Interest rate cut good news for the agricultural sector

by | Mar 21, 2020 | Article

In the midst of a recessionary domestic economy, favourable inflation outlook and lower oil prices, the South African Reserve Bank (SARB) got room to cut interest rates by 100 basis points to 5.25%.

This will go a long way in alleviating pressure on the agricultural sector especially in drought ravaged areas, by improving cashflow and lowering debt repayments. The recovery in tractor sales might garner momentum after rebounding by 46% month-on-month (m/m) in February 2020 to 485 units although still trailing that of last year by 8%.

This also comes at a time when sentiment in the agriculture sector has improved as evidenced by the recent sector confidence index for the 1st quarter of 2020 from the Agriculture Business Chamber (Agbiz).

Weather turned positive mid-season which saw an increase in the planted area and good crop growth with forecasts for maize, the country’s biggest staple, coming in at 14.6 million tons, and the total summer crop for the 2019/20 production season increasing by 26% y/y to 16.8 million tons.

Good rainfall replenished both soil and dam levels and improved crop and livestock prospects which should help tame food inflation in 2020. Although South Africa’s annual inflation rate edged above the midpoint of the SARB’s target range at 4.6% in February, the outlook still calls for the overall consumer price inflation to remaining within the SARB’s target range of 3% to 6%.

Looking ahead, the recent rand weakness with the local unit briefly touching R17.40/ US dollar recently, will boost revenues for export commodities such as citrus, wines, and maize and has further lifted prices of grain and oilseed commodities on the local exchange.

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