El Niño unlikely to dampen tractor sales

Historical trend shows no direct or significant correlation between below normal rainfall and tractor industry volume, said industry executives.

“Historically, El Niño has had a low correlation with tractor sales growth. The average industry growth has been 8% even in El Niño years,” Rajesh Jejurikar, executive director – farm and automotive sectors at Mahindra & Mahindra, told ET. Concurred AS Mittal, vice chairman, International Tractors Ltd. “Tractor sales get impacted only if the monsoon is below normal consecutively for three years or so. On last year’s high base and all the positive indicators, we expect tractor sales to advance 5-7% in the current year,” said Mittal.

Tractor sales rose to an all-time high of 945,000 units in the year ended March 31, up 12% from previous year.

On Monday, private weather forecaster Skymet predicted “below-normal” rains during the southwest monsoon and a 60% of chance for drought, citing El Niño conditions. But on Tuesday, India’s official forecaster, the India Meteorological Department (IMD), said the monsoon would be “normal” and also clarified that all El Niño years were not bad monsoon years.

While IMD’s forecast would help ease the concerns, a steady increase in irrigated areas, healthy water levels in reservoirs and high soil moisture are likely to help reduce the impact if the rains are indeed below normal. Also, expectations of superior cash flow in farmer’s hands due to higher minimum support prices (MSP) ahead of the election year will bode well for tractor sales, said tractor makers.

More than anything else, the crop prices have had a strong correlation with tractor sales, said Mittal.The MSP of wheat has increased to Rs 1,940 per quintal in 2022 from Rs 1,470 in 2017, while that of rice has risen to Rs2,015 from Rs1,625. This has improved the cash flows of farmers significantly. Historical data show the MSP hike in the pre-election year could be in double digits. This could further increase the disposable income for farmers.

While Jejurikar steered clear of giving any projection on tractor industry volume for 2023-24, he pointed out that strong agriculture credit growth, the upcoming elections, government’s capex push apart from good reservoir levels and healthy farm income would bode well for the industry.

“El Niño is not the dominant factor to decide the course of tractor sales even as the rest of the factors are,” he said.

El Niño describes unusual warming of the surface waters in the eastern tropical Pacific Ocean, which often results in deficit monsoon rains in India. According to the US government’s National Oceanic and Atmospheric Administration, the average surface temperature has reached 21 degrees centigrade in April 2023 — the highest since data started capturing through satellites. It estimates a 57% chance for the emergence of El Niño.

In the past 25 years, there have been five instances of El Niño, out of which four years have seen below-normal rains. However, in those four years, domestic tractor sales dropped in only two: 2002 and 2015. Tractor industry volume expanded in the other two years — 2004 and 2009 — backed by MSP hikes, growing alternative sources of rural income and increased government support in pre-election periods.

Taking cue from historical trends, analysts expect low-single digit volume growth for tractors in fiscal 2024.

Kotak Institutional Equities in note on Mahindra said its analysis of previous El Niño occurrences in India suggested mixed impact on tractor sales, despite deficient monsoon in most cases. “We expect M&M’s tractor volumes to grow by 5% y-o-y in FY2024E given adequate reservoir levels and expectation of increase in government support before elections,” it said.