Tougher Season for Sheep and Beef

“Sheep and Beef Farm businesses face a tougher 12 months for the season to 30 June 2004 than in the last 3 seasons. Dominant in the outlook is the expected full year effect of a stronger New Zealand dollar eroding export prices and profitability. The autumn drought in the lower North Island, northern South Island, and parts of inland Canterbury and Otago will also result in lower production in 2003-04”, according to Rob Davison, Executive Director of Meat and Wool Innovation Economic Service as he commented on their ‘New Season Outlook’ publication about to be released.

The outlook is for gross revenue from sheep and beef farms to decline by $330 million at the farm gate to $4.1 billion in 2003-04. This follows a $480 million decline for the farming year that just ended on 30 June 2003.

For the season just ended the strengthening exchange rate reduced receipts by $710 million with an offset of higher prices leading to the $480 million decline noted. For the forecast year ahead, the exchange rate reduces receipts $345 million with some offset of price increases. Key exchange rates used in the forecast were US 59 cents, Sterling 36 pence and Euro 0.50. It should be noted that these exchange rates are close to the average for the NZ dollar since it was floated in 1985. On this basis, the exchange rate “cost” identified above could be seen as the exchange rate “benefit” enjoyed in recent seasons.

Last spring produced a record lamb crop in terms of breeding ewe performance with large numbers of multiple lambs born. The outlook for the coming spring is for lower lamb production with the expectation of fewer multiple lambs born particularly in regions that were subject to the dry autumn - namely the lower North Island, northern South Island and inland Canterbury to Otago. The current outlook is for a 4.4 per cent drop in lambs tailed (-1.6 million) leading to reduced supplies of lamb for export. Beef cattle production is expected to decrease 3.5 per cent with some offset from increased cull cattle from the expanded dairy herd (+4.4%).

Of concern is the expectation that with low beef prices the retention of dairy-beef calves will be down significantly on last year from 520,000 to 390,000 head (-25%). This reduction will not affect beef production until late in the 2004-05 season and in 2005-06.

US beef prices in May and June this year were at a low and down 22 per cent on 12 months earlier. In NZ dollar terms these prices were down 37 per cent, the difference being the stronger New Zealand dollar. US domestic beef supplies are expected to reduce as they retain cattle to rebuild their herds leading to a recovery of the US beef price during the 2003-04 season. Given these factors, the 2003-04 outlook for NZ beef prices is for a 9 per cent decrease on a season average basis compared with 2002-03. This equates to a 23 cents per kilogram season average decrease or $65.00 per head.

Lamb meat prospects in offshore markets remain positive while demand for lambskins and other co-products remain stable. However, higher exchange rates reduce expected lamb prices by 6.5 per cent on the previous season to $59.00 per head. Most wool sold falls into the crossbred wool category where prices are expected to average $3.46 per kilogram greasy at the farm gate which is down 5.0 per cent on 2002-03 largely due to the exchange rate appreciation.

“Tying all of the previous factors together, the outlook for 2003-04 is for sheep and beef farm profit before tax to fall 17 per cent to $75,100 per farm. This will be the second successive year of lower profits measured against the peak of 2001-02. This outlook is for the “average” commercial sheep and beef farm that carries 3,000 sheep, 235 beef cattle and 40 deer which total 3,950 stock units”, says Rob Davison.
While the stronger exchange rate and less favourable seasonal conditions have combined to reduce sheep and beef farm revenue, farm and animal productivity is well ahead of the early 1990s from applied technology and improved management. No one would want to revert to the productivity levels of the past.

2002-03 Season Review

For the season just ended export lamb weights held at a high level (-0.7%) relative to last season despite the dry conditions in many parts of the country and lamb production was 5.5 per cent ahead of the previous year due to the excellent lamb crop in the spring of 2002. Export lamb prices were down (-11%) on the previous year average to an estimated $63.10 per head. Cattle prices reflected weakness in the US market and the rising exchange rate with prices falling $340 per head (-29%) for bull beef and by a similar percentage for prime beef. In contrast, wool prices were up on the previous year. Crossbred wool prices were up 5.9 per cent while fine wool prices were up 33.0 per cent.

These generally lower prices offset increased production levels for 2002-03, resulting in sheep and beef farm profit before tax falling 22 per cent to $90,800 per farm from the previous year’s peak.

Export Receipts

Meat and wool export receipts for the season ended 30 June 2003 declined 5.1 per cent to $5.63 billion. While wool prices were up, wool export volumes were down so that wool receipts were little different (-0.6%) from the previous year. Lamb export receipts for meat and co-products were down 2.1 per cent to $2.40 billion while beef export receipts were down 9.8 per cent to $2.1 billion.
“The outlook for 2003-04 is for meat and wool export receipts to decline a further 8.2 per cent to $5.2 billion with the reduction largely due to the stronger exchange rate. Despite the exchange rate effect this represents continued good levels of performance from the sheep and beef sector”, said Rob Davison

The full ‘New Season Outlook’ is available from MWI Economic Service (phone 04 471 6020) at a cost of $225.

Regional Comments

Northland Waikato Bay of Plenty
Hamilton Office Phone/fax 07 839 0286 (Boyd Weir/Ian Jamieson)

• This region has 13 per cent of the country’s sheep flock, 35 per cent of the beef herd and 52 per cent of the dairy herd.

• Beef production dominates on sheep and beef farms and generates 45 per cent of sheep and beef farm gross revenue in the region. This is the highest dependency on beef cattle revenue of any region. In addition dairy cattle grazed on sheep and beef farms account for a further 4 per cent of sheep and beef farm revenue in the region.

• For the season just ended at 30 June 2003, prime lamb weights in the region were up 2.0 per cent on the previous season to a new record of 17.19 kg. In contrast, cattle weights were down (-2.7%) reflecting increased numbers of cows in the slaughter.

• The outlook for 2003-04 sees Gross Farm Revenue decrease 9 per cent on the year just ended. Cattle revenue for the region declines an estimated 11 per cent while sheep revenue declines 8 per cent. Wool revenue also declines due to lower prices. In response, on-farm expenditure is reduced by 6 per cent. However, expenditure on fertiliser (-9%) and maintenance (-15%) show larger declines. Fertiliser usage is down 7.5 per cent on the previous year’s level but remains above the level of the 1990s.

• Farm Profit Before Tax falls 14 per cent to $53,300 per farm from the previous year’s moderate profit as a result of farm expenditure falling less (-6%) than gross farm revenue (-9%). In inflation adjusted terms, this leaves Farm Profit before Tax below the level of the last three years, but above most years in the 1990s.

• Sheep and Beef Farms average 3,180 stock units in the region.

East Coast North Island
(East Cape to Cape Palliser)
Napier Office Phone/fax 06 835 4629 (Doug Syme/John Every)

• This region has 22 per cent of the country’s sheep flock, 26 per cent of the beef herd and 5 per cent of the dairy herd.

• Sheep production dominates on sheep and beef farms and generates 66 per cent of sheep and beef farm gross revenue in the region. Beef cattle generate 30 per cent of revenue while deer, cash crops and “other” account for the remaining 4 per cent of revenue. Dairy grazing contributes less than 1 per cent to sheep and beef farm revenue in this region.

• For the season just ended 30 June 2003, slaughter weights of all animal types were down on the previous season (cattle -2.9%; lambs -1.6%; mutton -1.6%), reflecting increased cow numbers in the slaughter and dry conditions in the lower half of the North Island.

• The outlook for 2003-04 sees Gross Farm Revenue fall 11 per cent on the year just ended mostly through lower prices. Wool revenue declines 4 per cent while sheep and cattle revenue both decline 12 per cent. On-farm expenditure falls 6 per cent with fertiliser expenditure down 9 per cent and maintenance down 20 per cent. Despite the reduction, fertiliser usage remains the fourth highest on record.

• Farm Profit before Tax falls 24 per cent from the previous year’s level to $79,600 per farm. In inflation-adjusted terms, this leaves profit for the region lower than the previous four years but higher than all other years since 1984-85.

• Sheep and Beef Farms average 4,820 stock units in the region.

Taranaki-Manawatu-Wellington
Feilding Office Phone/fax 06 323 4857 (Rex Williams)

• This region has 10 per cent of the country’s sheep flock, 12 per cent of the beef herd and 18 per cent of the dairy herd.

• Sheep production dominates on sheep and beef farms and generates 70 per cent of sheep and beef farm gross revenue in the region. Beef cattle generate 22 per cent of revenue while grazing of dairy cattle on sheep and beef farms contribute a further 2 per cent of revenue. Deer, cash crops and “other” account for the remaining 6 per cent of revenue in this region.

• The season just ended 30 June 2003 has seen average weights for all classes of stock ease back from the high levels of the previous two seasons. Lamb weights were down 1.1 per cent, sheep down 6.0 per cent, and beef down 0.7 per cent.

• The outlook for 2003-04 sees Gross Farm Revenue fall 11 per cent, through a combination of lower prices and lower production volumes. All major income sources decline from the 2002-03 season level. On-farm expenditure is reduced by 6 per cent in response to the lower revenue, with fertiliser (-15%) and maintenance (-16%) being cut sharply. However, fertiliser usage remains at a high level with tonnages per farm at their fifth-highest recorded level.

• The combination of revenue down 11 per cent and expenditure down 6 per cent reduces Farm Profit before Tax by 21 per cent to $84,000 per farm in 2003-04. In inflation-adjusted terms, this is the fourth-highest farm profit for the region since 1979-80.

• Sheep and Beef Farms average 4,590 stock units in the region.

Marlborough-Canterbury
Christchurch Office Phone/fax 03 366 9031 (Bevan Whitty/Gary Walton)

• This region has 27 per cent of the country’s sheep flock, 17 per cent of the beef herd and 14 per cent of the dairy herd.

• Sheep production dominates on sheep and beef farms and generates 61 per cent of sheep and beef farm gross revenue in the region. Beef cattle generate 11 per cent of revenue while grazing of dairy cattle on sheep and beef farms contributes 1 per cent of revenue. Cash crops (21%) are a significant source of revenue in this region. Deer and “other” sources account for the remaining 6 per cent of revenue.

• The season just ended 30 June 2003 has set another new record for prime lamb average weights (+1.1% to 17.08 kg) while mutton (+5.0%) and beef (+0.5%) are both up on the previous season but remain below record levels.

• Gross Farm Revenue for 2003-04 is estimated to ease (-5%) on the previous season. This is markedly less than the revenue reductions in North Island regions reflecting the lower dependence on beef cattle for revenue in Marlborough-Canterbury, and an increased contribution from cash crop (+11%).

• On-farm expenditure remains similar (-0.8%) to the previous season, as quantities of productive inputs are maintained. Reflecting this, fertiliser usage is up slightly (+0.5%) from the 2002-03 season level, and is at its third-highest recorded level.

• Farm Profit before Tax for 2002-03 is estimated to fall 19 per cent in the Marlborough-Canterbury region to $57,300 per farm. In inflation-adjusted terms, this is lower than the last three years, but is higher than all other years since 1989-90.

• Sheep and Beef Farms average 3,440 stock units in the region.

Otago-Southland
Dunedin Office Phone/fax 03 489 9173 (Richard Farquhar)

• This region has 28 per cent of the country’s sheep flock, 10 per cent of the beef herd and 10 per cent of the dairy herd.

• Sheep production dominates on sheep and beef farms and generates 85 per cent of sheep and beef farm gross revenue in the region, the highest for any region. Beef cattle generate 7 per cent of revenue while cash crops deer and “other” account for the remaining 8 per cent of revenue.

• The season just ended 30 June 2003 has seen a new record weight for lamb (+1.2% to 16.70 kg), but a lower weight for cattle (-1.6%). Mutton weights remain similar (+0.7%) to the previous season.

• For 2003-04, Gross Farm Revenue is estimated to decline by 6 per cent on the previous year as a result of lower prices. All major income sources decline from the 2002-03 season level.

• On-farm expenditure eases 2 per cent with most expenditure items showing little change. Fertiliser (-6%) and maintenance (-3%) were the main items to decrease. Despite this, fertiliser usage remains high at its fourth highest level.

• Farm Profit before Tax falls 13 per cent in 2003-04 from the combination of 6 per cent lower revenue with only a 2 per cent reduction in expenditure. In inflation-adjusted terms, this leaves farm profit at its fourth-highest level since 1979-80.

• Sheep and Beef Farms average 4,210 stock units in the region.

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For more information, contact Meat and Wool Innovation - Economic Service:

Rob Davison Executive Director 04 471 6034
Brian Speirs Chief Economist 04 471 6035
E-mail: rob.davison@economicservice.co.nz
brian.speirs@economicservice.co.nz