Prices for lambs plummet

After shielding the meat industry from the worst effects of the high dollar for two years, lamb prices have begun a dramatic fall from record highs.

A price drop of about 20 per cent compared with a year ago is sending shock waves through the highly competitive sector, squeezing margins and slashing farmer incomes.

The rate at which prices have fallen has confounded expectations and left many farmers wondering how they will cope with incomes that could drop by more than $30,000 a year.

Last season's forecasts had been based on the assumption that the dollar would have dropped significantly by now.

In October, big South Island meat processor Alliance told farmer shareholders to expect prices to drop by about $3 a lamb.

"That was based on a $6 decline in market returns but with a $3 gain on the currency," said chief executive Grant Cuff.

Both sides of that equation have deteriorated.

"The market is worse. Instead of $6 down, it's more like $9-$10 down, and instead of being a $3 positive on the currency, it's looking like a cost of $6 a head. So that's $15 a head worse than last year at this stage."

Cuff said those prices were averages that included meat, pelts, wool and offal. Wool prices have been at historic lows for some time.

He said it was still early in the season and there was some hope that the dollar could fall further.

"But we've been waiting for two years now. You can't run your business on hope."

Keith Cooper, chief operating officer with New Zealand's biggest meat company, PPCS, said the drop in the prices to farmers appeared dramatic because two years of high currency were being corrected in the early part of this season. Currency costs had not been fully passed on to farmers last season.

"In addition, global markets are depressed, decreasing consumer demand for premium products."

The situation was compounded for lamb, where the quantity of heavy lambs processed earlier this season has resulted in an excess supply of some cuts in key markets.

Pelt prices had also dropped 30 per cent in the past 12 months, as US retailers pushed for lower prices for the coarser-grade leather garments.

Cooper said he was also expecting beef prices to fall "aggressively" in the coming year.

On Thursday, Affco chief executive Tony Egan warned shareholders at the company's annual meeting to brace themselves for a tough year.

None of the "big three" companies - PPCS, Affco and Alliance - were prepared to comment on what the falling prices would do to profits.

An overcapacity of processing plants is making competition for stock intense and, for the past few years, the companies have had to cut their own margins to ensure supplier loyalty.

But South Island sheep farmer David Rose said that this season the lamb price paid to farmers had fallen far further than anyone expected.

Rose, the Southland president of Federated Farmers, estimates that many sheep farmers are facing an income drop of more than $30,000.

He said plenty of farmers would make a loss this year.

"They'll cut their spending, and that will flow through the rest of the economy," he said. "The big cities will feel it eventually. They aren't immune."