Quick to go up, slow to come down

Price movement in value chains with dominant role players shows a 'rocket and feather' effect, quick to increase but slow to decrease

- Dr Koos Coetzee

Retail prices move up with the speed of a rocket when upstream prices increase but go down like a feather falling when input prices decrease.

The Competition Commission (CC) recently published a report on retail prices that clearly shows this trend. It quotes several South African studies that confirm this trend in terms of local beef, maize meal, bread, sunflower oil and fresh milk value chains.

The CC explains that retail prices in food value chains are formed by markups being added at every point. When input prices increase, the different role players increase prices in order to maintain their mark-up percentages.

According to the CC, this practice is not necessarily uncompetitive: the market power of firms allows them to increase prices to levels that boost their profits. If input prices increase sharply, as in the case of supply shocks, firms increase their profitability by maintaining mark-up levels.

TRENDS FOR SPECIFIC VALUE CHAINS

Cattle to beef value chain 

In its latest report, the CC examined the cattle-to-beef value chain in detail. It found that during the first half of 2023, weaner prices decreased from R37,28/kg to R29,61 (-21%). Beef A2/ A3 carcass prices fell from R62,43 in July 2022 to R51,17 in July 2023 (18%).