Commodity-driven imported inflation fears unpacked

BY TAFARA MTUTU

A RENEWED wave of price rallies in commodities has taken over futures markets across the world. According to CNBC, corn futures surged on Monday April 26, 2021, hitting their highest level in more than seven years and triggering a pause in trading at the Chicago Board of Trade. The futures contracts traded at more than US$6,50 per bushel early Monday, up more than $1 per bushel since late March. Wheat futures also followed suit with record gains over the past few weeks. Contract futures for wheat in Chicago climbed as much as 4,7% to $7,46 per bushel and equalled their highest price since February 2013. Chief drivers of the price movements in soft commodities include an increased demand from China – the world’s largest importer of farm products — and lower supply expectations underpinned by extreme weather conditions in various parts of the Americas and Europe. We also note that a low-base effect is punctuating the global soft commodity price movements given that the majority of these commodities’ futures contracts are rising from very low levels after the Covid-19 pandemic induced a decline in prices in 2020.

The rise in commodity prices has ushered fears of imported inflation in economies that are major importers of grain. Imported inflation refers to an increase in the price of goods that is driven by an increase in the price of imported products.  Given that soft commodities are used in many of the products that constitute a typical household basket, the increase will likely result in subsequent upward revisions in unit costs which manufacturers will pass onto consumers. Major maize importers that are likely to experience this kind of inflation include Japan, Mexico, Vietnam, Republic of Korea and Spain. We also expect inflationary fears from importers of soya beans (China, Mexico, Argentina, Egypt, and Netherlands) and wheat (Indonesia, Egypt, Turkey, Italy and Philippines).

On the other hand, economies that are largely dependent on soft commodities will likely experience a boom in the year, all things being equal. Several countries in South America (Brazil, Paraguay, Uruguay and Argentina) stand to benefit from the strong soya bean prices despite weather-related production constraints in the region. The United States, Canada and France are likely to record more wheat exports at higher prices after the world’s largest wheat exporter, Russia, announced an increase in wheat export tariffs earlier this year.

The current price trends in commodity markets are also expected to drive GDP growth in commodity-exporting countries.

According to the International Monetary Fund, The United States is expected to register real GDP growth of 6,5% in 2021 while Brazil is likely to experience a 3,7% real GDP growth. These strong and positive figures have also been met by calls to contain fears of subsequent high inflation rates. Brazil, for example, is expected to raise its interest rates to 5,25% in a bid to contain the inflationary impact of the strong commodity prices. Other counties, such as the US and Canada, have opted to maintain low interest rates in the interim despite mounting calls to take measures before inflation fears spiral out of control.

The dynamics are somewhat different on the African continent. Some soft commodity-dependent countries on the continent are mainly into products that have not experienced strong upward price movements in the same way as maize, wheat and soya beans futures contracts. Ethiopia, Kenya and Ivory Coast are major exporters of tea and coffee which have suffered subdued demand because of pandemic-driven restaurant closures in export markets such as Europe and the US. Other countries that are dependent on staples such as maize and wheat are likely to harvest for local consumption and replenishment of strategic grain reserves vis-a-viz extensive food security risks that were caused by consecutive droughts and a locust outbreak in recent years.

Zimbabwe, in particular, has been struggling to maintain adequate grain reserves following consecutive drought seasons in 2019 and 2020. The latest season, however, was marked by above-average rainfall and the country is expecting 2,8 million tonnes of maize, just shy of its record harvest of 2,95 million tonnes in 1984. We also anticipate a winter wheat output of c.250 000 tonnes in 2021 on the back of consistent supply of water and electricity for irrigation, and support from the government. The encouraging grain output expectations are likely to drive the substitution of imported grains to local produce and, subsequently, an ease in imported inflation fears in the country in 2021. However, we opine that there is not much room for Zimbabwe to capitalise on the strong commodity prices as an exporter.

Zimbabwe’s estimated annual maize requirement currently stands at 1,9 million tonnes and the Grain Marketing Board (GMB) has a mandate to maintain a minimum of 500 000 tonnes in strategic grain reserves. Given the expectation of 2,8 million tonnes, the country will have only 400 000 tonnes of maize which it could export in the case that the GMB only shores up its strategic reserves to the bare minimum.

However, at GMB’s maize producer price of ZW$32 000 (US$378,70) per tonne, there could be pressure by local farmers to match the local producer price to the current global price of c.US$690,40 per tonne which could be met by smuggling fears to neighbouring countries. We also note that our 2021 wheat output expectations for Zimbabwe remain well below the county’s annual wheat requirement of 450 000 tonnes, and the country will remain a net importer of wheat.

Similarly, figures from the Livestock and Meat Advisory Council indicate a soya bean crop output ranging between 50 000 and 80 000 MT against a national annual requirement of 240 000 MT. ZSE-listed National Foods Limited, the largest miller of maize and flour in the country, stands to record a solid performance underpinned by local output expectations, and investors should keep an eye on the stock.

Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or tafara@morganzim.com