Macroeconomics and your farm
This may be somewhat of an unfamiliar term to some of you. However, it is something that affects your farm business without you having much control over it. Thus, let’s begin by explaining the term.
Economics is the study of the production and consumption of goods and services and the supply of money and is divided into two main branches, microeconomics and macroeconomics. Micro means small and therefore microeconomics studies how individual people and businesses function in specific situations. Macro means big or large and macroeconomics studies how the entire economy of a country functions. In very simple terms economics is concerned about money and thus macroeconomics is concerned with the money of country.
Today farm businesses operate in a complex, rapidly changing, deregulated and globalised environment. There are very few issues that our farmers can control, and this makes farming complex. The key macroeconomic aspects that impact on the economic and financial performance of farm businesses are the inflation rate, interest rate, real growth in the Gross Domestic Product (GDP), the level of employment and the foreign exchange rate. The trends of each of these need to be understood and followed.
The government is responsible to manage these aspects of the macroeconomics by policy decisions and government uses various institutions to regulate these aspects. The South African Reserve Bank is possibly the most well-known institution.
ASPECTS AFFECTING YOUR BUSINESS
Following let’s briefly discuss how each of these aspects affect the microeconomic and financial results of your business.
Inflation is an economic term that refers to generally rising prices of goods and services within a country. Today prices for many consumer goods are double that of 20 years ago. Prices rise when there is higher demand for goods and services because people have more money to spend. A direct result of inflation is the so-called cost-prize squeeze farmers are aware of. To combat this effect of inflation you must do everything in your power to increase the income of your farm every year, whilst containing costs.
When you borrow money from an official institution you pay interest. The amount of interest paid is determined by the South African Reserve Bank. Simply put, higher interest rates result in higher costs. The interest rate is also used to control inflation. The policy of the Reserve Bank at present is to maintain the inflation rate between 3% to 6%. When the inflation level increases the rate of interest will be raised to force people to borrow less money to spend to limit price increases.
Just as it is important to grow your business, it is important for a country to grow. When a country grows there is more money available and the demand for goods and services are higher. When more goods and services are produced to meet the higher demand, jobs are created, and more people are employed. In return workers receive a salary which they can spend on goods and services. To assist in growing the country the Reserve Bank can lower the interest rate, thus making it easier for businesses to borrow money to expand.
Government also has the responsibility to maintain and improve the infrastructure of country to support businesses to grow and therefore to grow the country. For this government needs money. The money is obtained through taxes and to borrow money. When taxes are lowered businesses benefit and can grow, which again leads to growth of the country.
We have already referred to unemployment and at present the unemployment rate is very high in South Africa, because of virtually no growth in the country. A direct result of the high unemployment is the increased theft experienced on our farms, causing a lower income and higher costs to combat theft.
Foreign exchange rate
Another aspect to take note of is the foreign exchange rate – for us, the price of money of another country paid in rand. The most well-known exchange rate is the rand/dollar rate because a lot of international trading is done in dollars. Exported products gains the most when the rand weakens against other major foreign currencies. When exporting and you are paid in dollars, the dollars must be exchanged for rands. With a weak rand say R18,00 per dollar you receive R18,00 for each dollar exchanged. Vice versa, imported farm inputs become more expensive, rands must be exchanged for dollars.
All the aspects discussed are closely inter-related and government must play a balancing act managing the aspects to benefit the country. The current situation in South Africa is that the trends in these aspects are negative and results in financial stress for farming businesses.
To manage and run your farm properly, you must be aware of the tendencies of the aspects mentioned. Thus, empower yourself with information. For instance, by reading the Pula Imvula, the SA Grain magazine, the Landbouweekblad and the Farmer’s Weekly you can already obtain relevant information to improve the management of your business by incorporating the tendencies in the planning of your business.
Publication: July 2020