SA’s ratings downgrades to squeeze local farmers, fan food prices

SOUTH Africa’s drought-stricken farmers could come under extra pressure after the currency weakened in the fallout from a credit ratings downgrade to junk status that could also push up food prices, industry experts said.

The price of July contract white maize rose to R2.008 yesterday from R1.700 on March 27 when President Jacob Zuma recalled former finance minister Pravin Gordhan from an investor roadshow before firing him.

The rand has dropped more than 10% since then. Rand weakness will also squeeze farmers who have borrowed following the 2015 drought, the region’s worst on record. Farmers’ debts looked to have risen more than 10% to R160 billion yearly in 2016, experts say.

“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 14 to the dollar by March next year according to Reuters, compared with 13.6 yesterday.

Grain prices usually increase by 0.5% for every percentage point drop against the dollar, the head of economic and agricultural intelligence at Agbiz, Wandile 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.

Samp is dried corn kernels, a staple in South Africa where more than 20% of the population lives below the food poverty line. However, this year’s bumper maize crop, up 84% from last year, could cushion 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 chief executive Jannie de Villiers said. – Reuters