Record-high input costs and more expensive loan repayments could prove a lethal combination for farming businesses that are already struggling to balance their books. This is according to Paul Makube, senior agricultural economist at FNB Agri-Business, who says that the latest rise in fuel prices comes at a time when South Africa’s outlook on interest rates is also worsening.
He says several global factors have played into the escalating fuel price. These include the unrelenting crisis on global crude oil trade with the ongoing Russia-Ukraine war, the unrest-induced production challenges in Libya, the rebound in Chinese demand following the lifting of Covid-19 restrictions, as well as Opec’s failure to meet its agreed supply quota.
They all contributed to an increase of 77 US cents in prices since May, which more than offset the 1.2% appreciation in the rand-dollar exchange rate.
Consequently, South Africa saw petrol increasing by between R2.37 and R2.57 per litre, effective from today (Wednesday, 6 July 2022), and diesel increasing by between R2.31 and R2.30 per litre.
“This comes at a time when the consumer inflation deteriorated and breached the upper end of the South African Reserve Bank target of 3% to 6% in May 2022, signalling further rate hikes after the 50 basis points increase to 4.75% last month,” Makube says.
Producers hit harder than consumers
Meanwhile, producer prices have accelerated faster than consumer prices, he adds. It reflects the impact of the cost pressures on producers that comes from fuel prices on the one hand and the limited availability of inputs on the other, due to global supply chain bottlenecks.
May’s agriculture producer price index (PPI) increased by 19.3% year on year with sharp increases of 30.8% year on year for cereals and other crops. It rose by 20.8% year on year for the fruit and vegetable subcategories.
“The combination of higher debt serving costs in a record-high input cost environment will continue to erode farmer producer margins and may force those that had already been in a dire financial situation to quit,” Makube says.
He adds that fuel price increases also manifest in the distribution of produce. “Grain producers and logistics companies in the agriculture value chain will feel the pain as closer to 80% of grain is transported by road. Livestock and horticulture with citrus export season currently in full swing will also be affected in terms of distribution across the country and for exports.”
On the consumer front, the latest FNB/BER Consumer Confidence Index (CCI) remained on the downside for the second consecutive quarter, signalling potential contraction in consumer spending in the medium term. Confidence dropped sharply to -25 points following a decrease to -13 index points in the previous quarter.
Makube says reduced spending may dampen demand and subsequently prices for produce, and may add to a further squeeze on producer margins in the near term.
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