Sarb to hike next week to save some pain later?

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SIMON BROWN: I’m chatting now with Casey Sprake, market strategist at AG Capital.

Casey, appreciate the early morning time. El Niño, which is the baddie of the weather formations, typically brings drought or at least drought-like conditions. In a recent note you say there is probably a greater than 70% chance that we will see El Niño forming by late 2026. Not good news for farmers or farm produce generally.

CASEY SPRAKE: Good morning, Simon. And yes, unfortunately this is adding another layer of risk onto the horizon at the moment. I think we spent a lot of time across the markets having the oil prices a driving concern. But this is another issue growing, which I think people are not paying quite enough attention to.

SIMON BROWN: I take your point on that. It is a little way off, maybe for the end of 2026. Although we’re midway through May, it’s not that far anymore.

You mentioned wheat, for example, which is where we have a recent report. Wheat plantings are at 11-year lows. If we couple that with this, when we are seeing a crunch coming, this will see prices higher and directly onto the consumer’s pocket.

Read: SA farms face El Niño drought risk on top of Iran war

CASEY SPRAKE: One-hundred percent. Wheat in particular is something that we call the ‘structural canary’, almost. South Africa produces only around 50% of our own domestic wheat requirements. The rest is imported. So we actually trade at import parity, regardless of what our local harvest outcomes are.

On that note, our wheat plantings have just hit an 11-year low, and I think that’s just a reflection of rising input costs worsening structural fragility. So it’s those types of shifts and concerns that permeates through the inflationary basket for us.

SIMON BROWN: You make a point there, and it’s wheat plantings. This is wheat that will be hitting our tables later in the year. In the immediate, in the near term, supply does remain strong. It’s good for now. It is at the end of the year and into next that is the concern.

CASEY SPRAKE: Yes, I think that’s important to highlight. The risk isn’t now, immediately. It’s what we’re looking at within the next six months, even sort of a year.

Right now, if we look at where we are today, overall food CPI is actually quite subdued. It’s sitting at the latest print of 3.6%.

That has been supported by strong harvests and a favourable base here in South Africa.

Our maize harvest, for example, has just been revised up to a record I think 16.8 million tonnes. So all of that together keeps downward pressure on things like … prices across the board. But what we say is that that calm is more on ‘borrowed time’.

After two consecutive La Niña seasons, which is your higher than expected rainfall, we’re starting to see this weather cycle turning, and that’s where the concerns come in, as you mentioned towards the end of the year, going into the beginning of 2027.

Read:
South Africa wheat plantings seen at 11-year low as costs surge
Fuel crunch from war threatens South African wheat, corn crops

SIMON BROWN: And of course what we’ve also got is an energy crisis. There are two components to it. One is the fertiliser, a lot of urea coming through – or not coming through – the Strait of Hormuz at this point. That is a large part of farmer input.

And then of course, diesel, which is another large part. Those are collectively probably over 50% of the farmers’ input costs, and both of those are, I was going to say record levels, but certainly very high levels and hurting farmers. They’re going to do their best to try and pass it through to us.

CASEY SPRAKE: One-hundred percent. I’d say those input costs are really amplifying the risk at the moment. You mentioned fertiliser. I think it’s around 35% of grain farmers’ input costs.

Diesel is 23% of agricultural costs across the sector. Don’t forget that about 80% of our grain is actually transported by road in this country. So you really see that fuel is deeply embedded throughout the food value chain.

I’ve spoken a lot about crop products in that, but think about your protein products like poultry and beef – they are effectively derived from grain inputs. So that sort of amplifies the pass-through from grain price shocks into our broader inflationary basket. So you see that farmers are increasingly becoming under strain.

And then if you think more of recent localised risks sitting here in the Western Cape, where we’ve had floods running through and into the Eastern Cape. It just keeps layering on that risk level.

Read/Listen:
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Fuel rationing sets in, some farmers battling supply shortages

SIMON BROWN: Then there is the MPC meeting next week and you wrote an article where you made, I have to say unfortunately, a compelling case for an interest-rate increase next week for a couple of reasons, one pre-emptive.

But also, this is our first sort of crisis within our new 3% inflation-targeting world. Almost certainly we’re going to get above that 4% and the Reserve Bank needs to hold on to its credibility.

CASEY SPRAKE: One-hundred percent. I think that’s key. I’m the last person who wants to see a hike myself, and our economy can ill afford it from that sense. But, as you’ve just mentioned, this is probably the first real stress test that we see now for this recent target.

It has not yet been stress-tested, so it’s almost as if the case is seeing that a smaller more pre-emptive hike now might just save us a bit of pain down the line – consider it almost a sort of insurance move.

Read:
Sarb to act if war inflation shock persists
Spare a thought for SA farmers

SIMON BROWN: Yes, I take your point, and your logic is sound. I’m with you. We don’t want one, but often what we don’t want is often not what we get.

We’ll leave it there. Casey Sprake, market strategist at AG Capital, appreciate the early morning time.

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