Sheep and Beef Outlook an Exchange Rate Gamble

31 July 2007

Sheep and Beef Outlook an Exchange Rate Gamble

Meat & Wool New Zealand's 2007-08 Outlook offers little comfort for sheep and beef farmers if the current exchange rates continue for the next 12 months.

"While we have seen some easing in the currency in recent days, a continuation of the exchange rate, centered around USD 78-80¢ would see gross farm revenue decrease 9% and farm profit before tax plunge 49% to $23,400 for the average commercial sheep and beef farm", according to Mike Petersen Chairman of Meat & Wool New Zealand. This would be the lowest inflation adjusted sheep and beef farm profit in 50 years.

"This high exchange rate as it stands now is significant as it more than wipes out any expected increases in off shore prices for wool, lamb and beef. In contrast dairy international prices have more than doubled and these increases far exceed any exchange rate effect."

Mr Petersen commented "that the export sector is a major driver of the New Zealand Economy and within this the meat, wool and dairy sectors export 85% or more of their production. For this reason these sectors are very dependent on overseas markets and the prevailing exchange rate.

Even with the benefit of the high international prices, dairy will still only make up around 25% of New Zealand export receipts. The remaining 75% of the export sector is under extreme pressure from the high exchange rate and is now receiving lower prices than last year in New Zealand dollar terms. Continued, this will lead to retrenchment for 75% of the export sector and this will ripple through the whole economy".

For the meat and wool sector, farm operating expenditure is already cut back and will be reduced further leading to lower activity in the servicing sector. After essential on-farm expenditure is met, there is a rock bottom net farm profit ($23,400 per farm) that is spent on taxation, debt reduction if possible but more likely increased overdraft debt, and then on the farm family expenses. This all adds up to lower regional demand and activity.

Lamb prices at the farm gate for the farming year just finished averaged $53.00 per head and were unacceptably low to farmers compared with previous years. A continuation of the early July 2007 exchange rates for the whole of the 2007‑08 farming year would see lamb prices fall to $50.00 per head (‑6%), beef prices fall (-12.5%) and strong wool prices fall (-11%). These decreases would occur despite the outlook for offshore prices to increase due to tighter international supplies, particularly for lamb.

If the exchange rate centered on USD 70¢ instead of USD 80¢ for the 2007-08 season then the lamb price would increase from last year's low of $53.00 to $61.00 per head (+15%). Beef prices would lift an estimated 20% and sheep and beef farm profit for the "average" farm would lift 155% from the extreme low of $23,400 to $59,800. The only difference in this scenario would be the lower New Zealand exchange rate.

The high exchange rate not only impacts on sheep and beef farms it impacts adversely on the whole export sector and the economy.

ENDS

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