Farmers face higher debt servicing costs following the South African Reserve Bank’s decision to raise its repo rate by 0.25% and, subsequently, the prime lending rate to 7.5%. This is the view of Paul Makube, a senior agricultural economist at FNB Agri-Business.
Reserve Bank governor Lesetja Kganyago yesterday announced that inflation was driven by higher oil and food prices. Expectations are for further increases of 125 basis points through to 2023, warns Makube.
“Thus, farmers face higher debt serving costs from rising interest rates which will erode profit margins … in an environment of higher input costs emanating from the massive upswing in fuel, fertilizer, pesticides, and herbicides experienced during the current season,” he says.
Makube remarked that before Kganyago’s announcement Mzansi’s agriculture sector was set on “another excellent season despite cost pressures.”
The past record low interest rates gave farmers a chance to replace and replenish machinery and equipment which saw the total tractor and combine harvester sales for 2021 growing by 26.4% and 44.9%, respectively, compared to the previous year.
“A further dampener to what was supposed to be an excellent agriculture season is that much needed seasonal rains on the back of the La Nina weather pattern flooded crops, caused damages in other areas, and delayed planting,” says Makube.
Impact on summer crops
The latest national crop estimate committee report shows a mixed picture on planting of summer crops. The preliminary planting estimate shows a year-on-year contraction of 5% to 2.61 million hectares in the area under maize, the country’s biggest crop.
“Although it is still early days, this might yield a crop of 15.3 million tonnes which is sufficient for the country given the bulging carryover stock. On the positive side, gainers were sunflower and soybeans with area planted increasing by 21% and 10% respectively.
“Commodity prices remain relatively strong and should somewhat help offset the cost pressures on the sector. We hope for a few weeks on sunshine to allow the crops to recover and deliver another good harvest, paving a way for a better agriculture season and help limit food inflation pressures.”
Meanwhile, North West University Business School economist Professor Raymond Parsons warned that the subdued economy limits the ability of producers to pass on cost increases to consumers. “The danger here is that an aggressive rise in interest rates this year may then instead just harm output and employment,” he says.