Inflation, competition and rand volatility challenges for industry

Unstable inflation and rand volatility, coupled with global competition, have been the biggest challenges for the food and beverage industry in South Africa in recent times, says derivatives brokerage Intrepid Capital derivative dealer head Tarryn Wright.

She explains that, as local inflation rises, the competitiveness of South African local goods is affected.

This can have a substantial impact on both the demand for locally produced goods as well as the exchange rate.

Wright explains to Engineering News that, if a country’s finished product imports are greater than its exports, it is a sign that local manufacturers are having to increasingly compete with mass-producing global manufacturers.

If the rand is stronger, import demand increases as foreign goods become cheaper, therefore, negatively affecting local manufacturers in the both domestic and foreign markets.

A weaker rand generally enhances the price competition of South African goods in export markets, as well as provides some protection against import competition as imports become more expensive.

When the rand is stronger, Wright says, local manufacturers can benefit by importing raw products as inputs and using these locally; however, South Africa imports an excess of finished products, impacting negatively on local manufacturers.

She adds that local manufacturers are struggling to compete with cheaper finished-product imports, citing poultry production as an expensive endeavour locally, compared with imports from the US.

The price level at which chicken is being imported from the US is just not sustainable for local chicken farmers, and they are unable to compete with these prices.

Wright explains that industries in the food sector, such as farming, are interconnected, with the impact of the drought last year creating a chain reaction – the drought had a massive impact on maize supply and maize is necessary for chicken farming.

That combined with the depreciation of the rand in 2016 drove food inflation to the highest levels seen in half a decade.

Regarding the significant challenge of the volatility of local currency for local consumer goods manufacturers, she states that a noteworthy factor in the currency volatility in South Africa is ongoing political instability.

“The rand took over from the Mexican peso in November 8 last year as the world’s most volatile currency. After the Turkish lira, the rand is currently the second-most volatile and politicised currency globally, as its volatility is directly linked to political instabilities and occurrences,” she points out.

Wright notes that the volatile and politicised rand threatens potential investments because investors understandably prefer stability, with the rand simply being too reactive to the country’s political climate.

She says that currency volatility makes the ordering of raw materials from abroad challenging for manufacturers with lengthy lead times.

This lack of predictability makes it difficult to accurately pass consequential price increases on to consumers and, ultimately, also affects the predictability of companies’ profit margins because of the rand:dollar fluctuations.

Similarly, the volatile nature of the rand affects local exporters, as it directly affects the value of their turnover.

“It is nearly impossible for companies to forecast the exchange rate accurately, owing to rand volatility. So, when these companies are working out their budgets or estimating production to make profit, they tend to focus on operational efficiency to survive the market.” Wright explains.

However, she warns that this approach does not protect companies from unexpected costs, known as foreign exchange risks, which are faced by numerous local retailers, manufacturers and wholesalers.

According to Wright, only 52% of local companies with global currency fluctuations hedge their foreign exchange risk.

“Companies can create peace of mind and . . . focus on their core business by covering their foreign exchange exposure with hedging products.

When companies do not hedge, they are unaware that they are actually participating in currency speculation.

Although derivatives generally make high-level directors nervous, it is better to consider it as necessary insurance,” Wright concludes.