Food producers warn of higher prices as infrastructure crumbles

South African food producers, among the biggest on the continent, are spending hundreds of millions of rand mitigating prolonged rolling power blackouts, water supply issues and crumbling infrastructure.

This investment, sometimes at the cost of essential capital expenditure, will eventually be passed on to consumers, making food prices higher for longer, food companies, economists and lobby groups told Reuters.

It comes at a time when South Africa is already struggling with acute unemployment, 14-year high interest rates and ballooning inflation, and complicates efforts of the South African Reserve Bank (SARB) to ease interest rate hikes.

“We are aware of the struggles consumers are going through ... but inevitably some of it will be passed on to our consumers,” Tiger Brands chief manufacturing officer Derek McKernan said.

The group, one of the biggest food producers in Africa, has allocated R120m in capital expenditure for the second half of its financial year to mitigate the impact of power cuts, he said.

This includes additional back-up generators, fuel and water storage facilities, rooftop solar, mobile generators and water tanks to be operational from July.

It has even supplied a generator to one of the local municipalities, he added.

South Africa faces daily power cuts — its worst in history — as creaking, old power plants break down, plunging production and the economy into prolonged blackouts.

This has affected sectors across the board from telecoms to insurance.

For most part of this year the country was in the throes of “stage 6 load-shedding” with almost 10 hours of daily power cuts, forcing companies to scramble for alternative power and water sources.

South Africa implements power cuts in stages from one to eight with eight being the highest and translating to 16 hours of outages in a 32-hour cycle.

Premier Group, among the top five food producers, has invested in diesel generators and boreholes to counter power cuts up to 16 hours a day, CEO Kobus Gertenbach said.

It said last month it would take all necessary steps to protect margins.

Rival Libstar told Reuters it has built storage capacity to ensure up to three days of production at most sites.

Poultry producer Astral, diversified food producers AVI and RCL Foods have indicated in their recent earnings statements the mitigating measures would eventually translate into higher food prices.

The listed food producers have collectively lost almost 15% in their market value since the beginning of the year.

Blackouts have eased in the past few weeks, sparking hopes of better times ahead, but there is a palpable fear that as the winter takes a deeper hold in July, power demand will exceed generation.

It is not only companies which are on the receiving end.

Their suppliers — farmers — are also being battered by power and water problems and general infrastructure bottlenecks.

“It's a nightmare to be an irrigation farmer today,” lobby group Grain SA CEO Pieter Taljaard said, adding he expected local wheat production to fall by 15% this year.

The South African Cane Growers' Association estimates continued power cuts between stages 4 and 6 would translate to a loss of R724m in irrigated areas, its CEO Thomas Funke said.

While stage 8 could mean a loss of R2.4bn and an almost 65 tonnes per hectare drop in yield, besides hitting the entire value chain, he said.

“To pack your sugar, refine your sugar and manage it in your warehouse and eventually transport it somewhere ... a lot of those processes also require electricity.”

Amid falling yields, farmers are also forced to plant less to accommodate erratic supply schedules.

“This is [the] same situation [as] when you have a severe drought ... we can't irrigate enough, so you plant less,” Charles Rossouw, MD of Rosle Boerdery, a citrus farming group, said.

And as supplies fall, prices will increase, he added.

South Africa's food price inflation in May eased to 11.8% from 13.9% in April but remained high, hovering in double-digits.

The central bank predicted in May food inflation would average above 10% for the year.

The mitigating measures come at a cost two to three times more than the price of electricity, Kandas Cloete, senior analyst at the Bureau for Food and Agricultural Policy, said.

Some people worry there could eventually be a threat to food security if power and water woes worsen.

“Level 8 would start to affect our ability to produce enough product to service our market,” Gertenbach said.

Reuters