by Wandile Sihlobo | Oct 7, 2020 | Daily Notes
South Africa’s tractors sales maintained the positive path in September 2020, which has been underway since June, increasing by 23% y/y with 529 units sold (see Exhibit 1). This was boosted, to a certain extent, by improved farmers’ financial position following a large summer grains harvest in 2019/20 production season and combined with relatively higher commodity prices.
The available data for the first nine months of the year already show that the tractors’ sales performance will be much better than we anticipated at the start of the year and also better than the 2019 performance. Already, in the first nine months of 2019, South Africa’s tractors sales amounted to 3 924 units, up by 0.1% y/y.
Importantly, the robust tractors sales also provide clues about the 2020/21 summer crop production season, which started this month. An increase in sales suggests that farmers are optimistic about the recently started 2020/21 summer crop production season. The aforementioned higher commodity prices and expectations of favourable weather conditions for the summer season are some of the key factors that support this positive sentiment.
Nevertheless, I won’t get ahead of myself as we will know more about the upcoming season’s production prospects on 28 October 2020, which is the day when the Crop Estimates Committee will release the data on farmers’ intentions to plant.
Exhibit 1: There is some level of optimism, these tractors’ sales are solid
Source: South African Agricultural Machinery Association (SAAMA), Agbiz Research
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | May 17, 2020 | Agricultural Production
This essay first appeared on Business Day, May 12, 2020
No industry will escape the economic pain of the Covid-19 pandemic. The high-frequency economic data for industries that are classified as non-essential during the lockdown period already shows the negative effect. However, for essential industries such as agriculture and its value chains, the data points to a relatively better performance thus far, though the outlook remains uncertain.
This is specifically the case for the agricultural machinery industry. The latest data shows that SA’s tractor and combine harvester sales were down by a mild 4% and 13%, respectively, year on year in April, with 416 units and 20 units sold. By comparison, the automobile industry, which was already in full lockdown, saw new vehicle sales plummet 98.4% year on year. But I doubt the agricultural machinery performance can be sustained.
The main factor behind April’s tractor sales was that SA’s winter crop planting season began, specifically in the wheat, barley, canola and oat producing regions, namely the Western Cape, Northern Cape, Free State and Limpopo. In the case of combine harvester sales, a supporting factor is that SA is expecting its second-largest grain and oilseeds harvest on record in the 2019/2020 production season. The harvesting process for this crop recently started and it is set to gain momentum towards the end of the month.
The trend for agricultural machinery sales, particularly tractors, has actually been subdued since last year, when farmers’ finances were constrained because of drought-induced poor harvests.
Another point to highlight is that the lower tractor sales of the past 16 months were preceded by robust sales in 2018. That year SA’s total tractor and combine harvester sales amounted to 6,687 and 200 units, respectively, up 4% and 2% year on year. As a result, the rate of replacement in 2019 was expected to be lower, and 2020 sales were suppressed by the financial constraints many farmers are experiencing.
But agricultural machinery sales are likely to remain subdued in future, irrespective of the robust agricultural output expected for the 2019/2020 production year. The drag on the industry will emanate from weak exogenous macroeconomic fundamentals. First, the weaker domestic currency will lead to higher prices for imported agricultural machinery, which will reduce farmers’ ability to acquire tractors and combine harvesters. Second, the recent further downgrade of SA’s sovereign credit rating to the subinvestment grade could negatively influence the financing of agricultural equipment.
As I have argued in this column before, in ordinary times the Reserve Bank would have responded to the downgrade by raising interest rates in anticipation of possible exchange rate depreciation and associated inflation risks, which would have increased the cost of capital. However, now the situation is different. The pandemic has disrupted global supply chains, which has led to deteriorating economic conditions. Several central banks, including SA’s, have responded by reducing interest rates to ease financial conditions.
Whereas the implied prime rate after the recent policy rate cuts would suggest easier financing conditions, commercial banks are likely to be more risk-averse in the current unprecedented environment. We have already seen US banks tighten lending standards despite unheard of liquidity provision by the US Fed. Therefore, risk-adjusted lending rates to SA farmers may not be as accommodative as suggested by the 225-basis point cut in the repo policy rate so far in 2020.
The classification of agriculture and its value chain as essential services during the lockdown period has enabled the agricultural machinery industry to operate and record better-than-expected sales compared with other sectors of the economy. However, the weak macroeconomic conditions could weigh on the industry’s performance in the coming months. One silver lining to this cloud is that of higher rand commodity prices as a result of a weaker currency.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Feb 7, 2020 | Agricultural Production
The South African agricultural machinery market started the year on a bad footing. Tractor sales were down 14% y/y, with 333 units sold. This is the lowest monthly sales data that has been recorded over the past six years – see Exhibit 1.
Exhibit 1: South Africa’s tractors sales
Source: SAAMA, Agbiz Research
This sales data is, however, unsurprising as it is a continuation of the 2019 tractor sales trend. That year, farmers’ incomes were constrained because of poor harvests on the back of drought and biosecurity issues, amongst other aspects. As we have consistently pointed out in the previous posts, the drought which led to lower agricultural output in 2019 is not the full story. It’s worth remembering that in 2018 South Africa’s agricultural machinery sales were relatively robust, which implies that the rate of replacement in 2019 was going to below.[1]
What’s more, there have been questions about whether agricultural policy, which has dominated the headlines in the past few years (certainly between 2017 and 2019), has influenced farmers’ attitudes on investments. To this end, we continue to monitor, through the Agbiz/IDC Agribusiness Confidence Index (ACI), the influence of policy discussions on agricultural investment.
Certainly, sentiment in the farming sector has generally been subdued for the past six quarters (counting from Q4, 2019). This is the longest period the ACI has trended below the neutral 50-point mark points since 2010, which implies that agribusinesses are downbeat about business conditions in South Africa.
However, we are yet to have a full picture of the sector’s fixed investment numbers for 2019. What we found rather comforting thus far is that fixed investments in the sector did not decline notably in 2018.
Be that as it may, the subdued confidence levels suggest a need for urgency in moving the policy levers to ensure that, at least matters that are in the South African policymakers’ reach are well addressed in the interest of sustainable growth of the agricultural and agribusiness sector.
[1] South Africa’s total tractors and combine harvesters’ sales for 2018 amounted to 6 687 units and 200 units, up by 4% y/y and 2% y/y, respectively.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jan 15, 2020 | Agricultural Production
After a brief downtime from blogging, I am finally adjusting back to my normal routine, and today’s comment will briefly reflect on South Africa’s agricultural machinery market performance in 2019. This is one of those sectors that “feels the cold when farmers are sneezing”, and 2019 was certainly that case.
South Africa’s primary agriculture underperformed because of drought and biosecurity issues, amongst other aspects. The constrained farmers’ income on the back of the aforementioned factors was reflected in agricultural machinery sales for 2019. Tractors and combine harvesters’ sales were down by 21% y/y and 26% y/y, with 5 270 units and 149 units sold in 2019, respectively.
But the drought, which led to lower agricultural output, is not the full story. It helps to remember that 2019 followed a year where agricultural machinery sales were relatively robust (in 2018), which implies that the rate of replacement in 2019 was going to be low, as we have witnessed on the aforementioned sales numbers. To demonstrate this point; South Africa’s total tractors and combine harvesters’ sales for 2018 amounted to 6 687 units and 200 units, up by 4% y/y and 2% y/y, respectively.
What’s more, there have been questions about whether agricultural policy, which has dominated the headlines in the past few years (certainly between 2017 and 2019), has influenced farmers’ attitudes on investments. To this end, we continue to monitor, through the Agbiz/IDC Agribusiness Confidence Index (ACI), the influence of policy discussions on agricultural investment.
Certainly, sentiment in the farming sector has generally been subdued for the past six quarters (counting from Q4, 2019). This is the longest period the ACI has trended below the neutral 50-point mark since 2010. This implies that agribusinesses are still downbeat about business conditions in South Africa.
But we are yet to have a full picture of the sector’s fixed investment numbers for 2019. What we found rather comforting thus far is that fixed investments in the sector did not decline notably in 2018. However, as we have indicated at the end of 2019, the subdued confidence levels suggest a need for urgency in moving the policy levers to ensure that, at least matters that are in the South African policymakers’ reach are well addressed in the interest of sustainable growth of the agricultural and agribusiness sector.
In as far as the agricultural machinery market performance for 2020, a lot will depend on what happens on crop production. The recent rains have been very helpful in most parts of the country, and farmers have thus far managed to plant a great deal of the intended 3.9 million hectares for summer crops. For major crops such as maize, about 90% of the intended 2.5 million hectares have been planted. A lot of this, however, happened way beyond the optimal planting dates. And some areas are still finalizing plantings.
This adds some level of uncertainty about the potential yields at the end of the season. Most importantly, the South African Weather Service has flagged a possibility of below-normal rainfall in summer crop growing areas over the next two months. This is another major risk for crop yields, albeit the crop currently looking good in some areas that have already planted. The interplay of these factors in the next few months and subsequent crop output for the 2019/20 production season will be an important determinant of agricultural machinery sales performance this year.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Sep 5, 2019 | Agricultural Machinery
This has not been a good year for South Africa’s farming sector and related industries. The effects of poor summer crop harvest which in turn influence farmers’ financial position have spilt over to the agricultural machinery market which has been subdued all year.
The figures for August 2019 presents no joy, although having increased from the previous month. Tractors’ sales were down by 10% compared to August 2018, with about 437 units sold, as shown in Figure 1 below.
Figure 1: South Africa’s tractor sales
Source: SAAMA, Agbiz Research
Of course, we can’t blame the poor tractors’ sales performance solely on the bad weather. This is a year that follows 2018 where sales were relatively robust, which implies that the rate of replacement will likely be down in 2019. To illustrate this point; South Africa’s total tractor sales for 2018 amounted to 6 680 units, up by 4% from the previous year.
Being in South Africa where agricultural policy has dominated the headlines in the past few months, questions have rightly been asked by some people about farmers’ attitudes on investments. To this end, I continue to monitor, through the Agbiz/IDC Agribusiness Confidence Index, the influence of policy discussions on agricultural investment. Admittedly, sentiment in the farming sector has generally been subdued since the second quarter of 2018. But what I found rather comforting is that fixed investments in the sector did not decline notably in 2018.
However, the subdued confidence levels in the second quarter of 2019 suggest some urgency in moving the policy levers to ensure that, at least matters that are in the South African policymakers’ reach are well addressed for the interest of sustainable growth of the agricultural and agribusiness sector.
Overall, while South Africa’s tractors’ sales have been generally subdued throughout the year – see Figure 1 – there could potentially be a turning point around October 2019 when the 2019/20 summer grains and oilseed production season starts. The weather outlook is generally positive which signals a potential recovery in production and activity on the fields. I’ve expanded on this point in my Business Day column on 04 September 2019 (you can read it here).
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
