“Correction” predicted for sheep and beef farm profits

17 September 2012

“Correction” predicted for 2012/13 sheep and beef farm profits

Beef + Lamb New Zealand’s (B+LNZ) New Season Outlook is expecting a correction that is likely to see average sheep and beef farm profit settle at around $96,500 for the 2012/13 season.

B+LNZ Economic Service Executive Director Rob Davison says profit before tax rose 30 per cent in 2011/12, which means this season’s predicted 34 per cent drop could be interpreted as a correction, from what was a near record farm profit in the 2011/12 year.

“While disappointing, it’s not entirely unexpected given the global recession,” says Davison.

Looking ahead, he says the exchange rate scenario used for this outlook is for the value of the New Zealand dollar to remain near last year’s level against the US dollar. This was the highest annual average since the NZD was floated in 1985. The NZD is expected to strengthen around 2 per cent against the Euro, while remaining steady against the UK pound.

“These are the main currencies that influence the sheep and beef farm sector, keeping in mind that around 90 per cent of meat and wool production is exported. Under this exchange rate scenario, the average New Zealand sheep and beef farm profit before tax would be around $96,500 for 2012/13. Lower exchange rates would improve returns to farmers just as a higher exchange rate has the opposite impact.

“What is important is where the exchange rate will be from November to June when the majority of production is exported.”

Davison says the lower level of farm profit is largely due to lower prices and revenue from wool and lamb sales. Beef revenue is expected to hold.

“The profit decrease directly reflects head winds from the recessionary trends in Europe and flow-on from the global financial crisis that continues to lower economic activity and confidence around the world.

“On the upside, even though the growth engines of China and India have slowed, they remain a positive influence on the global economy and China is an increasingly important lamb market, now New Zealand’s fourth largest single country market by value.”

Davison predicts sheep revenue overall will fall 16 per cent, dominated by lower export lamb and mutton prices, down 16 and 18 per cent respectively. However, this will be partially offset by the size of the lamb crop, which is expected to be up 870,000 head on last year due to more lambs born per 100 ewes.

Wool revenue is predicted to fall 24 per cent.

Beef cattle revenue remains similar to last year. Higher prime cattle prices, up 2.5 per cent, are offset by cattle weights, which are predicted to ease from last season’s high. However, export beef production is expected to lift, with increased numbers of cull dairy cows this season.

Overall, gross farm revenue falls 11 per cent, while on-farm expenditure drops only 1 per cent, Davison says. “As a result, the fall in gross farm revenue essentially cuts straight into farm profit, with on-farm expenditure largely fixed in the short run.”

At a national level, export receipts from meat and wool products are estimated at $6.1b for 2012/13, 3 per cent lower than last year. A 9 per cent fall in wool and sheep meat exports of $355m is predicted, but this will be partially offset by a $185m (7 per cent) increase in beef product export receipts.

The full outlook – including the farm situation, export volumes and prices – is on the Beef + Lamb New Zealand website at: www.beeflambnz.com/economic-reports

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