Plunging rand, soaring corn price to stoke S. African inflation
A plunge in the rand is combining with record high corn prices to drive up inflation expectations in South Africa, increasing the chance of interest rate hikes and raising concerns about food security before a spring election.
Patchy rains in the last two years have hit South African farmers, pushing the price of white maize, the human staple, to a record 3,090 rand per tonne this week. Yellow maize, used mainly in animal feed, has also hit its highest ever level and a shortage is looming.
With food accounting for around a 15 percent weighting in South Africa's consumer price index (CPI), the lofty maize price - which feeds through into everything from meat to bread - is going to deepen concerns at the central bank about price pressures.
They are already bubbling away because of the plummeting rand, which is trading at its weakest levels in more than five years.
Reserve Bank Governor Gill Marcus, in her last monetary policy statement in November, made clear any further monetary easing was off the table, with inflation risks seen on the upside "mainly as a result of further potential exchange rate pressures".
Since then the rand has weakened 8 percent against the dollar, compounding a 20 percent drop in 2013, to touch 10.9620 this week. It has also suffered equally badly against the euro and sterling.
Headline inflation moderated to 5.3 percent in November, the latest available data, but it has breached the top end of the central bank's target range of 3-6 percent, in July and August last year.
So far, the bank says 'follow-through' inflation from the weak rand has been muted, but analysts say it is only a matter of time before the bank has to take action.
It has kept its benchmark interest rate at 5.00 percent, its lowest in four decades, since July 2012, but analysts say it could raise rates towards the end of the first half of this year, for the first increase in six years.
Forward Rate Agreements (FRAs), which give the market view on future interest levels, are creeping higher, with the 9x12 month instrument suggesting interest rates will be higher than 6 percent by the end of the year.
"The sharply depreciating rand and increases in maize prices over this month have left the market jittery and extremely cautious, with mainly local hedge funds paying short-end FRAs as interest rate hike expectations are brought further forward," said Thando Vokwana, a trader at Rand Merchant Bank.
Even after its precipitous decline, some analysts say the rand has further to fall, with the psychologically key 11.0 level under threat as investors weigh the implications of the U.S. Federal Reserve winding up its bond-buying programme.
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