Sales of new tractors and combines are expected to increase in Canada, based on higher crop receipts in 2016 and 2017, according to Farm Credit Canada.
FCC released its 2016-17 Farm Receipts and Equipment Sales report, based on projections of farm cash receipts and other economic variables, such as the Canadian dollar, interest rates and world demand for agricultural commodities.
The strength of farm cash receipts is a key factor farmers consider when deciding to buy new equipment, and equipment sales are a leading indicator of future farm cash receipts, said FCC economist, J.P. Gervais.
“Crop receipts (are) projected up in 2016 by 5.8 percent, so that’s a big jump, and a further increase of 3.8 percent in 2017,” said Gervais.
However, overall farm receipts are expected to remain flat as the stronger crop receipts are offset by weaker livestock returns.
As well, the Canadian dollar is projected to stay above 2015 levels, weighing down cattle prices.
“Livestock (will be) down 6.9 percent with a rebound up 2.6 percent in 2017. Driven by cattle prices coming down,” Gervais said.
“We are probably looking at a different stage of the cattle cycle, with the Canadian dollar higher than it was in 2015 on average.”
Futures prices for the remainder of 2016 suggest a decline in cattle prices. But the cattle sector is coming off two strong years, so even with the projected decrease, cattle receipts will still stay above the 10-year average.
Hog receipts will likely be flat into 2017, while the dairy sector may see some weakness because of lower world prices for dairy products, such as powdered milk, Gervais said.
The FCC report examined only new combine and tractor sales, which are largely imported.
Equipment sales have been lacklustre for two years. Overall, new farm equipment sales fell 13.8 percent in 2015 and will likely fall another 7.1 percent this year.
Gervais sees sales picking up toward the end of the year with four-wheel drive tractors likely rising by 24.5 percent in 2016.
In 2017, he sees combine sales up almost nine percent and four -wheel drive tractors up 2.4 percent for a total equipment sales increase of seven percent.
The recent slowdown of new tractor and combine sales was largely caused by a low Canadian dollar driving prices up for new equipment.
The price of new combines increased by about 16 percent in 2015, while the price of four-wheel drive tractors rose 15 percent.
New equipment sales were also hampered because of reduced demand. Equipment sales were strong before 2014, which made sales in 2015 appear low even though they were in line with the 10-year average.
“Prior to 2015, we invested in equipment and at one point we had enough, and then it came to the low Canadian dollar and that pushed the prices up of equipment,” Gervais said.
“Pent-up demand was addressed when times were better and equipment prices were lower.”
Now with a strengthening loonie and increasing crop receipts, producers may again start kicking the tires on big-ticket items like combines and high horsepower tractors.
However, events that would hamper FCC’s projected increase in crop receipts would also threaten the likelihood that machinery purchases will increase.
“A big crop would perhaps bring (crop) prices down. My hope is that some producers have already locked in some of their production for the next marketing year,” Gervais said.
FCC’s projections used a Canadian dollar at US77 cents on average for 2016. If the loonie falls below that, the projection may prove too optimistic.
“Overall, if you look at net in-comes, so revenue minus expenses, we find that… you’re better off with a lower Canadian dollar than a higher Canadian dollar,” Gervais said.
“But of course there will be examples like we have in front of us where if you look at a particular market segment, you are going to be worse off with a lower Canadian dollar, and that’s the case with equipment.”
Higher interest rates would also affect new equipment sales, but Gervais said he does not expect a rate increase in the fall of 2016 and into 2017.
Farm debt increased 8.5 percent in 2015, and Gervais said producers must be sure they can withstand increased interest rates.
“Net income is still at the top of the cycle, so I’m not entirely surprised to see that debt continues to go up at a time when that income is still very strong,” Gervais said.
“We have some sectors that have grown quite a bit, maybe not necessarily in terms of production and I’m thinking of the cattle sector here, but in terms of income and revenues.”