By Paul Makube, Senior Agricultural Economist at FNB Agri-Business
A combination of runaway inflation, tightening policy cycle by major global central banks, and uncertainty over the Russia-Ukraine war with its ramifications for commodity prices and economic growth forced the SARB’s hand to hike rates. Effective from the 22nd of July, the repurchase rate increases by 75 basis points to 5.5% per year.
For the agriculture sector, this comes at onset of the new summer crop season for 2022/23 which is just two months away and potentially another excellent season given the La Nina weather pattern in the forecasts. Traditionally, farmers respond positively to these favourable conditions by expanding their operations. However, the situation this time is that input costs have risen exponentially meaning more funds required for both the new and the same hectares planted in the previous year. The higher interest rate means the farmer faces higher debt servicing costs which may force marginal farmers to reduce their operations and those that have already been in a dire financial situation to quit.
The unrelenting input cost pressures is unlikely to dissipated given the uncertainty on the global market, thus a potential squeeze on producer margins in the near term.
