Weak, strong or stable rand

The weaker and volatile rand holds both good and bad news for farmers.
Issue date : 28 November 2008

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One of the occupational hazards faced by economists is that they are expected to predict the value of the rand, particularly in relation to the US dollar. Unfortunately, one can’t predict the value of the rand within reasonable limits. One can at best identify the factors that drive exchange rates and indicate the direction of future exchange rate movements.
Factors influencing exchange rates Exchange rates represent the price of a country’s money in terms of another country’s money. the rand weakens against the dollar, it means that the price of the dollar has increased in rand terms.

As with any commodity, supply and demand influence prices. If the demand for the rand decreases and the demand for the dollar increases, the value of the rand will weaken against the dollar. T he long-term trend in the rand/dollar exchange rate is shown in Figure 1. The long-term downward trend is evident. From 1998 to 2001, the rand devalued sharply against the dollar, reaching R12+ to the dollar in daily trade. Since then the rand improved as the dollar depreciated to R6. D ollar weakness was caused by the slowdown in the economy and lowers interest rates. In spite of it, South Africa’s own problems resulted in a weakening in the value of the rand.

Since July 2008, the global crisis has resulted in a loss of confidence in emerging markets and a move back to quality currencies such as the dollar. While an exchange rate of R8,20/US for the last quarter of 2008 seemed reasonable at the beginning of 2008, it is now clear that R9,20/1 is a better estimate. he current uncertainty in international markets will cause a lot of volatility in the value of the rand in coming months. However, the long-term trend remains downward and we can expect a gradual weakening of the rand.

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Impact on agriculture
For exporting industries, a weaker rand leads to higher rand prices for exported products. The deciduous fruit industry, wine industry and other exporting industries do better with a weak rand. However, for exports to Europe, the rand:euro exchange rate is more important than the rand:dollar rate. International wool prices are quoted in Australian dollars and for wool farmers the rand:dollar rate is more important than the rand:dollar rate. N on-exporting industries are also affected. Import parity prices are based on international prices and translated into rand with the current exchange rates.

However, the net effect of a movement in the rand:dollar rate depends on whether the change is caused by dollar strength or rand weakness. If it’s the former, the international price in dollar terms adjusts and the possible effect of a weaker rand is eliminated. That’s why the price of CBOT maize in dollar/ton and rand/ton follows the same trend in spite of rand:dollar volatility. On the input side, a weaker rand leads to higher input prices. problem is that the higher input prices tend to survive the weak rand. Even when the rand regains its strength, input prices remain high. Producers who sell their products in euros and other currencies face a dilemma if the rand weakens more against the dollar than against the euro as their product prices then increase at a slower rate than their input costs. A weaker rand is generally better for local industry.

It raises world prices in rand terms and limits imports. a weaker rand also results in higher input prices and higher general inflation. This in turn results in higher interest rates and an increase in all cost levels. The net effect depends on specific farmers’ production structure. If they buy locally produced inputs and sell all their products on export markets, they’ll benefit from a weaker rand. he farmer who uses a lot of imported inputs to produce a product sold on the local market will be worse off with a weaker rand. R and volatility is a big problem.

 It creates uncertainty, which leads to lower prices as buyers are hesitant to commit themselves. stable rand is preferable to a fluctuating one. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw • global farming The weaker and volatile rand holds both good and bad news for farmers. Weak, strong or stable rand by koos coetzee