Update 1 africa money food inflation entrenched in southern africa

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(Adds Mozambique, editing)By Ed StoddardJOHANNESBURG Aug 10 Food inflation is taking hold in southern Africa, putting pressure on some state budgets and making it hard for central banks to loosen monetary policy in the hunt for growth and jobs. U.S. drought has driven corn prices to historic peaks, and maize and wheat futures in South Africa, the continent's biggest producer, are at or near record highs, raising the stakes for governments such as Mozambique that subsidise the cost of basic food. The price pressures constrain central banks in the region, notably in South Africa, which is feeling the pinch from economic stagnation in the euro zone, a major trading partner. Already drawn to the region by attractive but waning bond yields, foreigners may choose to pile in in greater numbers if bubbling inflation contributes to higher returns. Politicians, too, will be taking note, given the relative size of spending on food in the average household's budget and the potential for hungry masses to take to the streets, as happened two years ago in Mozambique. Compared with the food price crunch of 2008, headline inflation is still moderate, but looks unlikely to stay that way, especially as the price of corn is felt across the food chain in southern Africa, one of the few regions where the crop is mostly grown for human consumption instead of livestock. In South Africa, the continent's biggest economy, inflation was 5.5 percent in June compared to 11.6 percent at the same point in 2008. It accelerated to 13.6 percent in August that year. In Zambia, inflation ended 2008 at almost 17 percent but is currently 6.2 percent, a trend mirrored elsewhere in the region.

South African inflation is not seen racing to 13 percent next year but pressure from food prices -- which account for 14 percent of the inflation basket -- are seen remaining in place. Local wheat prices, for example, are sizzling with the December contract hitting record highs in July. There is a strong-nine month tie lag between South African consumer inflation and domestic wheat futures. Inflation pressures 9 months hence could have wide consequences as mine workers and platinum, gold and coal bosses will start sitting down then to hammer out new wage deals. This in turn could keep the pedal on overall prices in the economy if the settlements far exceed inflation. INPUT COSTS

Even if grain futures suddenly fall back to earth, the prices consumers pay in South Africa and elsewhere in the region may not follow suit because of ballooning input costs. According to Mike Schussler, director of economists.co.za, South African seed prices have been rising at almost 18 percent per year since 1999, almost triple the average inflation rate over the same period, because there are so few distributors."Regionally I think food inflation is likely to be higher for the next 18 months to two years," Schussler said."I think the whole costs base here in southern Africa is under pressure as diverse costs such as rail fees and port fees and seeds all are increasing above the rate of inflation."With inputs so high, commercial and peasant farmers alike will have no incentives to plant big crops if global grain futures do cool off and domestic prices fall with them. This in turn could push domestic prices back up.

And in the longer run, the outlook for regional food prices can only be skyward because of demography, which will lift demand, and also possibly climate change, which may hit supply if events such as the current U.S. drought become frequent. Take Zambia and Malawi. Both countries have been reaping bumper harvests in recent years, helping to contain inflation. Zambia needs around 2.5 million tonnes of maize for human consumption and output has been topping that. The 2010/2011 season saw a record crop of over 3 million tonnes. But this 500,000-tonne surplus could get snapped up by population growth if harvests don't continue to grow. According to the U. N. Population Fund, 46 percent of Zambia and Malawi's populations are under the age of 15, a trend seen in other countries in the region such as Angola. In South Africa the number is lower but still high at 30 percent. Such a demographic profile can only mean demand for maize will continue to rise briskly for the foreseeable future. It also points to an economy where dependents far outnumber breadwinners, a scenario that further feeds into labour wage demands in the most unionised region on the continent. Southern Africa also has a growing middle class that will rely less on maize as a staple but trends in other emerging markets suggest this shift in diet will boost consumption of meat products such as beef which also rely heavily on corn. It all points to growing demand amid uncertain supply: the key ingredients for a food inflation recipe.