Wandile Sihlobo: Incredible machines - what tractor sales tell us about agribusiness | Fin24
 
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Wandile Sihlobo: Incredible machines - what tractor sales tell us about agribusiness

Nov 13 2018 06:00
Wandile Sihlobo

One should never preannounce the focus of their next column, because one never knows what the next day might hold. Last week, I wrote about South Africa’s growing beef exports and argued that the next region that holds potential for growth in the coming years is the Far East markets, with the hope to further the discussion this week.

But things got more interesting in the other areas of the South African agricultural economy.

Since December 2017, when the African National Congress announced its decision to speed up land reform by pursuing expropriation without compensation, provided that it is sustainable and does not harm the agricultural sector or the economy, I have been closely monitoring most of the high-frequency agricultural data in order to track the investment path in the sector.

Force of a tractor

One of these is the agricultural machinery sales – tractors and combine harvesters – for which the South African Agricultural Machinery Association recently released an update for October 2018.

The tractor sales were up by 16% from October 2017, with about 817 units sold, which was the highest monthly sales figure since October 2014. This boosted South Africa’s tractor sales for the first 10 months of this year to 5 818 units, 9% higher than the corresponding period last year.

This is an important development from an agricultural investment perspective, particularly if we consider that earlier in the year there were views that farmers might reduce crop planting due to uncertainty caused by land reform, which would have negatively affected tractor sales. In addition to the aforementioned robust tractor sales, last month, the South African Crop Estimate Committee provided further tentative evidence indicating that farmers intend to increase the area plantings for summer grains and oilseeds by 5% to 4.03 million hectares in total from the 2017/18 production season, which again contract to the view of a possible decline in planting.

Moreover, the combine harvester sales more than doubled the previous month’s volume and 45% higher than October 2017, with about 29 units sold. This was driven by the winter crop harvest process currently underway in barley, wheat and canola producing regions of the Western Cape.

A glimpse of activity

Admittedly, the aforementioned tractor and combine harvester sales data are not perfect indicators of general investments in the agricultural sector, but give a glimpse of the current activity in the sector.

The other data point that I am also monitoring closely, but which is not a perfect indicator of measuring investment reaction to policy changes in the short term, is the Gross Fixed Capital Formation.

This declined by 3% year-on-year to R16.2bn in 2017. This decline was largely on the back of unfavourable weather conditions in some parts of the country, which somewhat constrained investment.

Going forward, however, policy uncertainty, if it lingers for longer, could weigh on fixed investment. In the meantime, we look at agribusiness confidence levels as a guide of the investment path for the year.

In September 2018, the Agbiz/IDC agribusiness confidence index fell below the 50 neutral mark to 46 index points, suggesting that agribusinesses are somewhat downbeat about business conditions in the country.

The root cause of the pessimism was the lingering uncertainty around land reform policy and weak economic growth, among other issues.

Above all, the recent tractor and combine harvester sales data are an encouraging barometer of the investment path in the South African agricultural sector following a slowdown in agribusiness confidence.

Of equal importance is that while the recent tractor sales data paint a fairly optimistic picture about activity in the sector, the decline in confidence is a concern as it could weigh on fixed investment in the long run.

Wandile Sihlobois an agricultural economist and head of agribusiness research at the Agricultural Business Chamber of South Africa (Agbiz). Follow him on Twitter: @WandileSihlobo

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wandile sihlobo  |  tractor sales  |  agribusiness
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