Livestock farmers will see inflation-adjusted pre-tax farm profits drop by a fifth this year, down an average $25,800 at $104,400 for the season to the end of June.

The grimmer outlook from Beef+Lamb New Zealand reflects the impact of drought and the outbreak of the covid-19 health crisis, disrupting what was otherwise a record start to the season for livestock farmers and primary exporters.

Chief economist Andrew Burtt said demand from China was "severely curtailed" during the second quarter and he expects the economic toll of the virus in both Europe and the US to also sap demand for red meat exports for the rest of the season.

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Despite the disruption, he said the fundamentals for demand remain solid and he is forecasting export receipts for beef, lamb and mutton of almost $9 billion this season, supported by the strong start and the weak New Zealand dollar.

Beef returns down

Still, under an assumed exchange rate of 61 US cents, gross farm revenue is forecast to decline 3.8 percent to an average $597,600 per farm due to lower returns across beef, sheep and wool.

Beef prices, which reached records during the first half of the season, are now being affected by covid disruptions and cattle revenue is expected to drop 6.4 percent to $151,500 per farm. Beef+Lamb expects beef receipts to contribute about 25 per cent of farmer revenues this season.

Farmgate returns for sheep, which account for almost half of all gross farm revenue, are expected to be down about 4.2 per cent at $293,900 per farm, with fewer prime lambs and sheep sold than during the prior season.

Beef+Lamb also expects wool revenue to be down 4.7 per cent at $36,100 per farm this year, as the fibre remains in decline across almost all classes of fine, medium and coarse wool, offsetting an increase in the average volume sold.

Fuel price impacts

Aggregate sheep and beef farm revenues at the farm gate for the year are forecast to be up 3.4 per cent to $5.9 billion, of which $4.2 billion will be spent on farm inputs, an inflationary increase of 1.8 per cent.

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That translates to an average of $457,100 per farm, with major cost items including fuel, fertiliser and seeds.

Beef+Lamb said that fuel has seen the largest increase for the season, jumping 8.6 per cent and now accounting for 3.1 per cent of total farm expenditure – or about $14,170 on average.

While servicing interest on loans will account for about 11 per cent of overall farm expenditure, this was actually down 5.9 per cent at $52,700 per farm, reflecting lower interest rates, the report noted.

Red meat demand in China

Burtt said a continued shortage of pork in China, as a result of the African swine fever virus, is expected to underpin a recovery of demand for New Zealand sheep and beef product exports, with Chinese pork production expected to be down 40 per cent on pre-swine fever levels.

"During 2019, Chinese consumers were increasingly turning to sheepmeat and beef as alternatives to pork. As economic activity recovers following covid-19 being brought under control, demand for meat is expected to similarly recover."

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He said shifting market access dynamics also have the potential to change the distribution of beef exports this season, with US exports constrained due to the closure of meat processing plants on the back of covid-19.

"This may increase competitive pressure for NZ beef in some markets but has the potential to create opportunities in others."

He noted that a significant reduction in Australian sheepmeat and beef production will also provide some support for demand for New Zealand red meat in key markets during 2020.

"How the situation develops from this point is uncertain given covid-19, however, the NZ livestock production and red meat processing sectors continue to work hard to deliver products that meet customer needs."

- BusinessDesk