/ 14 August 2023

Agricultural machinery sales could continue to slow in the second half of 2023

Argentina Agriculture Glyphosate

One set of the critical data releases I have been closely following is South Africa’s agricultural machinery sales. This data has, in the past six months, continued to surprise me, painting an optimistic picture, which was the opposite of what I had expected. 

Admittedly, South Africa’s relatively more robust agricultural machinery sales of the first half of this year are a tail-end benefit of the previous season, when large harvests and higher commodity prices boosted grain farmers’ finances. Thus, I suspect that the delivery delays of the orders boosted the sales report for recent months. 

What was aligned with my general view were the July 2023 tractor sales, which showed the sharpest annual decline this year, down 15.4% year-on-year, with 660 units sold. The combine harvester sales were down by 11% year-on-year, with 32 units sold. Still, one will have to watch the sales of the next few months to understand whether we are now in a downturn in machinery sales or there will still be a continuation of the past few months of delayed orders. 

My baseline view is that farmers have probably slowed agricultural machinery purchases for several reasons. First, while we have a large grain harvest on the horizon — with the 2022-23 maize harvest estimated at 16.4 million tonnes, the second largest on record — and soybeans at a record 2.8 million tonnes, the prices of these commodities have declined by roughly 13% year-on-year. This softening of commodity prices has reduced farmers’ profits somewhat. 

Second, agricultural machinery sales have been robust in the past few years, so the replacement rate will be reasonably low for the next season. For example, tractor sales for 2022 amounted to 9 184 units, up 17% year-on-year and the highest annual sales for the past 40 years. The combine harvester sales amounted to 373 in the same period, up 38% year-on-year and the highest yearly sales figure since 1985. The ample crop harvest of the 2021-22 production season (and the 2020-21 and 2019-20 seasons), combined with generally higher commodity prices, specifically grains and oilseeds, helped boost farmers’ incomes and their ability to procure new machinery

Third, as we approach the 2023-24 summer crop production season, which starts in October, the farmers’ focus will be the input costs. Although various input cost prices, such as fertilisers and agrochemicals, have softened in recent months, the current price levels are still well above long-term levels, thus adding pressure on farmers’ finances in an environment where commodity prices have declined slightly. 

Last, the higher interest rates also continue to put pressure on farmers’ finances, adding to my downbeat view that agricultural machinery sales will probably continue to decline in the coming months.

Overall, while South Africa’s agricultural sector is in a healthy position, with large summer grains and oilseeds harvest, and decent output in horticulture, the machinery sales will probably show a disconnect to this optimism in the coming months. But this must be understood from the context I painted above, not from a view of difficulties in the sector. 

Admittedly, some problems confront the agricultural sector — such as persistent load-shedding, rising protectionism in key export markets, high-interest rates, intensified geopolitical tensions, continued dysfunction in municipalities and network industries (water, rail and ports) and the deterioration of rural roads — remain a significant threat to the sustainability of their businesses, which I have recently outlined elsewhere

Still, my downbeat view of the agricultural machinery market is underpinned by industry-specific matters.

Wandile Sihlobo is chief economist of the Agricultural Business Chamber of South Africa, author of Finding Common Ground: Land, Equity, and Agriculture and visiting research fellow at the University of the Witwatersrand’s School of Governance.