Grain a risk to inflation
SURGING grain prices could dash hopes that inflation will be contained, with the brunt likely to be felt next year just when mining houses and unions sit down for wage talks.
Domestic maize and wheat futures scaled fresh peaks yesterday as a global grains rally, sparked by drought in the United States heated up.
The stakes are high for the South African economy as food prices account for about 14% of the inflation basket monitored by the Reserve Bank for monetary policy.
Because of time lags from grain futures prices, inflation may not immediately bubble back above the Reserve Bank's three to 6% target range, but current red-hot global and domestic prices could push it beyond that next year.
Local wheat prices are sizzling with the December contract hitting a record peak of R3440 a ton yesterday.
"There is a good relationship between the price of the front-month wheat futures and food inflation with a nine-month lag," said George Glynos, managing director of financial consultancy ETM.
"The lag is explained by the time it takes to harvest the crop, refine it for food production purposes, the packaging and then the storing in inventory. Food inflation will appear to remain under control over the next six months only to reverse higher three or so months after that," Glynos said.
South Africa imports half of the wheat it needs for domestic consumption, adding to the cost pressures from the price.
Annual food inflation slowed to 6.8% in May from 10.7% in January, helping to brake the headline number to 5.7% from 6.1% in April.
That raised hopes that domestic interest rates would remain near three-decade lows. But the US drought has seen key grain prices hitting highs, which caused food crises in vulnerable parts of the globe. - Reuters