SENSIBLY OPTIMISTIC
Luckily for everyone the rains have returned to South African agricultural regions, providing some much-needed relief to farmers. Maize plantings are up 25 % vs last year and forecasts for the coming seasons maize crop are for 12.5-14mln tons( up 80- 100 % vs 2016).
Maize Crop Production( tons)
So, given that maize and grain prices are down significantly from their highs, all else being equal, we can expect to see a pullback in food inflation and thus CPI. The ultimate timing will be delayed( 2H17) as many food producers hedge their purchases 6 months out. With grain prices, likely to be down 30 % plus Y / Y, it is not a stretch to assume Food Inflation can fall within a range to 4-6 %( 4 % * 15 % = 60bps < 180bps contribution in 2016), which could take 1 percentage point out of the CPI number.
This rejuvenation in the maize crop has caused the price of maize to pull back from its records highs. The picture is similar across many of the other grains.
A pull back in Food Inflation will have two effects. Firstly, it will provide consumers with some breathing room, allowing them more cash to spend on more discretionary items, in turn stimulating growth. Secondly, a pullback in CPI may provide the Reserve Bank enough wiggle room to cut rates in order to stimulate the economy.
WHAT CPI MAY CAUSE THE RESERVE BANK TO CUT RATES
CPI expectations are already coming down toward 5.5 % for 2017.
Maize Prices CPI inflation expectations: 2017
7.
As we move into 2017 expect to see big Y / Y drops in maize prices, in the vicinity of 35-40 %.
What does this all mean?
As mentioned earlier, CPI inflation remained stubbornly ahead of the Reserve Bank ' s inflation target of 3-6 %, which was a primary reason for the 75bps hike in interest rates in 2016, despite very weak economic growth. Food has a weighting in the CPI basket of 14.6 %, but throughout 2016 Food Inflation contributed almost 30 % toward CPI. Refer to table below.
If inflation expectations are correct that means real rates( repo rate minus CPI) will be approximately 150bps, a level that provides the Reserve Bank room to enact a 50bps cut to interest rates( Resbank deems real rate of 100bps to be neutral). Consensus is for no interest rate cuts in 2017 so a dovish surprise will have a big impact.
continued on page 27
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
CPI |
6.2 % |
7.0 % |
6.3 % |
6.2 % |
6.1 % |
6.3 % |
6.0 % |
5.9 % |
6.1 % |
6.4 % |
6.6 % |
6.8 % |
Food Inflation contribution |
1.1 % |
1.3 % |
1.5 % |
1.6 % |
1.6 % |
1.7 % |
1.7 % |
1.7 % |
1.7 % |
1.8 % |
1.8 % |
1.8 % |
% of CPI |
17.7 % |
18.6 % |
23.9 % |
25.7 % |
26.1 % |
27.1 % |
28.2 % |
28.6 % |
27.8 % |
28.3 % |
27.2 % |
26.6 % |
sensible finance Mar17
15