Sheep and beef farm profits to improve as industry stabilises

Some farmers have been motivated to increase their number of beef cattle.

As the 2017-18 meat export season begins, Beef + Lamb New Zealand's New Season Outlook 2017-18 report forecasts beef and lamb prices to remain similar to the previous season despite an expected weakening of the New Zealand dollar.

The report estimates farm profit before tax to increase 6.6 per cent to $84,600 for 2017-18 on average for New Zealand sheep and beef Farms.

"This outlook sets the scene for steady meat prices and production in 2017-18. However, strong improvements are expected in revenue from deer and velvet, as production increases, and from wool, which is coming off low prices," B+LNZ chief economist Andrew Burtt says.

Earnings before interest, tax, rent and manager's salary (EBITRm) per farm, which provides a benchmark for viewing farms on a comparable base, is forecast to increase by 3.1 per cent to $158,800.

"A slight drop in the national sheep flock was driven by a drop in breeding ewes but this was tempered by a lift in the number of hoggets, particularly on the East Coast of the North Island."

A rise in the number of beef cattle (+2.8 per cent) was largely driven by weaner cattle being carried over into the 2017-18 farming year in response to good feed conditions and firm prices, which were due to tighter availability and strong store cattle prices in 2016-17.

"As beef cattle prices have continued at comfortable levels and production conditions have improved, some farmers have been motivated to increase the number of beef cattle they have because cattle are less labour-intensive than sheep."

Burtt says much of the outlook depends on the value of the New Zealand dollar, which is expected to ease as major trading economies strengthen in 2017-18. The New Zealand dollar strengthened in 2016-17, to average 0.71 cents against the US dollar, up 3 cents on the previous season.

"The US dollar is significant for New Zealand's export-focused sheep and beef industry because 70 per cent of meat export volume is sold in USD-denominated transactions."

Total farm expenditure is forecast to rise marginally (+0.5 per cent) this season. Though fertiliser prices are expected to remain steady, a lift in spending on fertiliser is expected as farmers continue to focus on improving their soils' productive capacity. The increase is expected to outweigh a reduction in expenditure on interest, and repairs and maintenance.

Much of the 6.6 per cent increase in the average farm profit before tax on sheep and beef farms results from revenue of deer and velvet (+10 per cent), wool (+10 per cent) and cash crops (+4.8 per cent). Sheep and beef revenue are expected to remain similar as small increases in production and easing exchange rates counter softening export prices.

Burtt says that while there were disruptions to the international beef market in 2016-17, demand is expected to remain reasonable this year, driven by China. Continuing tight sheepmeat supplies in Australia and New Zealand, particularly mutton, are expected to support prices exchange rates the prime uncertainty.

Export lamb production is forecast to increase marginally (+0.5per cent) in 2017-18.
While exports to the EU, including the UK, dropped in 2016 17, the EU accounted for 36 per cent of exports and remained greater than China. However, China remained the largest single country market for New Zealand lamb, accounting for 33 per cent of volume.

New Zealand beef production is expected to be down slightly ( 0.9per cent) on last season as the average carcase weight is forecast to be lower.

In 2016-17, the share of New Zealand beef exports to the US decreased to 48 per cent but increased slightly to China, which is the second largest market.