Possible renewal of the Trans-Pacific Partnership (TPP) agreement, or new negotiations around market access in Asia. â¢
FCC Ag Economics
Economic Snapshot of Canada’s Equipment Sector July 2017
Growth in Canadian sales of selected farm equipment will continue into 2018
Sector highlights: next 12 months 1. Following two years of declines, Canadian sales of tractors and combines will grow in 2017 2. Combine sales will remain just below their most recent five-year average 3. Sales of 4WD tractors will pick up from recent lows and increase in 2017 then decline in 2018
As of June 2017, year-to-date Canadian farm equipment sales were strong. Combine sales were up 28.0% and 4WD tractor sales were up 21.6% in the first half of 2017, compared to the same period in 2016. Total tractor sales1 were up 19.1%. That’s a big improvement from the slowdown of the previous two years: in 2015, sales started slowing due to several factors, including uncertainty around prices in commodity markets and weather-related concerns for production. In 2016, total tractor sales declined 9.6%, 4WD tractor sales were flat at -0.2% and combine sales declined 5.9% from 2015 levels (Figure 1). Those drops followed strong equipment sales growth in 2014, when total tractor sales reached a high of 23,860 units as a result of producers’ anticipation of higher future farm revenues from rising commodity prices.
FCC Ag Economics expects combine sales will increase 27.3% (or about 500 more units) in 2017 (Figure 1), raising them to a level that will be just slightly below their five-year average (Figure 2). We expect they’ll soften again in 2018, with about 350 more units sold. These forecasts show combine sales normalizing at a level between the 20002007 annual average and the most recent five-year average.
Figure 1: Tractor sales are projected to increase in 2017 and 2018; combine sales to decline in 2018
Total tractors
4WD tractors 2015
2016
Combines
2017p*
2018p*
40% 27.3%
30% 20%
13.1%
10%
13.4%
9.1%
0%
-0.1
-0.4
-0.1%
-10% -20%
-13.2%
-0.4%
-5.9%
-9.6% -20.9%
-30%
-15.6%
-35.0%
-40% Source: Bloomberg and FCC calculations *2017 and 2018 figures are projections
FCC Ag Economics defines “total tractor” sales as 4-wheel drive (4WD) tractors, tractors under 40 HP, tractors between 40 and 100 HP and tractors over 100 HP. We report “total tractor” and 4WD tractor sales only, as many sales of smaller tractors are for non-agricultural purposes.
1
As of June 2017, total tractor sales were also trending higher (Figure 3). Sales declines in recent years for this aggregate category reflected lower sales of smaller tractors. We expect annual sales in 2017 to grow at a rate of 13.1%, to reach levels just below the most recent five-year average. The rebound in total new tractor sales we expect to see in 2017 (a 13.1% increase, or an additional 2,900 units sold) will continue in 2018, with 9.1% growth (equivalent to 2,300 units sold). The current projections suggest a rising sales environment in line with the most recent five-year average.
While 4WD tractor sales were also up in the first half of 2017, they’ve been trending lower for a couple of years. The 2017-18 sales projections compare favourably with the annual average sales of 2000-2007 (Figure 4), but we don’t expect sales in this market to reach its most recent five-year average in either 2017 or 2018. With sales growing at 13.4% in 2017 (about 120 additional units sold), and staying flat in 2018, the 4WD tractor market seems to be normalizing at a level between the 2000-2007 and 20122016 periods.
Figure 2: Combine sales 2000-2007 avg
2012-2016 avg
3,500
# units sold
3,000 2,500 2,000 1,500 1,000 500 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 2017p* 2018p*
2012
2013
2014
2015
2016 2017p* 2018p*
2012
2013
2014
2015
2016 2017p* 2018p*
Source: Bloomberg and FCC calculations *2017 and 2018 figures are projections
Figure 3: Total tractor sales 2000-2007 avg
2012-2016 avg
35,000
# units sold
32,500 30,000 27,500 25,000 22,500 20,000 17,500 15,000
15052.764
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg and FCC calculations *2017 and 2018 figures are projections
Figure 4: 4WD tractor sales
# units sold
2000-2007 avg
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
2000
2001
2002
2003
2004
2005
Source: Bloomberg and FCC calculations *2017 and 2018 figures are projections
2006
2007
2008
2012-2016 avg
2009
2010
2011
Growth in equipment sales is the direct result of strength in the Canadian agricultural economy. Producers’ responses to existing commodity market conditions – and their anticipation of future conditions – determine, in part, the strength of demand for equipment. A healthy farm economy driven by growing global demand for Canadian agricultural commodities has meant Canadian farm cash receipts have trended upward since 2010, reaching $60.8 billion in 2016. That’s helped drive the demand for new equipment. We forecast overall farm cash receipts to increase slightly (1.8%) in 2017, and 1.7% in 2018, increases that reflect differing patterns in revenues across different sectors.
Figure 5: Crop* receipts projected to remain flat 35
30 Billions (CAD)
A strong Canadian farm economy supports equipment sales
20
Our projections of farm equipment sales rest on a number of assumptions related directly to the health of Canada’s farm economy:
Crop receipts expected to remain flat as livestock receipts grow Supply trends have most recently dominated the story about crop revenues. That story won’t change, as global supplies of commodities, already high, are projected to continue climbing. In particular, growing global production of corn, soybeans and wheat is expected to pressure commodity prices, keeping cash receipts for crops, and most notably, grains and oilseeds, flat through 2018 (Figure 5). Livestock prices, pressured in 2016 by growth in North American protein supplies, recovered in the first half of 2017. Livestock receipts are expected to increase 4.6% in 2017 and 4.2% in 2018 (Figure 6), largely on the strength of both domestic and global demand, which are leading producers to increase production.
15
2012
2013
2014
2015
2016
2017p** 2018p**
Source: Statistics Canada, FCC computations *Crop receipts includes all field crops grown in Canada **2017 and 2018 figures are projections
Figure 6: Livestock* receipts projected to slightly increase 35
30 Billions (CAD)
• the Canadian dollar averages US$0.75 in 2017, rising in 2018; • interest rates will rise in 2017 and 2018; • total farm cash receipts will grow 1.8% in 2017, and another 1.7% in 2018; • livestock receipts will grow 4.6% in 2017 and 4.2% in 2018; and • total Canadian crop receipts decline marginally (0.3%) in both 2017 and 2018.
25
25
20
15
2012
2013
2014
2015
2016
2017p** 2018p**
Source: Statistics Canada, FCC computations *Livestock receipts include cattle, hog, poultry and dairy **2017 and 2018 figures are projections
The low loonie provides a buffer from low commodity prices and boosts farm revenues
Canadian dollar expected to remain at US$0.75
Even as several sectors within the Canadian farm economy experienced some price pressures in 2016, the relatively low loonie supported strong cash receipts. U.S. farmers had no such advantage. South of the border, farm cash receipts peaked in 2014 at US$424.2 billion, and declined 11.5% in 2015 and a further 5.2% in 2016 (Figure 7). They’re expected to remain flat or possibly weaken slightly further in 2017.
A low Canadian dollar usually means strong farm revenues. We expect the loonie to average around US$0.75 in 2017 and to head slightly higher in 2018, based on our projection of crude oil staying, on average, around US$50 in 2017 and 2018. Low interest rates encourage equipment purchases. While borrowing costs are likely to trend up in response to interest rate hikes by the Bank of Canada and U.S. Federal Reserve, future rate increases should be minimal and proceed slowly.
Several factors explain the divergence in the ag operating environments of the U.S. and Canada, but none is more important than the loonie. By 2017, U.S. prices for corn and soybeans had declined, on average, 25.0% compared to their five-year average, crushing U.S. farm revenues. Prices for those same crops in Canada also declined, but averaged only 10.0% lower than the five-year average. The depreciation of the loonie helped to avoid large losses in farm cash receipts in Canada by buffering the lower commodity prices North American producers received between 2014 and 2016. As a result of the loss in revenues, farm equipment sales in the U.S. have not only declined, they’re also expected to remain weak in 2017. Combine sales were down 6.0% and 4WD tractor sales were down 6.1% in the first half of 2017 compared to the first half of 2016. There’s some bright news, though. U.S. total tractor sales were up 6.2% in the same period, reflecting growth in the sales of smaller tractors. And, the weak demand in the U.S. market allowed manufacturers to deliver sooner to Canada. That also helped to boost Canadian equipment sales in the first half of 2017.
Figure 7: As U.S. farm cash receipts declined, Canadian revenues continued to grow U.S. farm cash recipts (Right axis)
65
450
60
410
55
370
50
330
45
290
40
2010
2011
2012
Source: Statistics Canada, USDA, FCC computations *2017 and 2018 figures are projections
2013
2014
2015
2016
2017p*
2018p*
250
Billions (USD)
Billions (CAD)
CA farm cash receipts (Left axis)
On the radar for 2017-18
The low loonie means pricier equipment and higher farm revenues: Which effect wins out?
• Patterns in the USD/CAD exchange rate. Trends in oil prices and interest rates in Canada and the U.S. will determine the value of both currencies. • Market access in export markets: – Renegotiation of the North American Free Trade Agreement (NAFTA). – Implementation of the Comprehensive Economic and Trade Agreement with the European Union (CETA). – Possible renewal of the Trans-Pacific Partnership (TPP) agreement, or new negotiations around market access in Asia.
A low Canadian dollar raises revenues for Canadian producers, but it also raises the price of farm equipment manufactured in the U.S. Since 2013, the loonie declined 25.0% against the USD, while the average price of equipment manufactured in the U.S. and sold in Canada increased 45.0% (Figure 8). The lower loonie wasn’t alone in pushing up the price of new farm equipment. Other factors included the rising costs of both the raw materials used to produce the equipment and the technological advancements improving performance. However, lower equipment sales in 2015 were, in part, the result of prices driven higher by the weaker Canadian dollar.
• Potential impacts of weather patterns on North American crop conditions and the supply of grains and oilseeds. • Changes in world demand for agricultural commodities that would impact prices of grains and oilseeds. • Potential disruptions to U.S. equipment manufacturing as a result of pending U.S.-China trade issues on steel.
The weak loonie has had a large impact on prices of 4WD tractors, a sales category with some of the largest declines in sales. Our projections of farm equipment sales (see Figure 1) suggest the benefits of a weak loonie in raising farm revenues don’t outweigh the disadvantages it also produces in raising the cost of equipment. A US$0.75 loonie tends to mute sales of new farm equipment.
Figure 8: A weaker loonie increases the price of farm equipment imported from the U.S. USD/CAD
4WD
Combine
140 120 100
Apr-17
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
60
Apr-12
80
Jan-12
Value of the CAD (Index 2012 = 100)
160
Source: Alberta Agriculture and Forestry, FCC calculations
39964 E 20170727 RH
Learn more about the economic events that could impact our industry and your bottom line. Our team of economists and researchers share their unique perspectives in the reports, videos, blogs and articles available on our website. fcc.ca/AgEconomics
Follow the team on Twitter J.P. Gervais Martha Roberts Leigh Anderson Craig Klemmer Amy Carduner
@jpgervais @MJaneRoberts @AndersonLeigh3 @CraigKlemmer @ACarduner
