ON THE COVER | There is (always) money in food


Local grain scenario

Locally, South Africa’s Crop Estimates Committee (CEC) has forecast a maize crop of 16.4 million tonnes – the second largest since the record began – for marketing year 2021. This compares to a total harvest of 15.3 million tonnes in marketing year 2020, according to CEC.

Despite the bumper harvest expected for the current year, the price of maize, as traded on Safex, is trading around R1,000 per tonne higher than a year ago. This price refers to yellow maize for delivery in December in the two comparable years (see graph 2).

Global and local meat production

Global meat production is expected to increase from 337.2 million tonnes (carcass weight equivalent) in 2019 to 345.6 million tonnes this year. Between 2020 and this year, production is expected to increase by 2.2%, mainly thanks to a 4.2% increase in pork production. This reflects “an expected rebound in meat production

in China, with notable expansions in Brazil, Vietnam, the United States and the European Union, partially offset by probable contractions in Australia, the Philippines and Argentina, ”according to the FAO. “The expected growth in meat production in China reflects a likely expansion in the production of all types of meat, especially pork, thanks to significant investments in improving meat value chains and biosecurity. ”

Global meat prices, however, have not increased as vigorously as cereals. For the period from January to May of this year, compared to the same five months last year, the FAO meat price index rose only 1.3%. “International meat prices increased from January to May, reflecting strong import demand, particularly from East Asia and the Middle East, amid limited supply expansion world export despite the resumption of production in the main producing regions. ”

Locally, meat prices have skyrocketed. The average price of sheep (grade A2 / A3) broke above the R100 / kg level for the first time in the second week of July to trade at R100.17 / kg.

During the last week of August, the price fell to R91.60 / kg, making it the 14th consecutive week of trading above R90 / kg, according to data compiled by Absa.

Likewise, the price of beef (grade A2 / A3) was 17.2% more expensive in the last week of August compared to the same week a year ago, according to data from Absa. This category of meat traded at Rand 51.60 / kg after hitting its highest price of Rand 54.41 / kg in February, according to data from Absa.

Local food price inflation

The Bureau of Food and Agriculture Policy (BFAP) compiles an alternative food inflation basket, called the BFAP Thrifty Health Food Basket, which “measures the cost of basic healthy diets to low-income households in the context of the ‘South Africa,’ according to the bureau. The BFAP basket “is designed to feed a reference family of four (consisting of an adult male, an adult female, an older child and a younger child)” monthly where parents both receive minimum wage (R4,229.55 per month for a 195 hours per month of work), child allowance (R460 per month) and children benefit from a school feeding program.

In July, the cost of the BFAP basket increased 4.2% from the previous year, or Rand 119, to Rand 2,392 per month. The bureau noted that the prices of several components were increasing by more than 10% on an annual basis, including vegetable oils, pork (ribs and ribs), margarine, dried beans, beef (stew and offal), chicken (IQF and fresh cuts), super cornmeal, pumpkins and bananas. The products that have seen a price increase of between 6.7% and 10% are chicken offal, canned sardines, white sugar, polony, cabbage and beef (ground and brisket).

Roy Mutooni, senior equity analyst at Absa Asset Management, told finweek that the main driver of food price inflation is currently the price of meat. “The problem is that the inflation of the price of meat, which is essentially chicken because it is consumed more, is quite high. Until October 2021 the basis of food, as well as meat, inflation is low. So food inflation could stay at high levels at least until then and will likely start to decline due to the higher base effect by November or December. ”

Patrick Ntshalintshali, who helps manage the equity and balanced funds of Perpetua Investment Managers, highlights the global dynamics underlying local food prices. “Food price inflation is high right now due to global supply shortages, high commodity prices and logistical challenges resulting from the pandemic,” he said. weekend. “However, indicators show that the supply is increasing, that commodity prices have peaked and started to decline. This would provide much needed price relief at the consumer level.” He predicts that commodity prices food will slow to less than 5% annual growth by the end of the year.

Tiger Marks

Showing their annual results between June 1, 2020 and May 31, 2021, the 13 listed companies of SA in the food producers sector of the JSE generated a turnover of 135.04 billion Rand and a net profit of 7 R 02 billion, according to data compiled from the companies annual report. publication of financial results. Of these, Tiger Brands, with annual sales of R 29.76 billion, and RCL Foods, 75% owned by Remgro, with sales of R 27.8 billion, are the more important (see graph 3).

Founded 100 years ago, Tiger Brands manufactures and sells brands such as Koo, All Gold, Tastic and others across the continent. The company, which is on a strategic trajectory to increase its market share and reduce costs, last year sold its unit of value-added meat products (the source of a listeriosis epidemic in 2017, deaths which have resulted and now a class action suit) and plans to do the same with his deciduous fruit business.

“I think this is the right strategy for Tiger Brands – they need to focus on grains and groceries in South Africa. I think the group needs to focus and historically it has been strong in branded food products, ”Mutooni said.

Rella Suskin, head of research at BenguelaGlobal Fund Managers, agrees. “I believe the strategy of disposing of non-core business units without competitive advantage is essential for Tiger Brands to turn around its business. This will allow management to focus attention on innovation, branding and growing product offerings with strong value propositions rather than being distracted by the need to put out fires in small units. deficit. ”

During a presentation to investors on May 20, the question arose as to whether Tiger was considering selling its underperforming corn unit. CEO Noel Doyle responded, “Corn is a category that is not a perfect fit, but extracting corn from an integrated site into an integrated business is quite a challenge. We had a few conversations about it. This is not an easy transaction to close, given its integration into the entire milling infrastructure. It is therefore certainly one of our worst performing assets in the portfolio. A value-destroying outlet is quite difficult to build.

So, with the corn unit unlikely to be sold soon, Suskin gives hope that a refocused Tiger would regain market share. “In a nutshell, they sell not-so-good coins that are in deficit and give you a special dividend. I don’t think this is a bad strategy. A smaller, more manageable, and more branded quality business is left behind, which has better returns. This will allow management to better manage its portfolio of brands which is currently losing market share. ”

In the six months ended March 31, Tiger managed to increase its revenue from SA operations by 7.1% to R14.6 billion and from international operations by 18.5% to R1.83bn, according to its interim financial statements. Overall, sales increased by 8%, supported by a 9% price increase despite a 1% contraction in volumes. To go through an increase of 9%, compared to an inflation of food prices at the producer level of 8.2%, is quite a feat. However, it is unlikely to happen again.


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