As many parts of the economy remain closed due to lockdown restrictions, we are seeing some evidence that South Africa’s agriculture and allied industries have thus far not been as hard hit by the coronavirus pandemic as other sectors of the economy.
A case in point is the monthly data for agricultural machinery sales, which show that South Africa’s tractor and combine harvester sales were down by just 4% y/y and 13% y/y in April 2020, with 416 units and 20 units sold, respectively.
Click here to view April’s tractor and combine harvester sales.
The classification of the agricultural sector and its value chains to operate during the lockdown period as part of essential services, was a key catalyst to sustaining the sales during last month. By comparison, some sectors that have remained in full lockdown, such as the automobile industry, saw new vehicle sales plummet by 98,4% y/y in April.
Favourable growing conditions
Another catalyst of tractor sales has been the fact that South Africa’s winter crop planting season began this month, referring specifically to 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, the supporting factors include the fact that South Africa is expecting the second-largest grain harvest on record. The harvesting process for this bumper crop recently commenced and it is set to gain momentum towards the end of this month.
To zoom into major summer grains and oilseeds, the 2019/20 maize, soybeans and sunflower seed harvests are forecast at 15,2 million tons, 1,3 million tons, and 731 210 tons; which are up by 35%, 10% and 8% respectively, from the 2018/19 production season. The increases are mainly attributable to an expansion in area planted in the case of maize and expected improvements in yields on the back of favourable growing conditions.
Long-term trend of agricultural machinery sales
Nonetheless, the long-term trend of agricultural machinery sales, particularly tractor sales, has been subdued over the past couple of months (see Exhibit 1 below). This trend has continued from 2019 when farmers’ finances were constrained because of drought-induced poor harvests.
Another key point to highlight is that the lower tractor sales of the past several months were preceded by robust sales in 2018.
In that year, South Africa’s total tractor and combine harvester sales amounted to 6 687 units and 200 units, up by 4% y/y and 2% y/y, respectively. As a result, the rate of replacement in 2019 was expected to be lower, but the 2020 sales were pressured by the aforementioned financial constraints of farmers.
While the classification of agriculture and its value chain as essential during the lockdown period has sustained activity in the sector, the weaker domestic currency will lead to higher prices of the imported agricultural machinery in the coming months. This, in turn, could weigh on the tractor and combine harvester sales.
Credit downgrade to add to negative impact
Moreover, the recent further downgrade of South Africa’s sovereign credit rating to sub-investment grade could negatively influence the financing of the agricultural equipment.
In ordinary times, the South African Reserve Bank would probably have responded by raising interest rates in anticipation of possible exchange rate depreciation and associated inflation risks, which would have increased the cost of capital. However, this time the situation is different.
The COVID-19 pandemic has disrupted global supply chains, which subsequently led to deteriorating economic conditions. Several central banks, including the South African Reserve Bank, have responded by reducing interest rates as a way to ease financial conditions.
Escalating debt and scarcity of capital
This means the transmission of a sub-investment grade could now be felt through the scarcity of capital, rather than the cost of capital. Moreover, it is plausible to assume that some financial institutions could become more risk-averse to lending, especially to already highly geared farmers.
South Africa’s farming sector is highly geared. As of 2018, the total farm debt was at a record R168 billion. About 60% of the debt is with the commercial banks, 29% is with the Land Bank, with the rest spread between agricultural cooperatives, private persons and other institutions.
The escalation of debt, particularly in more recent years, has been due to both the expansion in area farmed, specifically in horticulture, and the financial pressure brought by frequent droughts, which have limited agricultural output on various farms over the recent past.
Staying operational throughout lockdown
In a nutshell, the classification of agriculture and its value chain as part of essential services during the lockdown period has enabled the agricultural machinery industry to operate and record relatively better than expected sales, compared to other sectors of the economy.
However, the fundamental macroeconomic exogenous factors could weigh on the sector during the coming months, irrespective of the expected robust agricultural output in the 2019/20 production year. One silver lining on this cloud is that of higher commodity prices resulting from a weaker rand. – Wandile Sihlobo, Agbiz
Wandile Sihlobo, chief economist at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on agricultural markets for the major commodities.
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