“Junk” status for South Africa – what happens to agriculture?

To our overseas readers who may not know, the South African president fired several ministers including the respected finance minister and his deputy, and as a consequence, the country’s credit status has been lowered by both Standard & Poor’s and Fitch to the level derogatively called “Junk”. Today, which sees a second day of mass protests, is in a curious irony also the birthday of both the president and the former finance minister.

Agricultural services provider Senwes looked at what the downgrade means for agriculture:

The producer

• A weaker rand will drive up the price of inputs like fertiliser, chemicals and fuel.
• Imported tractors and parts will be more expensive.
• Sustained depreciation of the rand will lead to higher grain prices since these are derived from international prices [more bad news for the poultry sector!]
• Rising inflation levels will put pressure on the producer’s disposable income as their money’s purchasing power deteriorates.
• Interest rates will not be dropped as had been expected. As a result, interest on agricultural loans will remain high.
• Debt will increase and will need to be scrupulously managed by the producer.
• The producer’s ability to pay back loans may be affected.
• The producer’s weakened financial situation can have the consequence of his taking more risks e.g. not taking out insurance.

The consumer

• The same momentum which increased input costs for the producer will have decreased the buying power of the consumer. This will affect consumer demand for agricultural produce.
• Further weakening of the exchange rate, interest rates and higher inflation will place consumer disposable income under further pressure. The poorest of the poor will be affected by this.

Agricultural companies

• The weakening exchange rate paired with high inflation will negatively influence agricultural companies’ operating costs and profits.
• Financing costs will increase, which will see a drop in expansion and investment (and the opportunities which go with these).
• Reduced international competitiveness of South African companies as a result of increased production costs.
• Lower profitability and higher expenses will lead to a shrinking agricultural sector with direct results to job creation in this sector.
• The macro economic environment will be negatively influenced by the contraction in the agricultural sector.

 Find the Senwes Corporate Finance article here.