This week’s interest rate cut by the SA Reserve Bank’s Monetary Policy Committee will bring some relief to farmers' borrowing costs, improve profitability and offer farmers an incentive to invest in their enterprises, the Land and Agricultural Development Bank of South Africa said.
The interest rate was cut by 25 basis points, from 8.25%, a 15-year high, to 8%.
Sakhumzi May, the chief agricultural economist at the government-owned development bank, said the interest rate cut would also improve households’ disposable income, which could, in turn, improve their demand for agricultural products.
“Looking forward, from a cost-pressure perspective, the rate cut is likely to bode well for the growth prospects of the agricultural sector. After having contracted by 2.1% (quarter-on-quarter, seasonally adjusted and annualised) in quarter two 2024, preceded by growth in quarter one 2024 by 13.5% (quarter-on-quarter, seasonally adjusted and annualised), this reduction should stimulate some growth in the sector.
“During this period, the agricultural sector was the main positive contributor (0.3 percentage point) to overall gross domestic product growth in Q1 2024,” May said.
The contractionary monetary policy environment had put indebted farmers and consumer under financial pressure. High debt-servicing costs affected profit margins and investments and expansion plans were curtailed. May said that for example, agricultural machinery sales were low in 2023.
The agricultural sector contracted by 12.2% in 2023.
Paul Makube, a senior agricultural economist, FNB Commercial, said the rate cut would probably spur agriculture expansion prospects as debt-servicing costs declined, thus boosting profit margins.
Agriculture manufacturing sales had weakened in this year due to poor agriculture conditions and a reduction in interest rates would go a long way in bringing confidence to the sector.
“This comes at the right time as farmers prepare their budgets for the new agriculture season (2024/25). Additionally, weather outlook has turned positive with La Niña conditions forecast for the new season which should see a rebound in production. This follows the drought-induced reduction in the 2023/24 harvest by 19% year on year for maize, South Africa’s biggest staple, to 13.03 million tons,” Makube said.
FNB Commercial said further positive developments were that the fuel price outlook showed a decline after three-consecutive months of cuts, the electricity supply remained stable and the stronger exchange rates would help reduce input costs for farmers. “All this will of course improve prospects for renewed confidence in the sector.”
Wandile Sihlobo, the Agricultural Business Chamber of SA chief economist, said the easing global rice prices would benefit the South African consumer.
“In all our agricultural abundance in South Africa, rice is one of the crops we are not endowed with. We rely 100% on imports. We consume about a million tons of rice annually. We can’t produce rice because of our relatively dry environment; we are generally a semi-arid country,” Sihlobo said.
Agbiz said the rice prices from various origins had moderated significantly from the higher levels seen last year. That benefited the importers like South Africa.
“Moreover, the relatively less depreciated domestic currency will also help ease the costs of imported rice.”
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