The debate about rising global inflation and increases in interest rates is hugely relevant for SA’s agriculture and agribusiness sectors. In 2020, when central banks including the SA Reserve Bank lowered interest rates to record lows in response to the Covid-19 pandemic’s economic damage, debt servicing costs were significantly reduced in agriculture. This was a welcome development for a sector that had outstanding debt of R191bn in 2020, according to data from the SA Abstract of Agricultural Statistics.
However, the rise in interest rates now comes at a tricky time, with input costs such as fertiliser and animal feed elevated and likely to stay at a higher level for some time. The increases are partly the result of the Russia-Ukraine war, which has limited fertiliser production and exports from Russia. Before the war Russia was the world’s leading exporter, accounting for about 14% of global exports.
Supply constraints in China, partially caused by the Covid-19 lockdowns and Chinese authorities’ decision to restrict exports to secure domestic chemical fertiliser supplies, have also contrived to push up input prices. This is noteworthy because China is the second-largest exporter after Russia, making up an average of 12% of global exports. With the two biggest fertiliser exporters limiting exports, supplies have been notably reduced.
For this reason we believe prices could remain elevated for some time. In March, a critical month for winter crop farmers in SA, domestic fertiliser prices were up more than 70% year on year. We saw a similar price trend in agrochemicals.
Rising input costs are tough to escape as farmers need fertilisers and agrochemicals to attain optimal yields. Nevertheless, I was encouraged by indications from winter crop farmers that they intend to increase area plantings in the 2022/2023 production season 6%. We will have a clearer view of whether they maintained these intentions in July, when the Crop Estimates Committee releases its preliminary winter crop plantings data.
Meanwhile, summer crop farmers will provide us with their intentions to plant for the 2022/2023 production season later in the year on October 26. Other field crops such as sugar cane will require an even higher fertiliser usage during replanting after the devastating floods in KwaZulu-Natal.
For the horticultural industry, the disruption to important markets such as those in the vicinity of the Black Sea, important for citrus and deciduous fruits, implies that profitability will be negatively affected. It will not be an easy task to reroute all of this fruit to other markets, particularly citrus, whose export season starts in May.
The logistical challenges at ports, worsened by the recent floods in KwaZulu-Natal, are an additional cost to agribusinesses. These difficulties also apply to the wine, livestock and poultry industries. Foot-and-mouth disease has already resulted in a temporary ban on SA’s wool, beef and livestock products to most export markets. And these challenges come at a time when farmers face higher feed input costs, mainly maize and soya beans.
Overall, rising interest rates and input costs across the board imply that SA agriculture and agribusiness will, in the coming months, have to focus on cost management even more than in the past. For this reason, this column has consistently raised the issue of poor municipality service delivery and the lack of maintenance of network industries such as roads, ports, water and electricity.
This has meant agribusinesses and farmers have had to divert resources to the activities the state should be carrying out. In an environment of constrained financial resources there is limited flexibility for businesses to embark on such cost-intensive tasks.
• Sihlobo, chief economist at the Agricultural Business Chamber of SA and author of ‘Finding Common Ground: Land, Equity, and Agriculture’, is an academic at Stellenbosch University’s department of agricultural economics.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.