Farmer's Weekly (South Africa)
Rand’s weakness makes SA farmers stronger
South Africa may be in a technical recession, but the need to continue producing food, coupled with a considerably weaker rand, has largely saved the day for our farmers.
The news that South Africa’s economy again went into a technical recession in 2019 came as no surprise. Neither did Moody’s Investors’ Service (Moody’s) downgrading South Africa’s loans to non-investment grade (‘junk’ status). From 2018, South Africans suffered as infrastructure and government service delivery deteriorated, and in its April 2019 Monetary Policy Review, the South African Reserve Bank (SARB) stated: “It is becoming clearer that the damage done by state capture is worse than previously understood.”
The review highlighted unproductive capital expenditure by state-owned enterprises and warned that electricity shortages could result in still lower growth than projected.
The first two quarters of 2018 recorded negative growth, but the economy subsequently recovered, and the year ended with low, but positive overall growth of 0,8%. In 2019, negative growth in the first quarter was followed by a surprising 3,2% growth in the second quarter and then by two quarters of negative growth.
Currently, negative growth of 3% or more is expected for 2020, with some recovery possible in 2021. While South Africa missed the 2017/2018 global economic upswing, it will share fully in the downswing.
Weaker economic growth is not our only problem. Before the coronavirus disease (COVID-19) pandemic, government was already highly indebted. Lower economic growth resulted in lower income, while government expenditure continued to grow.
As the risks associated with COVID-19 became apparent, weaker currencies took a hiding.
In a few weeks, the rand dropped from R15/US$ to R18,50/US$. SARB’s unprecedented action of lowering the repo rate by two percentage points has provided some relief to debtors, but will also help sustain rand weakness.
GLOBAL OUTLOOK
The global agricultural outlook has weakened since the end of 2019, largely due to countries’ efforts to control COVID-19. The Food and Agriculture Organization of the United Nations’ Food Price Index weakened by 5% from December 2019 to March 2020 and will weaken further in coming months. The index is based on the US$ prices of a basket of agricultural products. The actual effect on South Africa’s agriculture depends on the strength/weakness of the rand. Because the rand has weakened by 30% since December 2019, world prices have actually increased in rand terms.
The effect of the pandemic on the agriculture sector abroad has varied. In countries where meals consumed away from home (fast food and restaurant meals) are more prevalent, food demand has decreased more than in countries where food consumed at home is more prevalent. South Africa’s farmers and food processors are thus fortunate in that fewer meals are eaten away from home. Moreover, the closure of restaurants during the lockdown to contain the spread of COVID-19 has led to an increase in demand for meat and eggs.
South Africa’s agricultural outlook is thus less negative than the national economic outlook, for a number of reasons. The weaker rand has driven up local agricultural product prices.
Grain prices usually move in a range between export and import parity. As the rand has weakened, both import and export parity have increased. The weaker rand has therefore largely protected South African farmers against lower world prices.
Weaker global oil demand and high production has resulted in lower fuel prices, which is good news for South Africa’s farmers. Food demand has also been bolstered by the increase in social grants.
CONCLUSION
South Africa is in a recession and in the middle of the COVID-19 pandemic with a government still unwilling to decrease its level of control over the population and economy.
Nonetheless, it regards agriculture as a critical industry and has largely allowed farmers to continue producing food and fibre. Contrary to predictions, the demand for agricultural products has remained high.
This will result in agriculture suffering the effects of the recession, but to a lesser extent than other industries.
NO DISMISSALS
An advantage of short time for employees is that no dismissals are allowed to take place during this period, and employees can return to normal working hours as soon as the employer’s circumstances stabilise and are successfully resolved.
Each farm as a workplace differs, and the employers’ unique circumstances will determine the right solution to be considered.
Nonetheless, it is critical for the farmer to follow the correct labour law procedure, as non-compliance holds a serious business risk.
The Department of Employment and Labour requires every employer to keep a detailed logbook of the hours worked by employees.
The recording of these hours can be done manually or electronically, using a clocking system.