An inflation hike projected from April onwards is likely to be felt by the primary link of the agricultural value chain – a move, economic experts believe will probably impact farmers in many ways.
According to Paul Makube, senior agricultural economist at FNB-Agribusiness, although the inflation outlook remains subdued at 3.5%, below the mid-point of the 3% to 6% range, things could soon change.
“The South African Reserve Bank’s forecast model points to a potential 50 basis hike for 2021 (second and third quarters),” Makube states.
Meanwhile Lunathi Hlakanyane, an agricultural economist with Stellenbosch University, states that this may affect the cost of borrowing.
How farmers will be affected
It may also lead to the disincentivising on-farm investment and to a certain extent, possibly disrupt the Rand value of land.
In terms of the cost of borrowing, Hlakanyane explains, “The average cost of financing farm operations and expansion may likely rise, exerting pressures on optimal productivity and gross farm profitability.”
He adds the sector is also likely to see a wide-scale deflection of investment farm machinery, equipment, buildings and dams.
“If, indeed, the base interest rate is hiked, then hypothetically, we’re likely to see the opposite occur.”
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In February 2021, year-on-year tractor sales were up by 28% largely due to the favourable interest rate cuts of the previous year.
As land value is intricately linked to the prevailing cost of lending, Hlakanyana explains an interest rate increase may offset a correlatory rise in the average cost of purchasing land.
This basically means that farmer who may wish to purchase additional land, may have to stall their expansion initiatives for a while.
“It could, in theory, also deflect would-be buyers from purchasing land from willing sellers, which obviously affects them through extended costs of maintenance, security, and other miscellaneous costs,” Hlakanyana says.
What does this mean for the consumer?
Simply put, the impact on consumers will be double-barrelled. This will prompt a reduction in disposable income and consumers spending power, Hlakanayana says.
In the context of food access, a substantial share of poor households’ expenditure tends to be allocated to food.
“With this said households’ diets will likely be under severe pressure and we could see a further decline of nutritious food access for financially struggling families,”
Hlakanyana believes what will adding further pressure on an already-overburdened consumer, is the cost of a food basket for an average South African. Currently it is above R4 000, which is noticeably higher than the national minimum wage.
Grim picture for local fuel prices
Meanwhile South African motorists will need to dig deep into their pockets as the country’s biggest fuel price hike since July last year is expected to come into effect in April.
The Automobile Association on Tuesday painted a grim picture for local fuel prices, saying the steeping international petrol prices were being worsened by a dipping rand over dollar exchange rate.
They predict petrol will increase by a whopping R1.16 a litre and diesel by 92 cents a litre.
This means a litre of 95 ULP Inland, currently at R16.32 a litre will now cost R17.48 of which R6.10 will be taxed. And the price of diesel, currently pegged at R14.12 a litre will increase to R15.04 of which R5.96 will be taxed.
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