Drought-stricken farmers in SA could come under extra pressure after the rand weakened in the fall-out from a credit-ratings downgrade to junk status, which could also push up food prices, industry experts said.
Ratings agencies S&P and Fitch downgraded South African debt to subinvestment grade while Moody’s placed its sovereign credit rating on review, citing President Jacob Zuma’s decision to fire finance minister Pravin Gordhan as one reason.
The price of July’s white maize contract rose to R2,008 on Wednesday, from R1,700 on March 27 when Zuma recalled Gordhan from an investor roadshow before firing him. The rand had dropped more than 10% since then.
Rand weakness would also squeeze farmers who had borrowed following the 2015 drought, the region’s worst on record.
Farmers’ debts were expected to have risen more than 10% to R160bn yearly in 2016, experts said.
"We have already seen a response to the weaker exchange rate with prices ticking up," FNB senior agricultural economist Paul Makube said. "If the exchange rate blows out on us then definitely there will be a further increase in prices."
The rand is forecast to further depreciate to R14 to the dollar by March 2018 according to Reuters data, compared with R13.6 on Wednesday.
Grain prices usually increase 0.5% for every percentage point drop against the dollar, the head of economic and agricultural intelligence, Sihlobo said.
"Whatever increase you see on the grain prices, half of that gets to be transferred to staple foods like maize meal and samp," said Sihlobo.
However this year’s bumper maize crop, up 84% from 2016’s, could cushions price increases.
"Food inflation will continue to come down over the next few months but this could change by early next year," said Sihlobo.
Input costs such as fertilisers and agro-chemicals, which are highly exposed to the exchange rate and make up 60% of grain production costs, will also rise after the downgrade, denting farmers’ profit margins further.
"The downgrading is like a slow death, you are not going to see it immediately but over time it kills you and makes you weaker and less competitive," industry group Grain SA CEO Jannie de Villiers said.
Reuters
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