A combination of a more favourable crude oil price outlook, lower local inflation with risks to the downside, and economic contraction afforded the South African Reserve Bank (SARB) room to cut the repo rate by another 50 basis points.
This brought the repo rate to a historical low of 3,75% and the prime lending rate to 7,25% effective from 22 May 2020. The interest rate outlook is even lower, with the SARB’s projections showing another repo rate cut of 25 basis points in the next two quarters of 2020.
Agricultural sector benefit during COVID-19 crisis
With debt estimated over R170 billion and rising, the agricultural sector is set to benefit during this period where disruption to trade due to COVID-19 will impact on incomes and debt serviceability. Bear in mind that some in the sector are yet to recover from the recent severe drought conditions that have gripped large parts of the Eastern and Northern Cape provinces.
The trend in agricultural machinery sales and replacements have been under pressure in the last twelve months on the back of drought-induced financial constraints due to the lower harvest. The latest tractor and combine harvester sales from the South African Agriculture Machinery Association (SAAMA) showed a decline of 4 and 13%, respectively, year-on-year (y/y) during April 2020.
Outlook for the agricultural harvest
The agricultural harvest outlook, however, remains bullish with the 2019/20 summer crop harvest expected up 31% y/y to 17,52 million tons. The country’s largest staple, maize, is set at 15,22 million tons (+35% y/y).
This, combined with a favourable interest rate environment, will afford producers the opportunity to replace various machinery and equipment employed in agriculture. The bullish supply outlook will help tame food inflation in the wake of income losses due to COVID-19, affording consumers a necessary breather. – Paul Makube, FNB Agribusiness