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John Deere Lures Africa’s First-Time Buyers of Tractors

September 12, 2013
 
 

The world’s largest makers of agricultural equipment are looking in Africa for more people like Levy Sinyimba.

The businessman bought his first tractor, a 60-horsepower model, about three months ago after becoming fed up with paying others to plow his 1,000 acres (405 hectares) in Zambia. Sinyimba says he knows other farmers who want to do the same.

Those Zambians are part of an emerging agricultural class in Africa increasingly courted by foreign manufacturers. Sub- Saharan Africa’s 5.6 percent economic growth forecast for 2013 will outpace the developed world’s, generating wealth to invest in crops. Almost half the land available for sustainable farm expansion lies in Africa, meaning it can better feed itself and the growing global population if productivity can be boosted.

Dealers for Deere & Co., the biggest farm-machinery maker, are opening new African sites to sell equipment such as the 5503 tractor, its most popular in the region. The $24,000 price is less than a 10th of some of its machines selling in the U.S.

Fiat Industrial SpA’s CNH Global NV unit says African sales are jumping as much as 20 percent year on year, boosted by farmers making their first purchase.

The companies "are all racing to get there for the next growth wave," Larry De Maria, a New York-based analyst for William Blair & Co., said in a Sept. 5 telephone interview. "It could be a lucrative situation for the equipment makers and solve the potential food shortages in Africa."

 

Self-Sufficiency

 

A lot has changed in the five decades since Moline, Illinois-based Deere entered the continent through apartheid-era South Africa.

Greater political and economic stability and a push by some nations for food self-sufficiency has made the continent more attractive, said Ganesh Jayaram, Deere’s vice president of agriculture and turf sales and marketing for most of Asia and Africa. An abundance of arable, uncultivated land and untapped water supplies also offer "strong tail winds," he said in a phone interview.

Africa has 45 percent of the land suitable for sustainable agricultural expansion, meaning it isn’t protected or forested and has a low population density, according to the World Bank.

Gross domestic product in sub-Saharan Africa will increase 5.6 percent this year, compared with the 1.2 percent expansion in the developed world, according to International Monetary Fund estimates.

 

Green Revolution

 

The value of the African food market may triple to $1 trillion by 2030 on population growth and urbanization, the World Bank estimates. African machinery demand will rise on the back of that growth while Asia slows, De Maria said.

The level of mechanization in African farming is still very low. Kenya had 25 tractors per 100 square kilometers (39 square miles) of arable land in 2009 while Nigeria has almost seven, according to the most recent data from World Bank. That compares with an average of 271 machines in the U.S.

The size of the farm-equipment market in Africa will be about 24,000 to 30,000 machines in 2013, according to Duluth, Georgia-based tractor maker Agco Corp. By comparison, U.S. industrywide tractor sales were 137,776 this year through August, according to the Association of Equipment Manufacturers.

Africa was largely bypassed in the last few decades by the Green Revolution, the name given to the series of improvements in grain and fertilizer technology and in irrigation that boosted crop yields in Asia and Latin America. Sub-Saharan Africa has the biggest gap between actual and potential yields, according to the World Bank.

 

Learning Center

 

In Nigeria, the continent’s most populous country, only 40 percent of arable land is cultivated. It plans to stop importing rice by 2015. Agriculture is Nigeria’s "new frontier for growth," President Goodluck Jonathan said in July.

As in much of Asia, African farmers work small lots, limiting their access to financing. An average of 1.1 tons of grain per hectare was reaped from 2008 to 2010 in the sub- Saharan region, roughly one-third of the world average, partly because farming technology is costly and under-utilized, the U.S. Department of Agriculture said in a September 2012 report.

To address those issues, Agco has opened a 150-hectare learning center and farm near Lusaka, the Zambian capital, to train local farmers and dealers in modern farming technology. According to Agco, 65 percent of African farmers work manually. Deere and CNH also help with training.

 

New Products

 

"The demand for technology is growing," Nuradin Osman, Agco’s director of operations for Africa and the Middle East, said in a phone interview from Switzerland. "The demand for higher horsepower is growing."

Agco, the third-largest farm equipment maker, already has 150 to 200 dealer outlets in Africa. It has opened a parts distribution center in Johannesburg and has started assembling Massey Ferguson tractors in a joint venture in Algeria.

Next year, the company plans to introduce 15 new products for the African market including planters, harvesters and storage units, Chairman and Chief Executive Officer Martin Richenhagen said in an interview. Agco may add to the $100 million it has already committed to investing in Africa, he said.

Deere had 30 dealer locations in east, west and central Africa excluding South Africa in 2010, and according to Jayaram the number will double this year. Deere set up a parts distribution center in South Africa in 2012 to serve the whole continent and has tripled its parts inventory in Africa in the last few years.

 

U.S. Decline

 

Dealers for CNH, the second-largest farm equipment maker, have added 20 to 30 new sites in the last three years for a total of about 300 sales and service locations, said Diego de la Calle, the business director in Africa for Case IH and New Holland equipment. It plans to continue expanding, particularly in distribution in West Africa.

"There is substantial growth for farming equipment, for more mechanization," De la Calle said in a telephone interview from Lugano, Switzerland. "The trend has intensified in the last three to five years."

Africa still accounts for a small slice of business at Deere, where sales in Canada and the U.S. represented 64 percent of revenue in its last fiscal year, according to data compiled by Bloomberg.

That core business is facing pressure after prices for corn and soybeans dropped. U.S. farmers’ cash receipts, the main indicator for agricultural machinery purchases, will fall 5.5 percent to $211.1 billion this year, the Department of Agriculture said Aug. 27.

 

Asian Competition

 

Deere’s sales will dip 0.5 percent in the year through October, according to the average of 17 analysts’ estimates compiled by Bloomberg.

Deere dropped 0.6 percent to $83.83 at 9:58 a.m. in New York. The shares have fallen 3 percent this year while CNH has gained 17 percent and Agco has climbed 21 percent.

In Africa, the big three face stiff competition from Asian players who are more established in that market. The tractor bought by Sinyimba, the businessman with four farms in Zambia, was made by India’s Mahindra & Mahindra Ltd., he said in a phone interview.

"I have never heard about the American tractor brands, but I believe they must be expensive," said Dennis Kamoga, 34, who plans to start farming in Mpigi district about 30 kilometers west of Kampala, Uganda. While he currently has no plans to buy a tractor, Kamoga said that if he were to do so, "I would go for those from Asia as they are cheaper and their spare parts are readily available."

 

‘Strong Opportunities’

 

Most tractors sold in Africa are have less than 100 horsepower, according to Deere’s Jayaram. The company’s 5503 75- horsepower model, made in Pune, India, is its bestseller in Africa, according to Afgri Equipment, a Deere dealer.

Despite the competition from rival manufacturers, Afgri is planning to add two more outlets in South Africa, Zambia and Ghana, Patrick Roux, the Pretoria-based company’s managing director, said in a telephone interview.

"Africa is a continent with strong opportunities for years to come," CNH’s De la Calle said.

 

--With assistance from Matthew Hill in Johannesburg and Fred Ojambo in Kampala. Editors: Simon Casey, Todd White

 

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net

 

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

 

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RELATED TOPICS: Machinery, Tractors, Combines

 
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