Farmers face spending chop

Beef and sheep-meat farmers will cut their spending as tougher market conditions are expected to slash incomes.

Net incomes for beef and sheep-meat farmers are projected to drop by about 30 per cent this year, says Jeff Grant, chairman of Meat and Wool New Zealand.

"The fall-out you will see in the industry is [that] farmers will reduce their expenditure quite considerably."

However, substantial investment by farmers in areas such as land improvement during the past five years would make this year different from previous downturns, he said.

"There's a bit of a build-up of reserve on the land throughout New Zealand that farmers will use as an opportunity to capitalise on over the next 12 to 18 months."

Total sheepmeat and co-products export earnings for the year to September were up 4.7 per cent to a record $2.7 billion.

But a fall in lamb prices since the season began in October has been somewhat unexpected.

A double whammy of increased supply in Europe and lower post-Christmas demand had caused a dramatic 17 per cent fall in price, of which only 5 per cent could be attributed to the high exchange rate, Grant said.

Europe accounted for 64 per cent of sheepmeat exports by value in the year to September. But sheepmeat supplies have increased within Europe as more stock than expected was sent to market following European Common Agricultural Policy reform.

Ireland alone has sent about 1.5 million ewes to works in the past 18 months, Grant said.

"We're going to see some land use changes in arable, dairy, beef and sheep in Europe and we really don't know what the outcome of that will be yet," Grant said.

Meat and Wool was also concerned about the continuing low returns for wool.

Initiatives to help the wool industry were being developed in discussion with the Government and would be released soon, he said.

The exact nature of these initiatives remains confidential but Grant said marketing and promotion would not solve the sector's problems.

"We will not see large-scale promotion as we did historically," he said. "That was a decision made by farmers in the demise of the Wool Board but we have to recognise that has some cost."

The initiatives are likely to focus on improving supply chain efficiency in meeting consumer demand.

Wool growers have endured low returns despite the price advantage enjoyed by synthetic fibres being at its lowest for two decades.

"That leads me to say there are some significant and probably fundamental changes in use and in the adaptability of a natural product versus synthetics," Grant said.

Beef and veal shipments for the year to September were 386,288 tonnes, down from 420,503 tonnes the year before, with export receipts of $2.25 billion down 7.4 per cent.

This was driven in part by farmers holding off sending cattle to the works and taking advantage of good weather to add more weight to animals, Grant said.

Exports to the key north Asian markets of Japan, Korea and Taiwan earned $735 million, up 12 per cent on the previous year. But earnings from Taiwan were down 8 per cent after the country was briefly re-opened to imports from the United States, which had been banned after an outbreak of bovine spongiform encephalopathy, commonly referred to as mad-cow disease.

Taiwan re-imposed its ban after a second US mad-cow case was confirmed, Grant said, but not before US exporters had dropped their prices by 30 per cent in an attempt to storm the market.

Grant is sceptical about how effective any future heavy price discounting would be in Asian markets.

The industry needs to promote its points of difference, such as being grass-fed rather than grain-fed and health benefits including a higher omega 3 content, he said.

The Meat Promotion Group, which is supported by the commercial sector and Meat and Wool, has agreed to double the marketing expenditure in northern Asian to between $1.8 million and $2 million this year.

Grant said that apart from raising New Zealand's profile to fend off returning competition in Asia, the industry needed to achieve greater security through price stability and understand where the markets were heading in 12 to 18 months.

And although the short-term picture looked like hitting farmers in the pocket, the underlying value of sheep meat and New Zealand's grass-fed beef was "still looking pretty good".

"We're all a bit surprised about the dramatic change in the current climate from where we were in October ... Everybody's just a bit cautious about how long this may go for and what effect it's going to have on future prices."

THE YIELD

* Earnings from meat and wool in the year to September 2005:

* Sheepmeat exports up 4.7 per cent at $2.7 billion.

* Beef and veal exports down 7.4 per cent at $2.25 billion.

* Wool exports down 6.7 per cent at $972 million.

* Meat farmer incomes expected to drop 30 per cent.