KARABO MABUZA: Reserve Bank’s rates pause brings some relief to SA farmers

The SA Reserve Bank’s decision not to increase interest rates has been welcomed by farmers, especially after facing a challenging period of rate hikes.

The central bank has chosen to keep the repo rate steady at 8.25%, which also means that the prime lending rate remains unchanged at 11.75%. In explaining its decision, the Bank mentioned that the current repurchase rate is considered restrictive and aligns with the objective of managing inflation expectations and outlook.

Farmers and other stakeholders in the economy can take some relief from this decision, as it provides stability and helps them plan their finances with more certainty. However, it is essential to remain mindful of the evolving economic situation and any future changes in the implementation of the monetary policy.

Impact on farmers

Continued interest rate hikes can worsen the challenges faced by SA producers, in particular small-scale farmers who already have limited access to resources. Producers are already grappling with high input costs, load-shedding, and a weak consumer environment among other challenges. The first pressure after an interest rate increase is the increased cost of borrowing, which makes it harder for farmers to access affordable credit and finance their operations, limiting their ability to cover input costs, invest in equipment, or expand operations.

Input costs are already at high levels, and this only makes it more expensive. Higher interest rates will also increase the cost of repayment of loans resulting in increased risk of debt default by clients.

As a result, in the short to long term, profitability may be challenged. The increased cost of borrowing reduces farmers’ ability to further invest in their operations. Additionally, the strain on debt repayment can increase financial stress for farmers. Moreover, rising interest rates come at a time of consumer financial pressure which we can observe in the livestock industry where prices are under downward pressure, which can affect farmers' income. The additional burden of load-shedding disrupts operations and increases costs.

El Nino threat

The Reserve Bank stated that though SA’s economy seems better now, the future remains uncertain due to global conditions. We agree with this sentiment. Our exports are competing in global markets and we also rely on imported agricultural products such as fuel, fertiliser and machinery, which is likely to increase the cost pressures for farmers. Year to date, on average, the rand is 17% weaker against the US dollar (as of July 21) compared with 2022, and this exposes the industry to market fluctuations that support higher prices for imported agricultural inputs.

Another development that the industry is watching is the exit of Russia from the Black Sea grain initiative. Global grain prices may remain volatile until the market understands the full impact of Russia’s withdrawal from the initiative, which may lead to inflationary pressure on foodstuff.

The Bank also mentioned further concerns about the agricultural outlook because of stronger El Nino conditions. Weather forecasters have highlighted that the summer rainfall area may experience above-average rainfall from about August to October, but it can then become very dry from November through the following summer’s second part. Fortunately we are coming from three to four successive seasons of rainfall that has improved soil moisture and can help limit the impact of a switch to El Nino.

• Mabuza is an agricultural economist serving in the agriculture advisory division at Land Bank. She writes in her personal capacity, so the views expressed in this article are her own and do not necessarily represent policy positions of Land Bank.