Investors with strong stomachs might take a closer peek at the JSE’s basket of food producers. The market, fretting about margin-gnawing increases in input costs, is struggling to digest the soft commodity price spike.
The war between Russia and the Ukraine, both major agricultural exporters, means that fears of a sustained rise in soft commodity prices — particularly wheat — are hardly unfounded. For the most part, it seems the JSE’s main food producers have factored in markedly higher input costs for the second half of the year, with Tiger Brands and RCL Foods — both leading bread producers — seeing their share prices drop 17% and 18% respectively over the past 12 weeks.
Investment company Brait, which is planning to list its consumer brands business, Premier Group, has lost 6% over the same period. Premier is also a major bread brand and has recently invested fairly heavily in its bakery segment. AVI, which owns best-selling biscuit and snack food brands, has lost about 8%, while Libstar, which plays across several food segments, is down about 7%.
Both RCL, via parent company Remgro, and Premier, via Brait, have indicated they have some breathing space in terms of wheat supply for the next few months. But that’s likely to change come July/August when new supplies are needed.
Materially higher input costs will be tough to recoup from consumers in the current environment and most probably will lead to margin dilution in these businesses
— Danie van Zyl
On paper, these all look like opportunities for long-term investors to nibble at quality businesses at reasonable prices — especially if the Ukraine war does not drag on too much longer, or supply constraints are resolved.
However, ClucasGray food sector analyst Danie van Zyl remains cautious. “Materially higher input costs will be tough to recoup from consumers in the current environment and most probably will lead to margin dilution in these businesses.”
One food company executive, speaking off the record, says there is no chance that additional input costs can be absorbed by food manufacturers. “If they try to absorb these costs they will find themselves in trouble in just a few weeks.”
He says some strong price increases were already in place before the war. “We’ve had to push up prices 16%-18% … sometimes 20% for certain lines. So far these have been accepted by the trade.”
But South Africans — already stretched by the fallout from Covid, sharp fuel price increases and a sluggish economy — can only take so much. Price increases will change eating habits, which could cause lasting damage at some food producers.
Eskort has already indicated that consumers are turning to cheaper options such as viennas, polony and liver or bacon spread as protein choices. Eskort CEO Arnold Prinsloo says demand for viennas and spreads has spiked 11.4% and 15.2% year on year (y/y) respectively.
A prolonged war could have a profound impact. Wandile Sihlobo, chief economist at the Agricultural Business Chamber, points out that Ukraine and Russia together account for nearly 30% of global wheat exports, about 14% of global maize exports, roughly 32% of global barley exports, almost 60% of global sunflower oil exports and about 14% of global fertiliser exports.
“The destruction of economic infrastructure within Ukraine, combined with various shipping lines avoiding the Black Sea region and the extensive sanctions that Western countries have imposed on Moscow, mean there will be limitations on the movement of agricultural products from these countries. This will be worsened by other factors, such as the agreement to exclude some Russian banks from global payment systems such as Swift.”
He also notes that when the war broke out at the end of February, global prices were already high as a result of relatively low grain and vegetable oil stocks.
Sihlobo says the global food price index compiled by the UN Food & Agricultural Organisation was up 21% y/y at 141 points in February — a record high. He expects the March average will register a new high.
Sihlobo points out that SA’s reliance on agricultural imports from Russia and Ukraine is limited. “In value terms, agricultural imports from these two countries accounted for just 2.4% of SA’s total agricultural imports of $5.9bn in 2020.”
Costs are rising, margin squeeze is occurring and a constrained consumer is enduring rising prices of daily staples
— Anthony Clark
But wheat and sunflower imports from the two countries constitute an outsize chunk of the total. Over the 2016-2020 period, SA imported an average of 1.8Mt of wheat a year — roughly half of total consumption. “Of this, wheat imports from Russia and Ukraine averaged 34% and 4%, respectively.”
For the 2021/2022 year, which ends in September, SA has already imported 40% of the 1.5Mt estimated requirement, says Sihlobo.
He believes SA will be able to close the import gap by sourcing wheat from Germany, Canada, Australia, Latvia, Argentina and the Czech Republic, among other countries. “But this will probably be at higher cost than the volumes already imported because of the upside pressure the war has added in the commodities market.”
So the big question is whether to gorge on food stocks, nibble selectively or politely decline taking a position.
Small Talk Daily analyst Anthony Clark, who watches the agribusiness sector closely, says there is no doubt that low economic growth, soaring unemployment and a fuel price that has doubled year on year mean all food producers are in a tough space. “Costs are rising, margin squeeze is occurring and a constrained consumer is enduring rising prices of daily staples like bread, cooking oil and mealie meal.”
He says that if global tensions do abate, there will be a meaningful slide in soft commodity prices. “But there can be no doubt that the sanctions on Belarus and Russia will not dissipate overnight. Thus, the elevated prices consumers have seen for the past two years will not come crashing down any time soon.”
Clark reckons that any easing in prices will immediately benefit poultry companies, and then businesses in the wheat value chain.
He says Astral Foods — the big bird on the JSE — buys 800,000t of maize a year and 240,000t of soya beans. “About 60% of the cost of rearing a broiler is feed. Astral, as the largest poultry producer in the country, will be an immediate buy on any material decline in soft commodities. Recently implemented price increases, which are unlikely to be trimmed, will allow any past underrecovery to be recovered.”
Clark predicts the large food counters such as Tiger Brands, RCL and AVI will receive a boost from lower soft commodity prices. “If I had to plump for one in the bigger list, I’d select RCL. Its basket of goods from dry groceries to poultry will feel the benefit far faster than its larger competitors … and its Rainbow Chicken unit is sorting out its poultry genetics issues.”
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