Strong beef prices underpin Sheep and Beef sector

2006-07 Mid Season Update

Strong beef prices underpin Sheep and Beef sector

The Meat & Wool New Zealand Economic Service has just completed its Mid Season Update for the Sheep and Beef sector.

The outlook for 2006-07 is for a 3.9 per cent lift in gross farm revenue to $4.07 billion at the farm gate. $3.22 billion or 79% of these receipts are spent on farm operating expenditure that range from shearing to local authority rates. The remaining $0.85 billion (21%) is farm profit before tax which is spent on mortgage repayments, taxation, capital equipment replacement and then the farm family living expenses.

At the per farm level, farm profit before tax is forecast to increase 20.9 per cent to $62,500. Last season’s farm profit before tax at $50,000 was the lowest since 1998-99 (7 years) in inflation adjusted terms. See graph below. Last year farm profit was low as farm expenditure was committed before lamb prices fell. This year lamb prices fell sharply in late December but expenditure has been tightly controlled and this accounts for some of the forecast increase in profit. Improved beef prices (+7.5%) and increased beef production coupled with a small increase (+1.8%) in the season average price of lamb contribute to this result.

The weaker NZ dollar against the UK and Euro currencies compared with last year and strong world commodity prices especially for beef in 2006-07 along with tightly controlled on-farm expenditure is expected to underpin a recovery back towards 2003-04 farm profit levels.

Exchange Rate Impact

As 80 per cent or more of meat and wool production is exported each year the exchange rate has a major impact on prices received at the farm gate.

If the season “average” exchange rate decreases 5 per cent from those forecast then gross farm revenue is estimated to increase $22,600 (+7.6%) per farm. However, the imported component of farm inputs would cost more increasing farm expenditure by $1,600 per farm.

Exchange rates used in the annual price forecasts for 2006-07 were US 68.0 cents (+4.3%); UK 35.0 pence (-3.4%) and 0.51 Euros (-3.5%) to the NZ $.

Farm Gate Prices

Wool: The forecast season average auction wool price for 2006-07 is for an increase of 2.2 per cent.

The outlook for 2006-07 is for steady demand for NZ Crossbred wool from overseas buyers despite strong competition from alternative fibres.

Total wool production in 2006-07 is forecast to decrease slightly (-0.9%) on the previous year with a slight increase in sheep numbers largely offsetting a decrease in per head production.

Lamb: The current forecast for the 2006-07 all grades lamb is to average $57.00 per head for the season. This is down 7.6 per cent from the November outlook price of $61.35.

In November 2006 the outlook was for a weakening NZ dollar plus good demand in offshore markets underwriting the all grades lamb price expectation of $61.35. The revised 2006-07 forecast includes an export lamb price per tonne similar to the previous year (-0.2%) which reflects a combination of more favourable Euro and UK currencies than last year offsetting to some extent in-market price decreases in this region. In other markets the stronger NZ dollar relative to the US dollar than last year and recent added competitive pressure from Australia acts to lower the price in NZ dollar terms.

The forecast 2006-07 export lamb slaughter is estimated at 24.7 million, which is similar to last year (-0.4%).

Beef: The NZ beef price for 2006-07 reflects the expectation of a strong US lean manufacturing price and the North Asia markets remaining strong. The US beef market accounts for around 52 per cent of beef exports and has a major influence on NZ farm gate prices.

The two factors mentioned above underpin the forecast 7.5 per cent increase in the M Bull farm gate price on last year.

Export cattle slaughter for 2006-07 is forecast to increase 12.1 per cent to 2.23 million from last season’s low. This increase reflects an expected higher production of cull dairy cows that were retained to maintain and build the herd size and an increase in the bull slaughter from last season’s low.

Forecasting Process:

Meat & Wool New Zealand’s Sheep and Beef Farm Survey provides the base for the forecasts in this Mid-Season Update. This ensures the forecast is firmly linked to the actual farm situation.

M&WNZ’s region managers conduct an annual survey of production, product prices, income and expenditure of randomly selected commercial sheep and beef farms that are representative of the industry.

The survey provides a statistically robust base for forecasting, which uses complex models of income and production in the sector. Forecasting involves gathering of a wide range of on- and off farm economic, financial/exchange rate and qualitative data and combining it with the knowledge of M&WNZ’s region managers who are experienced at evaluating conditions for the farm types in the regions they are forecasting.

The outlook is based on the best information available at this time.

ENDS

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