Low lamb prices hurt sheep and beef profits

Beef + Lamb New Zealand (B+LNZ) has released its mid-season update.

Six months ago, the organisation's new season outlook predicted the average farm profit before tax would be around $109,900 for 2015-16. However, B+LNZ economic service chief economist Andrew Burtt says those predictions were based on better lamb pricing conditions.

"The average farm profit before tax has been adjusted downwards by 25%, to $82,400 per farm, mainly reflecting a drop in sheep revenue. The effect of weak lamb prices was accentuated by an early lamb processing season, so that a large percentage of lamb sales were into a weakening frozen export market."

An increase in wool revenue is a small positive. The range of increase per kilogram greasy wool is forecast to be from 15% for medium wool (698 cents), to 5.2% for fine (963 cents) and strong (428 cents) wools.

Overall, sheep revenue drops 10%, reflecting a decrease in the lamb price and number of lambs sold. High inventories in China and more domestic lamb being available in the UK (resulting from a lift in UK lamb production and less UK exports to Europe) depressed New Zealand frozen lamb export returns this season.

Burtt says the average farm profit before tax is 21% less than the 2014-15 season. "It will impact South Island farmers more severely, due to the higher ratio of sheep to cattle farmed in the south and a second year of drought conditions in Marlborough and North Canterbury."

In the South Island, the average Marlborough-Canterbury farm profit is expected to fall 51%, while Otago/Southland profits are forecast to be 16% less than for 2014-15. Compared with 2013-14, farm profit for these two regions will have reduced by 67% and 40%, respectively.

The average North Island farm profit is projected to decrease 12%.

The lamb price paid to farmers, on average across the 2015-16 season, is forecast to average 525 cents per kilogram carcase weight – or $95 per head, based on an average 18kg carcase.

The season's latest forecast farm-gate pricing (the first three months being actual figures) is shown in the table below. February 2016's farm-gate pricing of around 480 cents per kilogram carcase weight is consistent with achieving the annual forecast of 525 cents per kilogram.

The country's overall export lamb production to September 30, 2016 is expected to be down 7.8%, from 21.2 million to 19.6 million head.

Cattle revenue is forecast to rise 2.1% to $120,400 per farm for 2015-16, on the back of cattle prices remaining relatively high (despite a slight decrease on last season's pricing) and increased stock values. Farm-gate prices are expected to ease by 2.6% – to 499 cents per kilogram carcase weight for steers and heifers and 390 cents for cows – after gaining more than 30% in the previous season. Heavier average carcase weights should partly offset the slight decline in per kilogram pricing.

This season's export cattle production is estimated to decrease 7.3% to 605,000 tonnes carcase weight. This follows record high production, particularly for cows, in 2014-15, driven by high international beef prices and low dairy prices.

After adjusting for inflation, using 2004-05 as the base year, the All Classes Sheep and Beef farm profit before tax per farm for 2015-16 is forecast to be $64,500 which is at the 2000's decade average. The impact of one to two years of adverse climatic conditions in parts of the country and early season lamb production sold into the weakening frozen lamb market have impacted upon the 2015-16 season and the 2010's decade average to date.

The full report is available on the B+LNZ website at: www.beeflambnz.com/economic-reports