Rand in freefall

It’s not all bad news. The weak currency is a mixed blessing for South Africa’s farmers.

Global farming - Dr Koos Coetzee

In December 2015, the rand reached its lowest value ever against the US dollar, falling to over R16/US$. There are various reasons for the decrease, not least President Jacob Zuma’s finance minister debacle.

The rand and other developing country currencies remained relatively stable during and after the 2008 depression. As growth in developing economies was better than in the developed world, there was an inflow of money into these markets.

Since then, developed economies, and especially the US economy, recovered, while growth in developing economies slowed down. In the aftermath of the recession, the US Federal Reserve kept interest rates low and stimulated the economy by buying bonds and thus putting money into the economy.

As the US economy recovered, it became clear that the Federal Reserve planned to increase interest rates.

Investors can earn higher interest rates on investment in South Africa than in the US. However, because investors regard SA investment as more risky than investments in developed economies, they will only invest in South Africa if the interest premium covers the extra risk. As the market expects US rates to increase, investors will de-invest in SA assets, resulting in a weaker rand.

Further weakness is due to risk aversion caused by the Greek crisis and slowdown in China’s economy. A large part of the rand’s current low value is also caused by domestic factors such as disappointing economic growth, a high level of unemployment, fear of being down-rated by the credit rating agencies, and Eskom’s dismal performance.

Implications
The chances are that the rand may recover slightly if the SA economy can pick up growth in 2016. This will need higher commodity prices, no further power cuts and government providing the infrastructure needed for the economy to grow.
If the current drought continues, agriculture’s contribution to economic growth will decrease further. The long-term trend will remain towards a weaker rand.

A weaker rand results in higher imported inflation in terms of energy and imported food products. This will in time create higher consumer inflation, causing the Reserve Bank to increase interest rates.

Even with inflation comfortably below the 6% ceiling, the Reserve Bank increased interest rates recently. Further increases are likely, especially as the firming of the US dollar results in a weaker rand and the Reserve Bank tries to protect the currency and limit the outflow of capital.

Interest rates

Most commentators expect interest rates to increase by up to two percentage points within the next year. Farmers with carry-over debt from the previous season may find it difficult to manage the higher interest costs, especially as the weaker rand will result in higher input prices.

The consumer’s situation has improved since 2008. Consumer debt as percentage of disposable income decreased from 86% in 2008 to 78% in the second quarter of this year.

Over the same period, consumers’ per capita real disposable income grew from R31 772 to R33 440 and consumers’ net wealth increased by 13,6%.

Higher interest rates will, however, have a negative impact on consumer spending on food as the price of energy and other administered prices increase. We may thus see a slight slowdown in consumer demand.

A weaker rand will benefit exporting industries and protect import-sensitive industries against low-price imports. The fruit industry is the main agricultural exporter and as the rand devalued against most currencies, fruit prices on international markets were higher.

The weaker rand provides some protection to the dairy industry too. However, the sharp decrease in dairy product prices on international markets cancelled the net benefit to the industry. The opposite is true for oil, where global oil prices decreased from US$66 in May to US$44 in November, a decrease of 33%.

Over the same period the rand devalued from R11,96 to R14,14. The oil price thus decreased from R789,60/barrel to R629,20/barrel, thereby cancelling the negative effect of the weakening rand completely. The same may happen in the case of other commodities.

The weaker rand has a negative effect on intensive livestock farmers. The current drought and expectations of further drought have resulted in the market pushing grain prices to import parity levels.

A weakening rand will result in higher import parity prices. While the higher grain prices are good news for producers – provided they manage to plant and harvest crops – they are bad news for livestock producers.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.