While the bulk of money is towards supporting more agricultural technology it’s the scarce supply of raw materials holding up the show
Ferrous materials and plastics are getting harder to come by and showed record demand in March, to the detriment of agricultural machinery.
The world economy is recovering quickly, and it’s now the surge in raw material prices that threatens to push production costs to all-time highs, with serious consequences for the agricultural machinery sector, a big user of ferrous and plastic materials.
In the manufacture of a tractor for instance, the ferrous component accounts for 75% of the total input.
Recent data on the world economy has forecast a jump in GDP from minus-3.9% in 2020 to plus-5.2% in 2021, and forecasts a further robust recovery in world trade, which is expected to go from minus-6.9% last year to a substantial plus-8.6% in 2021.
The issue ahead is simple, demand for goods is running faster than the production capacity of companies, which are slowed down by shortages of raw materials along with their current exorbitant cost.
The average price of materials for industry was up 22% in March 2021 compared to January 2020, with particularly high prices for the mechanical engineering sector skyrocketing up by 40%.
In markets such as Europe, steel prices reached an all-time high in March 2021, with particularly high prices for rolled products (HRC and CRC), up 70 to 80% compared to pre Covid-19 pandemic levels.
As for plastics, Europe recorded a 45% increase in the cost of ethylene and 121% increase in the cost of polyethylene in the first quarter of 2021.
In addition to high raw material prices, there are difficulties in logistics and transport (still linked to the Covid-19 pandemic), soaring container costs and significant delays in shipping.
All this has serious consequences for the agricultural machinery sector, that up until now largely uses ferrous materials and plastics and favours shipments of manufactured machinery abroad
In the manufacture of a tractor, there is an average of 1,700 components, 75% of which are derived from iron (cast iron, steel, metal tubes), plus another 5% of other metals such as copper.
The metal component therefore accounts for around 80% of the total materials used to manufacture a tractor.
Of the remainder build, more than 10% is covered by plastic materials (cab linings, guards, covers, plugs) and around 5% by rubber polymers (tubes, seals, gaskets).
The emergency obviously also concerns other types of machinery, and equipment in many cases made of ferrous materials only.
The agricultural machinery industry is going through a dynamic phase, due to the growth in demand and incentives for the purchase of clean current generation vehicles.
With raw material in dwindling supply, and at record prices there is little choice other than manufacturers lifting their prices or face the other alternative of seeing their production capacity at risk.
Expect some very unpopular, but unavoidable agricultural machinery price increases in the second half of 2021.