BEIJING (Reuters) - The world’s largest makers of tractors and combines are finding a rare opportunity for growth in China despite a sharp slowdown in the world’s No. 2 economy, with big farm machines in demand as the rural labor force shrinks and plot sizes grow. For manufacturers like U.S.-based AGCO (AGCO.N) and Deere & Co (DE.N) and Italy’s CNH Industrial (CNHI.MI), Chinese demand for big machines could help to offset weakness in North America and Europe, where farm incomes are declining with global commodity prices. The trend also contrasts with stalling sales in construction equipment and passenger cars, which have been hit by the slowing Chinese economy. Driving this binge on bigger, more powerful equipment to till larger farms is a combination of labor migration to the cities, land reforms and government subsidies that is spurring consolidation of the country’s vast small landholdings. “People are just getting ready,” said Alexious Lee, head of China industrial research at investment bank CLSA, pointing to the widespread move towards larger farms.
“Whether from the dealers or the financing side, everyone is skewing towards this angle.”
The average farm in China was smaller than a football field in 2012, but still nearly 900,000 “family farms” had an average size of 13.3 hectares (33 acres), according to data from China’s agriculture ministry.
While these family plots were still less than a tenth of the average U.S. farm, further expansions in size are expected as Beijing urges more efficient agriculture and takes steps towards reforming land rights.
Several thousand state and co-op farms of about 3,500 hectares each also need bigger tractors and combines to cultivate and harvest their agribusiness-size plots.
Total sales of 100-129 horsepower (hp) tractors in China increased 38 percent in the first half of 2015 compared with the same period last year, according to AGCO, owner of the Massey Ferguson brand.
And even though overall farm equipment sales for AGCO and others in China were flat through the first half of the year, long-term prospects look brighter.
Asia-Pacific accounted for only 5 percent of AGCO’s $9.7 billion in revenues last year, but the company - which recently opened its fifth factory in China - is targeting $1 billion in sales from the overall region before 2020 and expects its China business to quadruple by then.
CO-OPS AND SUBSIDIES
The slowdown in agricultural sales in the United States and other markets is probably too big for China to counter alone, although CNH International expects “significant acceleration” in the country overall, said Luca Mainardi, head of agriculture construction operations in China for CNH International.
“The main growth is from cooperatives, which have been growing rapidly in number the last five years thanks to Chinese government support,” Mainardi said.
CNH sells tractors of 140-230 hp in China, the high end of the market, and just started producing combines there. Mainardi reckons there could be about 5,000 co-op farms in China, with their number growing by 15-20 percent each year.
Subsidies - which can cover up to 30-40 percent of the cost of a tractor or give incentives for deep ploughing - have also encouraged rapid gains in mechanization in a sector still dominated by the lower-horsepower tractors and other machinery used on smaller farms.
“There are a lot of subsidies, and with a bigger land area you get more efficiency and more income,” said Zhao Shuanzhen, director of the Gaocheng Zengshou Agricultural Machinery Service Cooperative in Hebei province.
Zhao’s cooperative originally only leased equipment and services to farms across China, but since 2011 has also been farming on its own account, and now rents 40 hectares from more than 100 households.
The co-op has more than 200 wheat harvesters - including more than 30 it bought this year - 180 tractors and 24 corn harvesters, almost all of them domestic brands.
“If our land area was bigger, we might consider buying some good (foreign) equipment,” said Zhao.
Foreign players now account for an estimated 80 percent of the high-horsepower market, although they can expect to face greater competition from local counterparts in the future.
Under the national “Made in China 2025” plan, Beijing wants domestic companies to take 30 percent of the 200-plus horsepower market by 2020, and 60 percent by 2025.
Additional reporting by Pete Sweeney in SHANGHAI and the SHANGHAI newsroom; Editing by Tom Hogue