Despite the recent positive news from Statistics South Africa (Stats SA) indicating that the agriculture sector had increased 22.2% in the first quarter of 2017 and that a record maize harvest is on the horizon for this year, the recent sovereign downgrades by credit agencies and news that the economy is now in recession do not bode well for the consumer and business sectors.
This is according to Absa senior agricultural economist Wessel Lemmer, who spoke during the financial institution’s Agribusiness Industry Update media roundtable, which took place last month in Centurion, Gauteng.
Lemmer was joined by Absa agricultural economists Karabo Takadi and Conce Moraba, who gave an update on some of the key industry issues to date. Some of the issues that the team discussed included the broader impact of the downgrade on the industry; what the expected bumper maize harvest meant for consumers and food inflation; agriculture’s contribution to economic growth going forward; and some of the industry’s prospects amid uncertainty.
Despite the rand not having been negatively affected by the recent sovereign downgrades yet, the risk of its weakening remained, which could result in inflation exceeding the 6% upper limit set by the Reserve Bank, said Lemmer.
“For farmers, a weaker rand increases the cost of imports, such as fuel, fertiliser, pesticides, machinery and equipment. This, in turn, would mean an increase in production costs and more expensive food in the domestic market.”
Imported consumer goods could also be expected to become more expensive for local consumers, who were already experiencing pressure on disposable income, he added.
Lemmer noted that farmers who produced a surplus in commodities for export markets would benefit from a weaker rand, which could improve their incomes; “however, the imports of agricultural machinery and equipment will become more expensive . . .”.
The economists also explored the implications of the expected record maize harvest this year, following better weather and last year’s higher maize prices. South Africa is likely to harvest a record 15.6-million tons of maize in 2017, which is double last year’s output. According to Lemmer, this would make the country a net exporter of maize, with a forecast of about four-million tons of exportable maize.
“We can expect that the record harvest will have a stabilising effect on food price inflation. However, other factors, such as weak economic growth and further credit downgrades may lead to high input costs, fuelled largely by a weaker exchange rate and the possibility of higher interest rates,” said Lemmer.
The recent announcement by Stats SA that South Africa’s gross domestic product (GDP) contracted 0.7% for the first quarter of this year, indicating that the country has entered into a recession, also does not bode well for the industry’s growth prospects. The contraction follows the GDP decline of 0.3% in the fourth quarter of 2016, with South Africa experiencing only 0.3% growth overall in the year.
The main contributors to the contraction were the trade and manufacturing industries. Trade declined by 5.9% and manufacturing contracted by 3.7%. The agriculture and mining industries were the only sectors which made positive contributions. However, agriculture’s increase is its first positive growth after eight consecutive quarterly contractions.