Focus: South African food producers warn of higher prices as infrastructure crumbles

Astral

05/07/2023 09:00

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      Blackouts hurting municipalities' ability to pump water
    

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      Food companies inject millions of rand to mitigate effects
    

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      Farmers changing irrigation schedules, planting less
    

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      Costs of measures taken to be passed onto consumers
    

  
    By Tannur Anders and Anait Miridzhanian
       JOHANNESBURG, July 5 (Reuters) - 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 onto 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 very aware of the struggles that consumers are
going through ... but inevitably some of it will be passed onto
our consumers unfortunately," Chief Manufacturing Officer Derek
McKernan of Tiger Brands  TBSJ.J , said.
    The group, one of the biggest food producers in Africa, has
allocated 120 million rand ($6.4 million) 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 is facing daily power cuts - its worst in
history - as creaking, old power plants breakdown, plunging
Africa's most industrialised economy into prolonged blackouts.
    This has impacted sectors across the board from telecoms to
insurance. 
    For most part of this year the country was in the throes of
"stage 6 loadshedding" 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  PMRJ.J , amongst the top five food producers,
has invested in diesel generators and boreholes to isolate any
impact of power cuts up to 16 hours a day, Kobus Gertenbach, its
CEO, said.
    It said last month it would take all necessary steps to
protect margins.
    Rival Libstar  LBRJ.J  told Reuters it has built storage
capacity to ensure up to three days of production at most sites.
    Poultry producer Astral  ARLJ.J , diversified food producers
AVI  AVIJ.J  and RCL Foods  RCLJ.J  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
southern hemisphere winter takes a deeper hold in July, power
demand will far exceed generation.
    
    NIGHTMARE TO BE A FARMER
    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," the CEO
of the lobby group Grain SA, Pieter Taljaard, said, adding, he
expected local wheat production to fall by 15% this year. 
    The South African Cane Growers' Association estimates that
continued power cuts between stages 4 and 6 would translate to a
loss of 724 million rand in irrigated areas, its CEO Thomas
Funke, said.
    While a stage 8 could mean a loss of 2.4 billion rand 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 actually (the) same situation (as) when you have a
very severe drought ... we can't irrigate enough, so you plant
less," Charles Rossouw, managing director 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 are coming at a cost two to three
times more than the price of electricity, Kandas Cloete, senior
analyst at Bureau for Food and Agricultural Policy (BFAP), said.
    And some people are worrying there could eventually be a
threat to food security if power and water woes worsen.
    "In my view, level eight would start to impact our ability
to continue to produce enough product to service our market,"
Gertenbach from Premier said.
    
($1 = 18.8263 rand)

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JSE food index vs all-share index    https://tmsnrt.rs/3r8mchz
Costs borne by companies due to power cuts    https://tmsnrt.rs/3pqR1xP
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 (Reporting by Tannur Anders and Anait Miridzhanian
Editing by Promit Mukherjee and David Evans)
 ((Tannur.Anders@thomsonreuters.com;))