These factors influence product prices

March 2022

HELEEN VILJOEN, INTERN ECONOMIST AT GRAIN SA

In the current economic climate, retail prices are struggling to stay reasonably priced following country wide unrest and production pressure for raw material producers. These production pressures include steep increases in input costs, that are highly correlated with the total production cost of raw materials such as maize and sunflower. To what extent does it influence the price that a consumer pays for household items?

Maize meal and sunflower oil are some of the most common items found in the pantry of a South African consumer. The Consumer Price Index (CPI), which refers to a weighted average basket of consumer goods and services purchased, includes both these items.

THE VALUE CHAIN FOR COMMON HOUSEHOLD GOODS
The chain of producing a product has many links. A value chain starts off with the raw product and each link in the value chain adds value to the product until an end-consumer product is finalised. Figure 1 represents a general value chain for common household products. 

The participants in the value chain flow are as follows:

1. The input suppliers include companies that supply inputs like fertiliser, seed and agro chemicals.
2. The grain producers form the second link of this value chain. Once the soil has been prepared and the necessary inputs have been acquired, production can start. Production processes differ according to the needs of each grain type and cultivar. The days until harvest and weather conditions are specific to each commodity.
3. Once the commodity is harvested, the producers transport the raw material to the nearest silo or milling operation which then processes and refines the raw material into products as per consumer preference.
4. After the raw material is refined into the respective products, the miller either distributes the products under its own brand or sells the refined product to established brands.
5. The respective brands distribute the product to retailers and wholesalers.
6. The retailers and wholesalers then distribute the product to the end consumer.

INFLUENCE OF PRICES ON PRODUCTS
Influence of white maize price on a 2,5 kg bag of maize meal
Table 1 represents the data used to derive the percentage contribution of producers to the retail price of maize meal. The derived producer price is calculated by the average annual Safex price for each marketing year then deducting the relevant location differential as well as handling and storage costs. 

Figure 2 visualises the derived percentage contribution of producers to the retail price of maize meal. From Figure 2 it can be concluded that the price of maize contributes up to 50% of the retail price a consumer pays for a 2,5 kg bag of maize meal. The remaining percentages are contributed by value added through the value chain, this includes packaging, processing and milling.

Influence of sunflower producer price on a 750 ml bottle of sunflower oil
Table 2 represents the data used to derive the percentage contribution of producers to the retail price of sunflower oil. The derived producer price is calculated by the average annual Safex price for each marketing year then deducting the relevant location differential as well as handling and storage costs. 

Figure 3 shows the derived percentage contribution of producers to the retail price of sunflower oil. For the purpose of this illustration, prices from 2020/2021 were used. This is due to the significant sunflower price increases during 2021/2022 that may give an inaccurate representation of the producer’s contribution to the sunflower price.

CONCLUSION
Consumers often believe that high prices of a household’s goods are attributed to raw material producers which, as shown in this article, is not always the case. Raw material producers are not solely responsible for the retail price of goods. Value is added by the different links in the value chain, each contributing to the final price of the product. 

Publication: March 2022

Section: Pula/Imvula