2017 “Central No. 1 Document” Agricultural Key Forecast

[ China Agricultural Machinery Industry News ] "Central No. 1 Document" will be introduced soon. The Central Rural Work Conference is a special conference on the development of rural areas, which sets the framework for the annual Central Document No. 1. The Central No. 1 document is usually released in late January or early February and usually involves rural issues in China.

2017 “Central No. 1 Document” Agricultural Key Forecast

Supply-side reform: From the perspective of market information, it is expected that the 2017 Central Document will focus on supply-side reforms, with the focus on (a) reducing inventory; (b) reducing operating costs; and (c) improving weak links. We also expect that the “Central No. 1 Document” will focus on agricultural modernization, including “agricultural informatization” and “wide application of agricultural equipment”. The Chinese government has previously issued the "13th Five-Year Plan" for agricultural machinery, emphasizing the upgrading of agricultural equipment and the rate of increase. We expect the Chinese government to reiterate the importance of the “13th Five-Year Plan” for agricultural machinery. In addition to supply-side reforms and agricultural equipment, the market believes that land reform will also be a hot topic. China's agricultural land concentration rate is 69%, high may rise to 80% to 90%, and the average relative developed market is 95%, which is due to China's topographic constraints. Land transfer remains a key part of agricultural modernization, which will accelerate the process of land agglomeration. The land transfer system involves pre-applications for large-scale agricultural production, which is in line with the government's direction to promote modern agriculture. The introduction of land reform may lead to a reassessment of agricultural land and the speed of transactions may accelerate.

Corn prices will remain low in 2017. Corn futures prices fell 29% from the beginning of 2016 (the spot corn price also fell) to nearly 1,490 yuan per ton, mainly due to (a) changes in procurement policies and (b) high government reserves. The Chinese government's corn reserves were 106 million tons at the end of 2016, accounting for about 50% of China's annual production. The government's corn reserves have grown at a compound annual growth rate of 13.6% since 2010. Although the government's corn reserves fell year-on-year in 2016, the current level is still close to the historical high of 1998-1999, which is one of the reasons why the Chinese government hopes to reduce inventory through supply-side reform. Corn prices are not expected to rebound significantly in the short term, which is positive for downstream corn processors such as animal feed manufacturers and MSG manufacturers. Corn futures prices have been falling since mid-2016, which means corn processors' profitability may improve year-on-year in the first half of 2017. Hong Kong-listed corn processor CPP and MSG maker Weidan International are expected to benefit from the fall in corn prices.

The agricultural machinery market will grow in the next few years. On January 5, 2017, the Ministry of Agriculture issued the “Thirteenth Five-Year Plan for the Development of National Agricultural Mechanization”. The plan pointed out that the government will accelerate the mechanization of agriculture. The plan will promote balanced development of regional agricultural mechanization in different regions. An effective means of promoting agricultural supply-side reform is to improve the efficiency of China's agricultural production through agricultural mechanization and to create safe and competitive agricultural products based on market demand. At the end of the "Twelfth Five-Year Plan", the installed capacity of large tractors, transplanters and combine harvesters was 6.073 million, 726,000 and 1.74 million, respectively, 1.5 times, 2.2 times and 1.8 times the number of installations at the end of the 11th Five-Year Plan. Times. The proportion of medium and large-scale, high-performance agriculture continued to increase, and the comprehensive mechanization rate reached 63.8%. The "13th Five-Year Plan" lists the specific objectives of China's agricultural mechanization in five years: (a) the number of tractors above 80 horsepower has reached more than 1 million; (b) more than 300,000 tractors and more than 400,000 combine harvesters. By the end of the "Thirteenth Five-Year Plan", the comprehensive mechanization rate is expected to reach about 70%. In terms of agricultural aviation, China's current plant protection mechanization penetration rate does not exceed 3%. However, in some developed countries such as the United States and Japan, the mechanization penetration rate of plant protection is as high as 50%. From China's 18 million mu of farmland and 30% of aviation plant protection penetration rate, the annual market space is expected to reach 16.2 billion yuan.

The level of comprehensive mechanization or automation of China's agricultural sector has risen from 32% in 2001 to 63% in 2015, but it still lags behind developed countries. Tractor is a leading company in the field of high-powered tractors and will be the beneficiary of the government's policy to promote large tractors. The uncertainty of the tractor comes from the potential loss of bond investment. If the tractor fails to fully redeem its bond investment in Guoyu Logistics, this may constitute a significant provision for profit and loss. Zoomlion [1157.HK] made two acquisitions (Ladurner and Qiri) in 2015 to expand its environmental equipment and agricultural machinery business. Zoomlion's management said that demand for environmental and agricultural equipment is still growing. Zoomlion also mentioned that since March 2016, the hours of utilization of truck cranes, excavators and concrete machinery have improved and reached a high level. Zoomlion believes that the demand for new construction machinery will continue to rise in the next few years.

Agricultural information supports the land transfer system. Agricultural informatization is a growing business scope of Shenzhou Holdings. In 2015, Shenzhou Information, an IT services division of Shenzhou Holdings, acquired Zhongnong Xinda. The acquired company is a rural information service company with a comprehensive business layout in the three branches of e-government, e-commerce and e-agriculture. Zhongnong Xinda acquired Qishuo Technology earlier to enhance its capabilities in agricultural Internet of Things and big data services.


(Original title: Agricultural machinery market will grow rapidly in the next few years)