Economics & Politics / Rural India / Tractor Industry

India : Agriculture Income & Growth Trends For Farm Mechanization

Agriculture Sector & Farm Income

  • Even though Agriculture sector is losing its contribution to the total GDP in India as other sectors have been growing at a much faster pace in recent times, the income from Farm Sector is increasing and coupled with the steady growth in the availability of agriculture credit, it is fueling the demand for farm mechanization & tractors.
  • The low level of farm mechanization in India and high dependency on the manual labor which is becoming a serious problem now when the Govt. sponsored schemes like MNREGA are driving people away from hard farm labor are other factors which are impacting the Tractor demand.
  • When we look at 2010-11, the normal monsoon in most states, strong farm output and high minimum support prices (MSPs) resulted in increase in the farm income. Govt. policies also make the availability of farm credits easy, this has resulted in a year-on-year growth 20% for domestic market of Tractors in India.
  • It is now a reality across many states in India that MNREGA (National Rural Employment Guarantee Act) is leading to shortage of agricultural labor, thus giving an impetus to usage for tractor.  Other schemes targeting at improving rural infrastructure are also impacting the demand of tractor for non-agri purposes.
  • Even though the Agri production has seen volatile trend in the last decade, the Farm Income has remain stable due to the increase in Minimum Support Prices (MSPs) The Govt. has consistently increased the MSPs of 4 major crops (Wheat, Rice, Sugarcane and Cotton) – CAGR growth 7-12% from 2005-07 to 2010-11. This has ensured stability in Farm Income even though the Agri Production was impacted by deviations in rainfall.

 

Credit Availability

  • Agriculture credit has increased at a CAGR of 23% during 2003-04 to 2010-11. The domestic demand for tractor has increased by 15% CAGR during this period.
  • Credit availability has always been an important demand driver for Tractor Industry. Around 85-90% of tractors are bought on credit. Public Sector Banks & Non-Banking Financial Corporations are major financiers, in the recent years NBFCs share & focus has increased in the tractor financing.

Changing Product Mix

  • The higher HP segment (40hp+) has seen steady increase in its share to 41% in 2010-11 from 25% in 2005-06 – the high HP tractors are preferred more for harder soil conditions – which exist in Southern & Western Regions.
  • The growing usage of tractor for non-agri purposes/Commercial usage is also boosting the market of high HP segment.

Tractor Industry Growth

  • At regional level, the growth in India is driven by Southern & Western regions because of sustained income and relatively low penetration.
  • In Northern region, growth was subdued due to flood-like situations and relatively high tractor penetration.
  • The growth in Eastern region has been moderate because of delayed monsoon which resulted in a draught like situation.
  • Looking at the current year market scenario for Tractor industry, most of the key factor impacting tractor demand looks favorable or neutral, indicating positive outlook for the industry.

Favorable

Neutral

Unfavorable

Demand
  • Farm Income
  • Momentum of Tractor Sales
  • Rainfall

Supply

  • Channel Inventory
  • Player Action – Product & Pricing

Govt. Support/Financing
  • Agri-Credit
  • Higher MSPs
  • Financing

Future Outlook for Tractor Market growth

  • The short term tractor demand is impacted by Farm Income, availability of finance & govt. initiatives.
  • The MSPs are expected to remain stable at 2010-11 level but a higher Crop output is estimated due to normal rainfall, thereby increasing the Farm Income (expected to grow by 16% in 2010-11). Therefore, the positive demand side indicators and Government policy are the favorable factors that will drive the tractor demand next year.
  • Increased availability of finance coupled with favorable government initiative in the form of higher agriculture credit would also aid the Tractor Market growth.
  • Factors like irrigation intensity, type of soil & proportion of land holding, change in the usage pattern of farmers, etc. influence long term tractor demand.
  • Domestic industry is expected to grow by 11-14% in 2011-12 & by 7-9% in 2012-13.
  • The mid-term growth is expected to be 8-10% CAGR from 2010-11 to 1015-16 as against the 12% CAGR from 2004-05 to 2009-10.
  • The overall average growth rate for the decade has been 6-7% in the last 3 decades. It is estimated that the average is going to be higher going forward, with reducing replacement cycles, stable farm income and increased focus of government on agriculture & rural development.
  • There is a strong linkage between agriculture GDP and tractor population. There is a 97% correlation between these two variables.
  • Structural growth for tractor sales continue to be driven by the increasing need for farm power per hectare and increasing substitution of manual and animal labor for various farming operations.
  • Increasing finance penetration, more affordable rates of finance have enabled a larger number of farmers to own tractors. At the same time the economics of tractor operation have improved due to increasing custom hiring for agricultural and other purposes, including transport of farm produce, personal transport and transport of materials for road construction and other infrastructure projects.
  • The sharp growth rate is not expected to continue as the gap between current & potential penetration levels is some states is narrowing. Inadequate irrigation & problems with credit quality would continue to constrain growth in less penetrated areas.

Qualitative factors affecting long term tractor demand

  • Farm related factors
    • Fertilizer usage per hectare
    • Farm size
    • Crop intensity
    • Irrigated land
  • High crop intensity led to increasing fertilizer usage per hectare
  • Non-farm related
    • Spending on rural road development
    • Spending on rural housing development
    • Spending on other infrastructure development
  • Non-Farm usage of tractors on the rise
    • Presently non-farm usage accounts for 20-25% of the total demand for tractors.
    • The Govt. focus on rural infrastructure is increasing, under the Bharat Nirman initiative, Rs.1166 billion has been spent during 2005-06 to 2009-10. Tractor has proven to be a better alternative to commercial vehicle for carrying construction material, as they are more economical, can carry heavy weight and also move easily on rough rural roads.
  • India’s tractor penetration has surpasses world average in 2010-11, but it still lags in average HP
  • Average Tractor penetration (world; 2007)           –              21 Tractors
  • Tractor penetration in India
    • 2008-09                –              19
    • 2009-10                –              20
    • 2010-11                –              22
    • However, given the small farmland size and usage of relatively lower Horse Power (HP) tractors, India HP per hectare may be lower than its peer countries in the US & Western Europe, indicating significant potential for the sector’s growth.

Export Market

  • Export growing at CAGR of 20% from 2005-06 to 2009-10. There has been a decline in the Tractor export starting from 2008-09 though there was impressive growth of 29% CAGR during the last decade. The market recorded at decline of 2% in 2009-10.
  • While the export to US are coming down, there is an accelerated growth from South Asian countries, Malaysia, Turkey and Africa.

Profitability

  • Input Costs
    • Raw material (Pig iron, steel, tyres) costs are the largest component for a tractor manufacturer constituting 65-75% of the net sales.
    • Volatility in the prices of these three raw materials has a major impact on the raw material cost of the players, in-turn impacting profitability.
    • The raw material cost rose sharply in 2010-11 and is expected to increase further in 2011-12.
    • As the players are not able to completely pass on the rise in raw material cost, the operating margins are getting hit.
    • Margins
      • Operating margins are estimated to have declined in 2010-11 from a peak of 12.3% in 2009-10.
      • Operating margins are projected to further decline in 2011-12 as the input raw material cost is expected to increase. However, a lower fixed cost will somewhat cushion the fall as the increase in tractor demand is translating into peak capacity utilization.

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