Farmer’s Weekly – 23 August 2019

(Kiana) #1


Because of the

importance of both the

Chinese yuan and US

dollar in global currency

markets, the prolonged

trade war between these

countries has had an

impact on the global

economy and on the

currencies of developing

economies like South

Africa. The impact of this

on local agriculture has

been varied.

SA feeling the impact

of US-China trade war


hina’s reluctance to support the
yuan against the US dollar led to
the devaluation of the currency in
early August. Despite China’s waiver on
tariffs for soya bean and pork imports from
the US, the latter continues to threaten
China with imposing additional import
tariff on goods from China to the value
of $300 billion (about R4,6 trillion).
The depreciation of the yuan against the
dollar eliminates any hopes of a quick end to
the trade war as it is becoming increasingly
difficult for China to retaliate sufficiently
with import tariffs on US goods, which is one
of the reasons why the Chinese government
allowed the yuan to depreciate against the
dollar. A weaker yuan will benefit Chinese
exports to the US and will help mitigate
the impact of newly imposed tariffs, which
are set to come into effect on 1 September.

The yuan-dollar exchange rate is one of
the most watched financial instruments
amongst traders worldwide. When the yuan
depreciated in August, the price of crude oil
lowered and the exchange rates of emerging
economy currencies, including South Africa’s
rand, depreciated considerably against
major currencies. Due to its impact on the
global economy, the US-China trade war
has not only led to an expected slowdown
in economic growth in China, but also to
lower growth in developing economies.
China is South Africa’s largest trading
partner and any negative impact on China
will have a direct impact on South African
exports to that country. Coupled with
Eskom’s financial woes and heavy debt
burden, which is considered by ratings
agencies as a form of government debt, the
situation between the US and China may
even indirectly lead to an increase in the
probability of a downgrade for South Africa.
If this happens within the next year,
capital outflows will result in an even
weaker rand. The Reserve Bank, with
its mandate to protect the rand for the
benefit of trade, will have to increase
interest rates to prevent the rand from
devaluating out of control. Consequently,
the higher interest rates will curb consumer
spending and the weak exchange rate will


Wessel Lemmer is a senior economist
at Absa AgriBusiness. Email him at
[email protected].

increase imported inflation. Ultimately,
economic growth may experience more
pressure, with less income to the fiscus.

The impact of the economic development
on the local farming sector will be varied.
Producers that export agricultural
commodities and goods may benefit from
the weaker currency. At least in the short
term, a further weakening rand will bolster
gross income for exporters in relation to
the price increases of imported production
inputs. However, those agricultural
industries that are reliant only on domestic
consumers’ spending power and disposable
income on the one hand, and imported
inputs on the other, will increasingly
experience a tightening price cost squeeze.

The short-term impact of currency
devaluation will be most visible in field
crop and livestock prices. The weaker
rand will help protect these domestic
industries against cheap imports.
Adverse weather conditions this season
in the US impacted negatively on the US
maize crop, leading to a year-on-year
increase in US maize prices. Together with
uncertain production conditions in South
Africa and a weakening rand, local yellow
maize prices will benefit mostly from poor
global growing conditions. But due to the
increase in animal feed costs, local feedlots
may experience increasing cost pressure,
which may lead to low prices for weaner
calves and feeder lambs. The local prices
for pork recovered year-on-year based on
underlying support from the increase in
US export pork prices and a weak rand.
However, the Chinese government recently
ordered that state facilities were no longer
allowed to import pork from the US. This
may have a negative impact on US and
global pork prices and, as such, on prices
for South African pork exports. ▪FW


23 AUGUST 2019 farmer’sweekly 25
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