Agriculture not yet out of the woods

According to Paul Makube, senior agricultural economist at FNB Business South Africa’s agricultural sector is now on course for recovery but not yet out of the woods. On the back of the devastating drought and the recent downgrades Makube breaks down the impact of economic challenges on the sector as follows:

Impact on the rand – In the longer term the rand might weaken, which may cause inflation to increase and subsequently force the Reserve Bank to either delay interest rate cuts or even raise them.

Increased input costs – While a weaker rand might boost exports, it will increase the cost of input in agriculture, particularly fertiliser, chemicals and fuel, as well as technology, e.g. tractors and combine harvesters which are largely imported.

Increase in consumer inflation – Given that grain prices are based on import parity, which is derived from international prices, a sustained rand weakness will increase local prices, which may fuel consumer inflation, thereby eroding the purchasing power of the man on the street.

Decreased investment levels – Lower investment and confidence in the country will lead to job losses and a further contraction of the overall economy. Government revenues will eventually be negatively impacted as the tax pool declines in the longer term.

“Nonetheless, even in the face of rising economic pressures, the improved confidence in the sector with readings of the recent AgBiz/ IDC Agribusiness Confidence Index trending above 50-index points for three consecutive quarters indicate resilience in the sector. We therefore still expect a modest rebound in agricultural growth in 2017”, concludes Makube. Press release.