Unjustified price increases for essential food worries competition commission

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The Competition Commission has expressed concern about unjustified price increases for essential food items, which include sunflower oil, white and brown bread and maize meal, as well as frozen chicken portions, one of the few sources of protein that should be affordable.

According to the commission’s latest Essential Food Pricing Monitoring (EFPM) report that covers food prices from 2021 to 2022, food prices continue to be elevated and vulnerable to supply shocks although the effects of the pandemic on many markets have largely subsided.

One of the supply shocks was the war in Ukraine that disrupted the global grain value chain and in South Africa, worsening rolling blackouts affects the daily operations of businesses in the food value chain, the commission says.

The commission started monitoring food prices in 2020, to identify and prevent price gouging.

This is the eighth report about food prices and the commission says the food sector remains a priority as poor consumers spend a significant portion of their income on essential food.

The reports pointed out concerning features in several food markets and value chains, such as larger differences between what farms get paid for produce and what it gets sold for in stores, growing margins at the processor and retailer level and potential opportunistic pricing behaviour for staple food products, such as bread and cooking oil.

The price of sunflower oil

The commission’s analysis of steep prices for sunflower oil throughout the value chain in August last year prompted the commission to investigate the price of a range of essential food products that include bread, cooking oil, maize meal, rice, flour, margarine and pasta at the retail and wholesale levels.

In addition, the commission launched a Fresh Produce Market Inquiry to assess if there are features in these markets that impede competition.

The August 2022 edition of the report focused on the price of sunflower oil after consumers expressed concerns about steep price increases. The commission found a significant increase in the producer price of sunflower oil starting from March 2022, that were transmitted to retail prices.

However, retailers appeared to have absorbed some of the increase which resulted in lower retail margins from March 2022. Then, from June to December 2022, the wholesale price of sunflower oil fell drastically from R32.72 to R23.88.

The commission says the spotlight that fell on the conduct of processors of cooking oils in the report likely contributed to this decline and those companies remain under investigation. Meanwhile, the retail prices fell from R45.33 in July to R38.71 in December 2022.

The steeper decline in wholesale prices relative to retail prices resulted in the retail margin increasing to 38% in December from 22% in March 2022.

The commission says the fact that retailers were quick to increase percentage margins meant that consumers have not seen the extent of relief that wholesale price drops would warrant.

The percentage margins may be similar to 2021, but the higher wholesale price means that retailers are taking more rand margin than before, which is unlikely to be justified, the commission says, adding that the net effect of processor and retailer conduct in 2022 is that consumers are still paying far more for cooking oil than in 2021.

The commission remains concerned about the cooking oil value chain pricing and is currently conducting a formal investigation.

Bread, maize, fruit and vegetable prices

The latest edition of the EFPM report shows:

White bread prices increased by 20% and brown bread prices by 19% from January to December 2022, faster than producer prices that increased by 15% for white bread and 14% for brown bread. This implies that increases in the shelf price of R15.47 to R18.62 for white bread and R13.99 to R16.61 for brown bread, may not be justified by cost.

The price of maize meal increased by 32%, from R26.62 to R35.29 from January to December 2022, while the South African Futures Exchange (SAFEX) price of white maize increased at a slower rate, resulting in the price farmers charged for maize making up a lower proportion of the retail price of maize meal. The commission says this is concerning and may indicate opportunistic behaviour throughout the value chain. It also raises questions about the use of export parity pricing throughout the maize value chain.
The prices of five fruits and vegetables were generally volatile during 2022 and the Fresh Produce Market Inquiry will conduct an in-depth value chain analysis.
Price of individually quick frozen chicken portions

This edition of the EFPM report has a special focus on the feed-to-poultry value chain, specifically individually quick-frozen (IQF) chicken products supposed to be an affordable source of protein for low-income consumers.

The commission says feed costs account for more than two-thirds of broiler production costs and are, therefore, a source of upward cost and pricing pressure throughout the poultry value chain.

The feed-to-poultry value chain is highly concentrated with five firms making up 70% of total chicken production and the top two firms making up 50% of the market.

Some of the findings regarding the poultry value chain include that the price of grains and oilseeds used to manufacture animal feed, namely wheat, maize, soya beans and sunflower oil, were volatile and increased over 2021 and 2022. The price of poultry feed was relatively stable over the same period.

The commission says it is forecast that raw material costs may fall during the first half of 2023 and it will monitor the extent and degree to which these reductions are transmitted to feed prices and ultimately to chicken prices at the retail level.

In addition, the commission noted that feed prices increased faster than the producer price of individually quick frozen products, which are the most widely consumed chicken products in South Africa. Despite this cost pressure, producers reported improvements in their financial performance largely driven by high feed prices.

The report also noted that when chicken imports from the European Union were banned in response to the avian flu outbreak on the continent, domestic producer prices increased. The commission says this anomaly requires further interrogation and it will closely monitor the developments in the poultry sector to ensure that consumers are not subjected to unjustified price increases.

George Herald