March 1, 2017 / 10:19 AM / 5 months ago

South Africa maize prices tumble, inflation outlook improves

3 Min Read

* Drought last year hit crops, fuelled inflation

* Bumper crop seen this year despite pest infestation

* Meat prices remain concern on inflation fron

* GRAPHIC: Maize futures tmsnrt.rs/2lS0wSJ

By Ed Stoddard and Tanisha Heiberg

JOHANNESBURG, March 1 (Reuters) - Good rains and prospects for a bumper crop have pulled South African maize prices to 2-1/2 year lows and while the bottom may be near, analysts say inflation should start slowing as a result in the third quarter of 2017.

This will ease the burden on poor households, which rely on maize as a staple, and may give the central bank room to hold or cut rates. The flip side is meat prices, which could accelerate after drought-induced culls last year reduced cattle numbers.

The July white maize contract fell over 4 percent on Wednesday to a 2-1/2 year low of 1,817 rand ($138.70) a tonne after the government Crop Estimates Committee forecast a 2017 harvest of 13.918 million tonnes, 79 percent more than in 2016. That forecast was 6 percent higher than expectations of 13.11 million tonnes.

Domestic consumption is between 10 and 11 million tonnes.

Cold weather, rains and resilient genetically-modified crops (GMO) have also limited the damage caused by an armyworm outbreak.

The region offers potential export markets. Neighbouring Zimbabwe has been hit by the fall armyworm, an invasive South American species, denting crop output.

The difference with 2016 is stark, when the main white maize contract scaled record peaks over 5,000 rand as an El Nino-triggered drought parched lands. Prices are now around a third of that.

Consumer inflation slowed to 6.6 percent in January from 6.8 percent in December, while food inflation braked to 11.4 percent from 11.7 percent.

"There is a time lag. Food processors bought the grain we are using now a few months ago. CPI for food should only really start coming down in the third quarter," said Wandile Sihlobo, an economist at the Agricultural Business Chamber.

Traders said prices should soon bottom out.

"We are already 83 rand below the calculated export parity price but in the past it went up to 140 rand below so there is a chance it can go a bit lower," said one trader.

But domestic meat prices could rise.

"There are concerns that the cull of animals during the drought, and the necessary restocking now, will keep meat price inflation...we see inflation remaining uncomfortably high," said Razia Khan, chief Africa economist at Standard Chartered.

Other analysts see scope for lower rates.

Dennis Dykes, Nedbank chief economist, said lower maize prices were in line with the central bank's outlook at its January policy meeting, adding this gave the regulator some space to move on interest rates.

($1 = 13.1000 rand)

Additional reporting by Mfuneko Toyana; Editing by James Macharia and Susan Thomas

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