Absa’s projections indicate that the rand is undervalued and likely to follow a strengthening trend over the next 18 months to stabilise at around R17 to the US dollar.
“We acknowledge that this is a double-edged sword. A stronger rand would lead to lower export returns but could bring relief to the major cost pressure that producers have experienced over the past years,” Dr Marlene Louw, senior economist at Absa AgriBusiness, said during the launch of the report.
Pressure on consumer spending was also easing. Louw pointed out that fuel prices declined 15,5% since May, leaving consumers with a little more income to spend on luxury products like red meat and blueberries, amongst others.
“We have calculated that cheaper fuel prices will put R3 billion back into the pockets of consumers up until the end of 2025. So, where fuel prices contributed up to 3% to headline inflation in 2022 and the start of 2023, it is expected to have a softening impact moving forward into 2025.”
The lowering of interest rates will bring additional relief, with Absa expecting a 125-basis point cut up until the end of 2025.
The implementation of the two-pot retirement system will also help. “The South African Reserve Bank estimated that consumers might draw about R40 billion from the two-pot system, and up to R100 billion under an aggressive scenario,” Louw said.
She added that this money would allow consumers to pay off debt, while also contributing to the fiscus.
“Under the aggressive scenario, it is estimated that the two-pot system could contribute up to 1% to economic growth. This might not have a direct impact on agriculture, but the spill-over impact will be positive for the whole country.”
The decision over the future of the COVID-19 Social Relief of Distress grant in March 2025 could have a huge impact on staple and vegetable sales.
Louw pointed out that potato prices came under pressure when the COVID-19 Social Relief of Distress grant was suspended for two months, in April and May, in 2022. While it was reinstated in June 2022, the effect of this lingered in prices up to the third quarter of 2022.
“The future of the grant is unclear. The nature and quantum with which it is implemented beyond March 2025 will have a notable impact on vegetable prices and demand, given that around nine million people benefit from it,” Louw said.
Vegetable demand and prices will also be impacted by reduced exports of main vegetable categories, such as potatoes, onions and tomatoes, largely due to import bans from neighbouring countries, such as Botswana, Namibia and Zimbabwe.
“The export bans have likely offset some of the supply-induced price shocks that have been apparent over the past two years, but the impact will become more apparent over the coming months,” Louw said.
But it is not only Southern African countries that are becoming more protective and “inward-looking”. Louw pointed out that many other countries were following the same route globally.
In the US, the potential re-election of Donald Trump, for instance, could result in increased protectionism in this region and higher import tariffs, which in turn could trigger conflict between the US and China.
“Our research has revealed that conflict between the United States and China could have a big impact on soya bean and pork market dynamics, [which could] result in a big push for the inclusion of pork in AGOA trade negotiations between the United States and South Africa.”
The diversification of markets will have a huge impact on high value fruit exports. Most of South Africa’s high-value agricultural exports are destined for the UK and EU, with roughly 51% of the total value of fruit and nuts going to the EU in 2023.
Roughly 20% went to the Far East of which 53% was destined for China, and 13% went to the Middle East.
Louw said that India presented huge growth opportunities for South Africa, as the country had over 100 million consumers able to buy higher-value fruit, which was almost double that of the UK. India’s economy grew by 8,2% in the past year, and its population was steadily growing.
On the downside, the country had a high youth unemployment rate of 15%, the education system was not aligned with the strong focus on information technology and service provision, and there was a strong focus on gender parity and economic inclusion, which could slow down economic growth. Along with this, the country imposed high import levies.
A tariff rate of 30% was applied to avocados, macadamias and citrus, while a 15% tariff was imposed on apple imports.
“[India] presents exciting prospects despite these concerns, and various South African agricultural businesses have started to position themselves to capitalise on this. Market access is an important first step in trade relations and negotiations, but it should be followed up with discussion that can bring tariffs down,” Louw said.
