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What are you worth in dollars?

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“Think in terms of Rands and cents.” This is the advice that most farmers will give you when it comes to the financial planning of your farm. Farmers spend hours calculating what every head of cattle, every seed, every tractor and every hectare cost.

Cutting overheads and maximising profits is the obvious way to ensure the viability of your farm. Using this traditional wisdom many farmers have endured the harsh conditions that regularly face the agricultural sector.

Have you ever asked yourself what if the worst should happen to you? Drought, farm murders, and Foot-and Mouth Disease are all realities that the agricultural community have to face. Most farmers can beat these odds. If all else fails they can cash in on their property, livestock and equipment and use the capital to start over somewhere else. The problem is that the farmers in Zimbabwe had the same false sense of security.

In August 2006 the Zim dollar was trading at 650 to one US dollar. Those who thought that this was bad had no idea of what was about to happen. By February 2007, six months later the value of Zim currency dropped to 7500:1 USD. In March 2007 it fell further to 26 000 to the US dollar and by September of that year it was at 600 000 Zim dollars to a single US dollar.

What would the effect be if a similar situation happened in South Africa today? Assuming that your farm and all your assets is worth R30 000 000 at an average of R15 to the dollar that would mean that you could have $2000 0000.  This does not sound that bad. With two million of the world’s strongest currency you could theoretically move to any place in the world and start over if the situation in SA deteriorated.

But what if the exchange rate dropped as quickly as it did in Zimbabwe in 2007?

Within a month you would have 11,5 times less dollars for your Rands, putting your initial $2000 000 at $173 913. After the first month the Zim dollar devalued again ending up 23 times less in September than what it was in February. This means that your initial R30 000 000 is now only worth about $7500. Will you be able to buy plane tickets and start over somewhere else?

Along with the rapid currency devaluation came hyperinflation. Within 7 days in June of 2007 the price of a loaf of bread went up from Z$12 000 to Z$50 000.

But let us be realistic. This was Zimbabwe. What are the chances of the same scenario playing out here in sunny South Africa? Things are not perfect here, but they are not that bad. Or so we try to tell ourselves.

Ever heard of Bloomberg’s Misery Index?

The media house Bloomberg devised the Misery Index that considers a country’s unemployment rate, low GDP and high inflation in its calculations. In 2018 South Africa’s economy was listed in second place behind Venezuela on the Misery Index with a misery value of 33,1. This number stayed unchanged in 2019. This places us alongside the failed economies of Greece and Turkey.

In the meantime, South Africans are holding their breath for the Moody’s grading that is set to be announced towards the end of March 2020. Moody’s is the only agency that haven’t downgraded South Africa to junk status, yet.

The Rand has deteriorated against the Dollar over the past ten years by more than 50%. This trend showing that the Rand traded at R6,91 to the Dollar back in 2011.

Before the Corona panic hit the markets, the exchange rate was above R15 per Dollar. On Sunday the 16th of March, President Ramaphosa announced the Corona virus to be a national disaster and by Wednesday the 18th of March the Rand was trading R17,47 to the USD.

The information used to compile this chart was found on https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-ZAR.

Above all the dark clouds of expropriation without compensation are also circling over the South African economy. The uncertainty of the security of property rights in South Africa is a big concern to both investors and citizens of South Africa. After all it was the landgrabs under the Mugabe regime that pushed Zimbabwe over the edge.

According to James de Villiers of the Business Insider of 3 March 2020 South Africa’s GDP shrunk during the last two quarters of 2019. The Rand has been in a downward spiral for the past 11 years and the country is facing the worst economic recession since World War II according to Bloomberg.

These are the important questions that every farmer should ask himself:

  • What do I leave for my wife and children should the worst happen to me?
  • How do I survive an economic collapse?
  • Is all my money tied up in Rands, or do I have a contingency fund that is out of reach of the effects of the South African economy and politics?

The answer to these questions might be to not only think in terms of Rands and cents, but also in terms of US dollars.

For sound financial advice contact Toro Financial Planners on 011 590-4330 or 011-590-4331, or send an email to agri@mytoro.co.za. They are experts in the financial service industry and has more than a decade of experience in offshore investments.

Ask yourself: Can you afford not to?

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