• February headline inflation up by 1.8% YoY, while food inflation grew moderately

• SRI would disproportionately impact lower-income households by causing increased inflatio

• Favourable time to lift the price cap due to the softening of feed costs

• Limited effect of lifting price controls on chicken and egg prices

February 2024 saw headline inflation slightly rose to 1.8% YoY, with food inflation saw a slower increase (Feb: 1.9%; Jan: 2.0%). Core inflation remained steady at 1.8% YoY in February 2024.

THE POTENTIAL SPREAD OF EFFECTS RESULTING FROM THE RATIONALISATION OF SUBSIDIES

The government aims to float chicken and egg prices to benefit eligible citizens, excluding foreigners or affluent groups, from subsidies. Prime Minister Datuk Seri Anwar Ibrahim mentioned that since 2022, RM3.8 bn in subsidies has been allocated for chicken and eggs. Subsidy rationalization leading to increased inflation would disproportionately affect lowerincome households, especially due to B40 households exhibit a higher marginal propensity to consume, allocating a larger portion of their monthly expenditure (35%) to food compared to M40 (30%) and T20 households (23%).

Chicken consumption is remarkably high in Malaysia, reaching 50 kg per capita, which is one of the highest rates globally. Additionally, the average per capita consumption of eggs stands at 280 per year.

Malaysians are still paying a much lower price for chicken and egg compared to those in the neighbouring countries. For instance, in Malaysia, chicken is priced at RM9.40 per kg, while eggs are priced at RM0.45 each.

Price control measures for chicken were lifted on 1st November 2023, while similar measures for eggs have been postponed. The market will eventually settle at an equilibrium price, which could either rise or fall, making it challenging to predict. The primary variable influencing market prices is supply, as demand remains relatively stable with minimal fluctuations. The price cap implemented in February 2022 helped maintain stable prices for chicken and eggs amidst rising feedstock costs caused by the commodity price surge triggered by the conflict between Russia and Ukraine.

Industry sources in the poultry sector believe that allowing the prices of chicken and eggs to fluctuate will provide producers with accurate insights into the real demand and supply dynamics of the market. An industry player notes that high prices indicate insufficient supply in the market, prompting producers to ramp up production to meet demand. This approach would foster a healthier and more sustainable poultry industry in the long run.

FAVOURABLE TIME TO LIFT THE PRICE CAP DUE TO THE SOFTENING OF FEED COSTS

Feed costs, comprising about 70% of production expenses for poultry farmers, mainly consist of 75% corn and the rest soybean meal. Corn and soybean meal prices, traded in US dollars, are currently on a downward trend. Yet, the fluctuation of the Ringgit also plays a crucial role in this context.

LIMITED EFFECT OF LIFTING PRICE CONTROLS ON CHICKEN AND EGG PRICES

The elimination of the chicken price ceiling is anticipated to have a minor effect on inflation since it is already being sold at a price close to the market rate (Feb: RM10.29/kg; ceiling: RM9.40/kg). Regardless, fresh meat holds a modest weight of 2.3% in the CPI basket. Eggs, on the other hand, make up 0.4% of the CPI basket, and the removal of price controls for both is projected to save the government RM3.8 bn.

The poultry farming sector is anticipated to stay steady, backed by an ongoing government subsidy of 10 sen per egg and a price cap ranging from 41 to 45 sen for grade A-C eggs. We expect this subsidy to continue in the first half of 2024, with a possible review in the second half of the year, considering the expected stabilisation in egg supply. The removal of the subsidy could lead to a potential 10 sen increase in egg prices, varying based on the grade. In general, we expect these changes to have minimal impact on demand since eggs are regarded as a staple food item for the public.

The recent withdrawal of the chicken subsidy has had a slight impact on industry players, particularly small farmers, who are finding it challenging to pass on all their costs to consumers without affecting demand. However, despite the expected increase in the cost of living, consumer demand for chicken is projected to stay steady. This is because chicken remains the most affordable source of protein, especially when compared to the higher prices of fish and other meats.

OUTLOOK

Nevertheless, it is documented that price reforms have resulted in higher costs for both households and businesses. The challenges of managing these costs will persist, especially with fluctuations in global commodity prices directly impacting domestic cost conditions. Domestic costs may experience further upward pressure if global commodity prices continue to rise in the future. The removal of subsidies and price controls would disproportionately affect vulnerable groups, including low-income individuals, middleincome urban households, young working adults, and senior citizens, potentially leading to financial hardship for those with low savings. Small and medium enterprises (SMEs) must cope with volatile costs and may struggle to pass on these additional costs to customers while maintaining competitiveness. Increased uncertainty about future costs and prices could impact firms' decisions regarding investment and hiring. Considering that fresh chicken meat accounts for only 2.3% and eggs for 0.4% of the total weight in Food & NonAlcoholic Beverages (FNAB), we expect that any price increases would have a limited impact on overall food inflation. The complexity arises from the expected domino effect. While direct impacts of chicken and egg price increases on food inflation may be minimal, the interconnected nature of the food industry could lead to substantial indirect repercussions, highlighting ripple effects within the system.

Source: BIMB Securities Research - 29 Mar 2024