Effect of the credit rating downgrade on agriculture

  • 06 April 2017
  • 2663
  •  Senwes Corporate Finance
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  •  nuus



The decision by Standard & Poor’s is yet another blow to an economy struggling with a low economic growth rate, high unemployment, high inflation and interest rates. A deterioration in the macroeconomic environment should also have an adverse impact on role players in the agricultural industry. The impact will be felt from the producer and filtered through to the end-consumer as the dynamics of the value-chain changes:
 
Producer:
  • A weakening of the Rand will increase the price of imported inputs such as fertiliser, chemicals and fuel. 
  • Imported tractors and parts will also become more expensive.
  • On the other hand, sustained Rand depreciation should increase grain prices since they are derived from international prices. 
  • Exporters of agricultural goods will therefore earn more export income although their imported input products are more expensive.
  • Rising inflation levels will also put strain on producer’s disposable income as their money’s purchasing power deteriorates.
  • Interest rates are unlikely to decline as expected previously. As a consequence producers’ interest payments on loans will remain high.
  • Outstanding debt will increase if not managed well by the producer.
  • The ability of producers’ to pay back loans might be adversely affected.
  • The producers’ weaker financial position could result in them becoming less risk averse e.g. less likely to take out insurance.

Consumer
  • The spill over effect resulting from an increase in production inputs will directly influence the consumer’s purchasing power which in turn will lower demand from consumers for agricultural products.
  • In addition the weakening exchange rate, higher inflation and interest rates will put further strain on the consumer’s disposable income. The poorest of the poor will be hardest hit.
 
Agricultural companies
  • The weakening of the exchange rate as well as rising inflation levels will most probably increase operating costs and reduce profitability of agricultural companies.
  • Group financing costs will increase. This could lead to lower investment in expansion projects.
  • The international competitiveness of South African agricultural companies could decline as a result of higher production costs.
  • Lower profitability and higher costs could lead to contraction of the agricultural industry which could have a negative influence on job creation within the industry.
  • The overall economic environment could be negatively influenced by a contraction in the agricultural industry.
  • The resulting impact of the downgrading on the agricultural companies will eventually influence the national economy negatively.

Senwes Corporate Finance
 





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