Canada / Analyst Insights
Canadian Agriculture Sector Set to Rebound in 2018

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by Stephen Morea
Jan 16 2018

Merger and acquisition activity, while often distilled down to company-specific circumstances, can be meaningfully examined in the context of prices, demographics and industry trends. Particularly in the Canadian economy, where commodity prices drive key industries, business-level decisions can be rationalized through industry analysis. Moreover, it is not necessarily the industry that a company seeks to enter or expand within, but is often tied to performance upstream, downstream and in ancillary industries. Recently, commodity price rebounds, strong demographic trends and a favourable outlook in the industry make agricultural machinery and equipment manufacturing companies an enticing acquisition target. Moreover, there is evidence that the entire Canadian Agricultural Sector is rebounding, as exhibited by stronger price outlooks for key farm products.

Linamar Acquisitions

In December 2017, Canadian Auto Parts maker Linamar announced that it entered into a definitive agreement to acquire Canadian agricultural and harvesting equipment maker MacDon Industries Ltd. for $937.0 million. IBISWorld estimates that prior to the acquisition, MacDon accounted for 4.3% of the Tractors and Agricultural Machinery Manufacturing in Canada. Linamar, which primarily produces precision parts for the automotive, construction and industrial sectors, already has one foot in the agricultural parts market as a maker of Harvestec and Oros brand chopping and folding corn headers. Moving to expand its agricultural product pipeline and broaden its presence in the global agricultural market at this time would greatly benefit the company.

agricultural price index

Rebounding Canadian Agricultural Output

Although Canada has maintained its position as a leading global exporter of oats, barley, canola, corn and soybeans, its agricultural commodity prices significantly dropped between 2014 and 2016. Consequently, the agricultural sector in Canada has struggled over the past five years. Recent signs, however, suggest Canadian agricultural production has improved. According to Agriculture and Agri-Food Canada’s December Outlook for Principal Field Crops, Canadian farmers increased the production of canola, soybeans, oats and corn in 2017, but decreased the production of wheat and barley compared with 2016. These results are in line with IBISWorld estimates, as the Agricultural Sector (NAICS code 11) is expected to increase  1.1% in 2018. Meaningfully, this growth is expected to occur alongside agricultural price appreciation. For instance, the world price of wheat declined an annualized 10.0% over the five years to 2018. Over the next five years, prices are forecast to increase substantially. As demand increases with selling prices, this should expand farm profit margins and free up capital to spend on new equipment.

Moreover, other vital Canadian agricultural industries, including soybean farming, fruit and nut farming and vegetable farming are all expected to increase by about 3.0% in 2018. According to the Canadian Produce Marketing Association, kale, yams, artichoke, okra and ginger root are the top five industry products on the rise in Canada. While falling commodity prices and slower economic growth in emerging countries like China stalled exports of oil and other natural resources, overseas sales of Canadian vegetables thrived over the five years to 2018. According to IBISWorld estimates, Vegetable Farming industry exports are expected to increase at an annualized rate of 7.7% during the current period.

Global demographic indicators also support Linamar’s acquisition. An expanding and progressively wealthy global population should propel greater food consumption. A 2017 United Nations (UN) report indicated that the population grew about 1.0 billion over the last 12 years and a 2014 UN report indicated 54.0% of the global population lived in urban areas. Moreover, the UN estimates that by 2030, an estimated 60.0%, or almost one in every three people, are expected to live in cities. Fewer people living on farms will undoubtedly spur the need for labour-saving agricultural machinery and equipment. As a result, the industry will be in a position to experience increasing demand for agricultural machinery over the next several years. Moreover, as technology continues to improve in the industry, the productivity gains from transitioning from labour to machinery will be magnified.

world price of wheat vs soybeans

Potential for Future Acquisitions

Canadian agricultural equipment manufacturers are in a good position to meet this need. Canada’s agricultural machinery is built to withstand extreme temperatures and harsh conditions and is well suited to succeed in other parts of the world.  Canadian-made agricultural machinery, parts and equipment, according to IBISWorld estimates, generates more than $3.6 billion, and is already exported to more than 150 countries annually. Comparatively, the Auto Parts Manufacturing industry has experienced a modest annualized growth of 2.3% over the five years to 2018. Moreover, the Automobile Engine and Parts Manufacturing industry has grown an annualized 5.6% during the period. Importantly, Linamar is a major player in this industry. With the current favourable Canadian economic climate and advantageous world demographic indicators, deals like this may be more common in the future. The sharp decline in global commodity prices between 2014 and 2016 may support a valuable rebound in the Canadian agriculture and agricultural machinery manufacturing industries. In addition, manufacturers of related products (auto parts makers), which have experienced slow growth as of late, may seek to acquire Canadian agricultural businesses as an avenue of potential growth.