was at this stage last year, according to government figures.

"We'll pay more and we are going to import inflation from the higher cost of food," said John Robertson, an independent economist based in Zimbabwe.

South Africa: Exporter to Importer

South Africa has been harvesting bumper maize crops but because of export commitments, producer group Grain SA estimates it may have to import a combined 700 000 tonnes of white and yellow maize in the marketing year that ends on April 30.

Domestic maize prices are currently around record highs and double what they were a year ago and Grain SA says they are now at "import-parity" levels which means they are climbing to the global prices paid to buy overseas.

The March white maize contract is currently fetching around R2 680 a tonne while yellow maize is just over R2 600 a tonne.

This is worrying as inflation is slithering upward in the region's biggest economy - and grain prices are already a big factor driving that trend.

November consumer inflation quickened to 6.1% year-on-year, from 6.0% in October, a breach of the central bank's mandated target range of 3 to 6%. Food inflation led the way at 10.7%.

The typical South African blue-collar, unionised worker often has several dependents to feed, so food inflation rate is a better measure of his or her situation than the general rate.

Emerging food price pressures last year were seen behind wage settlements far above inflation in sectors such as mining and will drive negotiations again in 2012 when the annual "strike season" commences mid-year.

"It will be double-digits demands for pay increases. Food is a big chunk of the monthly basket of goods that unionised workers purchase," George Glynos, managing director of financial consultancy ETM, said.

This will have implications for the region.

"Higher inflation in South Africa typically triggers some spillover into inflation in the rest of its regional trading partners," said Standard Chartered's Khan.