12/04/2017 17:00 SAST | Updated 12/04/2017 17:08 SAST

Credit Downgrades Will Increase Food Prices And Hurt Farmers, Say Analysts

The price of contract maize has risen sharply since President Jacob Zuma sacked Pravin Gordhan as finance minister.

Stephane Mahe / Reuters

South Africa's drought-stricken farmers could come under extra pressure after the currency weakened in the fallout from a credit ratings downgrade to junk status that could also push up food prices, industry experts said.

Ratings agencies S&P and Fitch downgraded South African debt to sub-investment grade while Moody's placed its sovereign credit rating on review, citing President Jacob Zuma's decision to fire finance minister Pravin Gordhan as one reason.

The price of July contract white maize rose to 2,008 rand on Wednesday, from 1,700 on March 27 when Zuma recalled Gordhan from an investor roadshow before firing him. The rand has dropped more than 10 percent since then.

Rand weakness will also squeeze farmers who have borrowed following the 2015 drought, the region's worst on record. Farmers' debts looked to have risen more than 10 percent to 160 billion rand ($12 billion) yearly in 2016, experts say.

"We have already seen a response to the weaker exchange rate with prices ticking up," FNB senior agricultural economist, Paul Makube, said. "If the exchange rate blows out on us then definitely there will be a further increase in prices."

Rand depreciation

The rand is forecast to further depreciate to 14 to the dollar by March next year according to Reuters data, compared with 13.6 on Wednesday.

Grain prices usually increase by 0.5 percent for every percentage point drop against the dollar, the head of economic and agricultural intelligence, Sihlobo said.

"Whatever increase you see on the grain prices, half of that gets to be transferred to staple foods like maize meal and samp," said Sihlobo. Samp is dried corn kernels, a staple in South Africa where more than 20 percent of the population lives below the food poverty line.

However this year's bumper maize crop, up 84 percent from last year, could cushion price increases.

Food inflation

"Food inflation will continue to come down over the next few months but this could change by early next year," said Sihlobo.

Input costs such as fertilizers and agro-chemicals, which are highly exposed to the exchange rate and make up 60 percent of grain production costs, will also rise after the downgrade, denting farmers' profit margins further.

"The downgrading is like a slow death, you are not going to see it immediately but over time it kills you and makes you weaker and less competitive," industry group Grain SA chief executive, Jannie de Villiers, said.