Drought impact dire for economy

GDP and trade deficit to take strain

THE WORST drought in the country in more than 20 years could knock 0.5 percent off South Africa’s gross domestic product (GDP) this year.

Dennis Dykes, the group chief economist at Nedbank, said on Friday that the drought would have a very negative impact on the economy and a devastating impact on grain production in particular.

The loss of maize exports and the move to import maize could result in the widening of the trade deficit, he added.

Agricultural exports made up about 11 percent of South Africa’s total annual exports, so this year agricultural export revenue was likely to come down “a fair bit”, he said.

“The drought was likely to hurt the trade balance moderately,” Dykes said.

The fall in commodity prices was likely to have a more important negative impact on the trade balance, he added.

Food inflation

The impact that the drought would have on food inflation and in turn interest rates could be to increase the peak level of the repo rate by 0.25 percent to 0.5 percent during the current interest rate hiking cycle, Dykes said.

The price of yellow maize, which is used mainly as animal feed, has risen by 93 percent from R1 946 a ton in January last year to a high of R3 757 a ton on Monday last week.

The price of white maize, which is a key low-staple food, has climbed by 160 percent from R1 907 a ton in January last year to a high of R4 952 a ton on Wednesday last week.

Corne Louw, a Grain South Africa (GSA) economist, said GSA, which represents local farmers, was forecasting that farmers had devoted 1.3 million hectares to maize this season and was forecasting a maize crop of 4.8 million tons, the smallest maize crop since the 1994/95 season when 4.4 million tons of maize was harvested.

“The only good area is Mpumalanga, while the rest of the maize areas urgently need rain,” Louw added.

GSA is forecasting that South Africa will need to import 5 million tons of maize in the marketing year that runs from May to April 30, 2017.

The problem was that in the past 20 years the maximum amount of maize imported in a marketing year had only been 1.2 million tons in the 2007/08 year. High maize prices were expected to prevail until at least 2017, Louw said.

The increase in maize prices could result in food substitution and consumers could switch to rice and potatoes.

Weather forecast

In addition, the local wheat crop had also been hit by the dry conditions, especially in the Swartland in the Western Cape and in the marketing year up to September, 2 million tons of wheat imports were forecast, he added.

Louw said the debt levels of local farmers were close to record levels and some farmers could face bankruptcy as a result of the drought.

During the last major drought in 1992, the government provided farmers with R3.5 billion bailouts, he added. “There is now a free market so we don’t know how much the government is going to help.”

Louw added that the drought and the increase in maize prices was likely to have a major effect on poor people, who spent a major proportion of their income on food.

The SA Weather Service said in its seasonal climate watch for January to May that the late-summer season forecast indicated extremely belownormal rainfall totals.

“The likelihood of warmerthan-normal temperatures over most of South Africa is predicted to be high throughout the summer season,” it said.