Industry Trend Analysis - Africa Machinery Outlook - FEB 2015

BMI View: Agricultural machinery sales will be particularly poor over the coming months due to weak domestic currencies and lower farm incomes. Though the sector holds immense promise over the very long term, inherent institutional problems will remain an ongoing issue for adoption, despite subsidy schemes from both governments and multinationals.

Starting From A Low Base

The agricultural mechanisation rate in Africa is the lowest in the world. According to the FAO, tractor usage has actually declined over the last 40 years, a result of failed public support schemes in the 1960s and 1970s. South Africa, Morocco and Tunisia dominate Africa's new tractor sales market, taking almost half of the continent's total sales per year. However, more than 80% of these are light machinery of less than 100 horsepower and are two-wheel drive. In another example, Algeria counted 140 tractors per 100sq km of arable land in 2008, compared with 271 in the US and fewer than 6.6 in Nigeria. In Central Africa, it is estimated that 80% of land is taken care of manually, with this figure at 50% in East and Southern Africa.

Number Of Tractors Per 1,000ha Of Arable Land
Sub-Saharan Africa Asia Pacific
1980 2.0 7.8
2003 1.3 14.9
Source: FAO

Weak Sales Over Coming Months

There are three major components that need to materialise in order to increase agricultural machinery sales across most of Africa in the short term. These are: a favourable exchange rate, as African nations rely overwhelmingly on imports of agricultural equipment; high farm incomes resulting mainly from high commodity prices; and positive financial conditions such as low interest rates and improving access to credit. On the basis of these three criteria, we see particularly weak agricultural equipment sales in Africa over the coming quarters. Indeed, tractor sales in South Africa in December 2014 were the lowest on a monthly basis in two years.

Many African currencies have performed poorly over the last year and we expect further depreciation in the coming months as the US dollar continues to strengthen. Most imports of equipment are priced in US dollars or Indian rupees, which have both been strong since the beginning of 2014 against African currencies. Our Sub-Saharan Africa team argue that many currencies (such as the South African rand and Kenyan shilling) are still at risk of considerable depreciation due to continued dollar strength and widening current account deficits. Indeed, across Africa, we forecast the various currencies to depreciate by an average of 6% against the US dollar in 2015 and a further 4% in 2016.

The Worst Is Yet To Come
Select Currencies - YTD Performance Against USD (%)

Also, farm incomes are likely to be low over the course of the year, as grains prices will average lower compared with the previous three years. As of mid-January, the S&P GCSI Grains Index remains near its lowest level in four years, having fallen by nearly 50% since Q312. Although we forecast prices to average higher than spot levels for 2015 across the entire grains complex, on a multi-year basis prices will remain below recent historical standards.

Lowest In Four Years
S&P GSCI Grains Index (Monthly Chart)

Finally, financial conditions across many African countries will not significantly improve over the coming months, which will limit loan growth. Indeed, the FAO has stated that 'lack of finance is the overwhelming reason why farmers cannot purchase machinery'. Our Country Risk team sees lending rates across most African nations remaining high, having barely changed over the last five years. High interest rates will continue to combine with generally poor credit conditions to limit equipment purchases ( see 'Sovereign Profiles To Deteriorate', October 4 2014).

Higher Rates In Africa
Select Countries - Average Lending Rate By Year (%)

Obstacles To Long-Term Growth

We believe that a number of key obstacles remain for core long-term machinery sales growth in Africa. Many of these are similar to those which we have highlighted in previous analysis (see 'Africa GM Outlook', June 23 2014 ), namely poor profitability in the sector and the dominance of small-scale, subsistence agriculture. In order to increase profitability in African agriculture, we believe that partnerships with food companies, the development of co-operatives and greater access to credit are three of the primary goals that need to be achieved.

One major restriction on machinery sales growth in Africa is average farm size. According to FAO estimates, 80% of all farms in Africa had an area of less than two hectares in 2012. This has a dual impact on machinery usage: small farm sizes contribute not only to low profitability, but also limit the effectiveness of large machinery on fieldwork. While some government-run schemes exist for renting machinery to farms, these are neither widespread nor particularly effective as co-operative membership remains low.

Farm Size By Region (2012)
Mean Size (ha) % <2 ha
Central America 10.7 63
East Asia 1.0 79
Europe 32.3 30
South America 111.7 36
South Asia 1.4 78
South-East Asia 1.8 57
Sub-Saharan Africa 2.4 69
United States 178.4 4
West Asia & North Africa 4.9 65
Source: World Bank, Oxfam

A number of African governments and multinational agricultural machinery companies have tried to improve mechanisation rates through significant investment of capital in recent years. However, we believe these efforts will ultimately have limited success until inherent institutional problems are improved and other input usage develops. According to the FAO, the great increase in agricultural mechanisation in Asia between the 1970s and 2000s was a result of developments in biotechnology (ie, improved yields, plant varieties and increased fertiliser usage).

South Africa - New Tractor Sales Current Market Share In 2014 (%)
Brand %
Deere 36.0
Landini 22.0
Massey Ferguson (AGCO) 14.0
New Holland (CNH) 12.0
Case IH (CNH) 7.5
Other 8.5
Source: Farmer's Weekly

Though emerging Asian farms are generally as small as their Sub-Saharan African counterparts, the use of biotechnology, resulting in larger crops and increasing farm profitability, provided the impetus for increased mechanisation in Asia. Similarly, there will need to be investment into sectors strongly linked to agricultural equipment if the sector is to thrive in the coming years. The development of infrastructure such as roads, ports, power and finance will be necessary for sustained growth in the agricultural equipment sector.