SHARES in South African food manufacturers are being punished as companies struggle with record-high commodity prices and as consumers come under pressure from rising interest rates and accelerating inflation.
The FTSE/JSE Africa food processors and producers index has lost 5.5% this quarter, the second straight three-month decline, with eight of the 10 members falling. The retreat compares with a 2% gain in the all share index.
RCL Foods and Tiger Brands are among the companies facing rising consumer-price inflation, which accelerated for a second month in January, as well as higher prices for white maize, a staple food, which reached a record high on January 31.
The rand has weakened by 2.5% against the dollar so far this year, the second-worst among 16 major currencies tracked by Bloomberg.
“The consumer is a lot more constrained and looking for a cheaper alternative to get basic goods,” Vunani Securities equity analyst Grace Legodi says.
“Maize is a commodity and is dollar based.
“It doesn’t help us from a rand perspective.”
Rising distribution costs for companies have been driven by a petrol price that has climbed 9.6% over the past 12 months because of the weaker currency.
The Reserve Bank unexpectedly increased the repo rate by half a percentage point in January, citing concern that the weak rand may stoke inflation.
“We expect the consumer to continue being under pressure on the back of interest rate hikes and petrol price increases,” says Alex Mathole, group executive for corporate affairs for Tiger Brands, South Africa’s largest food and household-goods company.
Tiger Brands is struggling to “bed down” its acquisition of Lagos-based Dangote Flour Mills, Ms Legodi says.
Shares in Dangote Flour have dropped by 7.3% on the Nigerian Stock Exchange this year.
Pioneer Foods, South Africa’s second-largest food company by market value, plans to spin off its poultry unit this year as chicken producers battle with high feed costs and cheaper European imports.
This will bolster the value of the company’s remaining assets, Ms Legodi says.
Pioneer spokeswoman Lulu Khumalo says cost pressures stem from higher fuel prices, an 8% rise in electricity tariffs and raw material costs hit dwindling domestic stock levels and the rand.
Remgro-controlled RCL Foods has bought New Foodcorp and TSB Sugar since 2012 to bring in cash from sources other than chicken. The moves helped revenue, Vunani’s Ms Legodi says.
Consumers are increasingly turning to cheaper food as they face an unemployment rate of 24% and economic growth of 1.9% last year, the slowest pace since the recession in 2009.
“When times are hard for consumers, you are price-sensitive,” Ms Legodi says. “They’re looking for bargains.”