Farmer’s Weekly – 23 August 2019

COMMODITY CORNER

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

C

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.

LOCAL IMPACT

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

BY WESSEL LEMMER

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.

IMPACT ON AGRICULTURE

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

THE TRADE WAR HAS

LED TO LOWER GROWTH

IN DEVELOPING

ECONOMIES

23 AUGUST 2019 farmer’sweekly 25