Modest outlook for farm equipment sales
No industry will escape the economic pain of the Covid-19 pandemic. Highfrequency economic figures for industries that are classified as nonessential during the lockdown period already show the negative effect.
However, for essential industries such as agriculture and its value chains, the figures point to a relatively better performance thus far, though the outlook remains uncertain.
This is the case for the agricultural-machinery industry. The latest data shows that SA’s tractor and combine harvester sales were down a mild 4% and 13%, respectively, year on year in April, with 416 units and 20 units sold. By comparison, the automotive 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 in wheat, barley, canola and oat regions, namely the Western Cape, Northern Cape, Free State and Limpopo.
With combine harvester sales, a supporting factor is that SA expects its second-largest grain and oilseeds harvest on record in the 2019/2020 season. Harvesting of this crop began recently, and it is set to gain momentum towards the end of the month.
The trend for agricultural machinery sales, particularly tractors, has been subdued since last year, when farmers’ finances were constrained because of drought-induced poor harvests.
Another highlight is that the lower tractor sales of the past 16 months came after 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 2019/2020. 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 subinvestment could negatively influence the financing of agricultural equipment.
The Reserve Bank would ordinarily have responded to the downgrade by raising interest rates in anticipation of a rand weakening and associated inflation risks, which would have increased the cost of capital. But now the situation is different. The pandemic has disrupted global supply chains, leading to deteriorating economic conditions. Several central banks, including SA’s, 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. One silver lining is that of higher rand commodity prices as a result of a weaker currency.