Higher interest rates could knock the demand for higher-value agricultural products such as meat, according to Dr Marlene Louw, the senior agricultural economist at Absa Relationship Banking.
On Thursday, the South African Reserve Bank’s Monetary Policy Committee (MPC) increased the repo rate by a further 75 basis points to 6.25%.
Louw said higher interest rates would add to the broad-based cost pressures that producers had been experiencing over the last 18 months.
John Hudson, Nedbank agriculture head, said on the back of positive growth and investment in agriculture over the past two years, the sector’s exposure had risen significantly.
“While this is considered to be an investment in productive assets an increase in interest rate will result in higher finance costs. The impact will vary according to the level of indebtedness but an increase in interest rates means an increase in finance costs and this will only add to the spiralling input costs and margin pressure farmers are experiencing,” Hudson said.
He added that from an interest rate perspective, they felt that inflation was nearing its peak and might have peaked which should mean the country was nearing the peak in the interest rate cycle.
Paul Makube, a senior agricultural economist at FNB Agri-Business, said as was the case with other central banks, the SA Reserve Bank (SARB) faced runaway inflation, uncertainty over the duration of the Russia-Ukraine war and its continued curtailment of world trade, as well as weaker domestic and global growth.
He said that its consideration of recent data and projections pointed to an elevated inflation trajectory in the medium term thus forcing the SARB’s hand to increase the repo rate by another 75bps to 6.25% which was in line with market expectations.
Makube said for the agriculture sector, this came against the backdrop of declining confidence in the sector as reflected in Agbiz/IDC Agribusiness Confidence Index. Its third quarter 2022 outcomes showed a 7 points deterioration to 53 points.
“Sector challenges included elevated input costs, continued outbreaks of animal disease, war-induced disruption to global supply chains, resurgence of the use of non-tariff barriers to trade, and rising interest rates. Nonetheless, the confidence index remains above breakeven point of 50 points, which indicates that things may still rebound to the upside,” Makube said.
He said positive farming conditions previously had boosted financial positions and encouraged farmers to expand their operations and replenish the necessary machinery and equipment. This was evident in the excellent sales of agriculture machinery with year to August combine harvesters and tractors increasing by 53% and 17%, respectively, year-on-year.
“Again, the higher interest rate means the farmer faces higher debt servicing costs which may slow down expansions and sales. This may further force marginal farmers to reduce their operations and those that have already been in a dire financial situation to potentially consider quitting,” he said.
Makube said while showing signs of moderation internationally, input costs remained elevated amid the uncertainty on the global market thus a potential constraint to further improvement in producer margins in the medium term.