Agriculture headed for recovery but economic challenges remain

After a devastating drought, South Africa's agriculture sector is now on course for recovery. The recent downgrades, however, are likely to have sombre implications that may dampen this recovery. Further, agricultural debt has risen exponentially over the last decade, worsening over the past two years.

Paul Makube

The country’s economy is struggling with the recent International Monetary Fund (IMF) projections showing growth below 1% in 2017. Farmers and agribusinesses alike have had to look at new ways of rescheduling some of their debt.

Paul Makube, senior agricultural economist at FNB Business, breaks down the impact of these economic challenges on the sector:

Impact on the rand: 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 in 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.