This Is How A Weaker Rand Will Affect The Agricultural Economy -- And Your Ability To Buy Food

Junk status has serious ramifications for the rand/dollar exchange rate, which in turn heavily influences the price of staple foods like wheat and maize.

07/04/2017 03:58 SAST | Updated 07/04/2017 06:28 SAST
Aira Paleracio / EyeEm / Getty Images

One of the more direct impacts of the current political uncertainty is reflected in the depreciation of the rand, which has substantially weakened over the past few days. While the implications are manifold, a weaker rand has a significant impact on the food value chain – from farm to fork.

From a farmer's perspective, the backlash could be in two ways. On the one hand, South Africa's agricultural sector imports a significant amount of inputs – 80% of annual fertiliser consumption, 98% of annual agro-chemicals consumption, as well as fuel, machinery and capital equipment. All of these imported products have a direct impact on farmers' input costs, and therefore, global competitiveness. For example, fertiliser costs constitute roughly 35% and fuel 11% of grain production costs.

On the other hand, the value of the rand to the US dollar directly influences the competitiveness of the South African agricultural products and commodities in export markets - with the weaker rand positively influencing the competitiveness of our exports.

A simple illustration of this would be to look at the 2015/16 marketing season of grains. The rand to the US dollar exchange rate was an accurate indicator of the movement of South African grain prices - particularly maize and wheat.

South Africa is traditionally a net exporter of maize and a net importer of wheat. However, during the 2015/16 marketing year, the country became a net importer of both grains due to drought.

Total maize imports in the 2015/16 marketing season reached 1.96 million tonnes, and 2016/17 season's imports are set to increase by 17% year-on-year (y/y) to 2.3 million tonnes (due to lower domestic supplies). In the 2015/16 season, wheat imports reached 2.06 million tonnes while 2016/17 wheat imports are set to decline by 27% y/y to 1.5 million tonnes due to a recovery in domestic production.

In 2015/16, South African grain prices moved much more closely in tandem with the exchange rate, to the extent that the exchange rate was the main influence on grain price movements. For wheat, this phenomenon has been the norm, since South Africa is traditionally a net importer of the grain.

Statistical evidence shows that there is a strong correlation between the movement of the South African grain prices and the exchange rate. This is illustrated by the strong correlation between the rand/dollar exchange rate and grain prices.

This took place as imports increased from 1.8 million tonnes to over 2 million tonnes in the 2015/16 season.

The shift from export parity to import parity for white and yellow maize has seen a drastic shift in the correlation between maize prices and the rand to US dollar exchange rate. Between 2012 and mid-2015, there was no correlation between domestic maize prices and the exchange rate, but in 2015/16 for the correlation strengthened significantly for yellow maize.

During that period, every 1% change in the exchange rate, was matched with a movement in grain prices of at least 0.5%.

Overall, this suggests that, amongst other factors, the rand to US dollar exchange rate will remain a key driver of commodity prices and this will subsequently have a direct impact on the staple food prices.

This will affect poor consumers more as they consume proportionately more of starchy staples.