FNB believes rate cut will be a relief for struggling farmers

The recent cut in interest rates, coupled with a reduction in petrol prices, and a stronger rand, while marginal, will provide relief to farmers currently grappling with a tough economic environment, according to an analyst at First National Bank.

Interest rate cut

The South African Reserve Bank cut interest rates by 25 basis point with effect from 19 July, saying it now expected economic growth for 2019 to average 0.6 percent, down from the one percent forecast in May.

“The reduction in interest rates, coupled with the possibility of further cuts later in 2020, would have a positive impact on profit margins as it improved farmers’ ability to service loans,” said senior agricultural economist at FNB Business Paul Makube.

Makube noted that harvesting was currently in full swing in the summer grain and oilseed areas, with a lot of fuel utilised including for transportation to the country’s silos.

“A further benefit for farmers who are currently experiencing cash flow constraints is the overall impact of a decline in crude oil prices on the entire agricultural value chain as inputs such as fertilizer, herbicides and pesticides are derivatives of crude oil,” he said.

Lower cost of imports

The recent strength in the rand exchange rate would have a positive impact on input prices in the sector by lowering the prices of imported inputs such as fertilizer, pesticides, and herbicides, Makube added.

Fertilizer and fuel are the major inputs in crop production particularly grains and account for approximately 35 percent and 11 percent of total variable costs.

There are several pros and cons to an interest rate cut for the average consumer and this is likely to somewhat assist struggling farmers, especially if there are more cuts later in the year.

However, the stronger rand is a double-edged sword for many many farmers. For those who export, a strong rand can actually be a bad thing as many transactions are done in dollars.

– African News Agency (ANA), Editing by Stella Mapenzauswa, additional edits by Nick Krige