Record prices but flocks shrinking

Farmers are in a bind over flock sizes.

As the farm gate price for lamb hits record levels opinion is divided on whether it's enough to see the declining industry turn a corner.

The national sheep flock is now down to levels not seen since 1950.

Rabobank's latest Agribusiness Review said farm gate lamb prices had strengthened since January, hitting levels more than 50 per cent up on last year.

Rabobank senior analyst Hayley Moynihan said prices would be enough to improve profitability but were probably not enough to encourage more investment.

The smaller flock had pushed up prices, she said.

"Our sheep flock has fallen so much because producers have got out because it's unprofitable, but they're not yet at the point where producers are going to start expanding the flock numbers again.

"I'm not sure that farmers necessarily have the confidence that we'll see the next five years at these prices for example, it's been reasonably short term so far."

According to Statistics New Zealand the national sheep flock was 34.1 million as at June 30, 2008 - a drop of 11 per cent on the previous year and the largest annual fall since numbers peaked at 70.3 million in 1982.

Factors behind the drop in sheep numbers included drought, market conditions, competing land use, exchange rates and rising costs.

"The increase in prices to current levels is really only covering that high cost base that's come through in the last five years," Moynihan said.

The lamb slaughter was tracking 15 per cent below last year and mutton processing was down more than 20 per cent.

"In terms of lamb the contraction in supply has been such that it's likely to support higher prices next season as well," she said. "Particularly given that lamb supply is contracting globally, if we look at Europe, certainly the US, other producing nations they tend to be seeing falls in both their sheep flock and lamb production too."

However, it was harder to predict the three to five year outlook and there were risks in the current economic environment, particularly given that lamb was typically a high price meat, she said.

"Therefore we could see some demand fall out and some volatility if consumers choose a cheaper cut of meat ... but at this point the supply has dropped so much that it's likely to outweigh that consumer reaction."

A market update last week from meat processor and exporter Silver Fern Farms said the UK retail price of lamb had risen 9.8 per cent during the past 12 months, with New Zealand lamb rising by a higher margin of 14.8 per cent.

"Despite the positive news on price there has been some softening in the volume of lamb sales with recent promotions of two major retailers both failing to deliver anticipated turnover," Silver Fern said.

"This could indicate that prices have reached a point of resistance at retail level and could lead to a plateau in pricing."

Meat & Wool New Zealand said farm gate returns for lamb were nearly 60 per cent higher than the same time last year, with a more export friendly currency value and growth in higher value chilled exports.

Meat & Wool expected the national flock to fall to about 33.1 million animals before levelling off.

The average farm gate price for a 19kg lamb was about $105, compared with about $67 last year.

Meat & Wool chairman Mike Petersen said the improved prices could be sustained.

"It's enough to certainly swing it [the industry] around," Petersen said.

"The returns that are back into sheep farming now are starting to halt the decline in sheep and so that would indicate to me that farmers are seeing a business in sheep again."

Meat & Wool expected sheep and beef farm profit before tax to rise to about $45,600 in 2008-09 from its lowest level in 50 years of $16,700 in 2007-08.

However, Federated Farmers Meat & Fibre chairman Bruce Wills said the improved prices were not enough for a sustainable industry.

"The sad reality is total New Zealand sheep numbers are still going backwards and the reason they're going backwards is it's still not profitable enough to run sheep with an average price of around that $90 [for a 17-17.5 kg animal]," Wills said.

UP AND DOWN

* Sheep and mutton exports were worth $3.3 billion in the year ending March.
* National flock of 34.1 million animals is at 1950 levels.
* Farm gate price of lamb is hitting record highs after three years of low prices.