Bleak outlook for sheep

Last season was a tough one for sheep farmers and this one also looks bleak:

Beef + Lamb New Zealand’s New Season Outlook shows another challenging season for sheep and beef farmers with farm profit before tax expected to decrease by 7.4% to an average of $45,200 per farm.

While revenue is forecast to increase slightly by 1.1%, this is offset by a projected 1.8% rise in farm expenditure. 

High costs, particularly interest payments, continue to impact profit margins, with profitability remaining at levels similar to those seen in the 1980s and ’90s. 

In the mid to late 1980s we were among the many farmers who would have been bankrupt had we been forced to sell.

Raging inflation, high input costs and interest rates that reached 26% on seasonal finance combined with plummeting prices for land and stock meant the value of what we owed was greater than the value of what we owned.

Some farmers were forced out but there was safety in numbers. Banks and stock firms realised that forcing large numbers of farm sales would only depress land values further, and let most of us farm our way out of the mess.

One anecdote from that time concerns a farmer who made an appointment with his bank manager, turned up with the deeds to the farm and said, “You can have everything if you want it, or you can give me time to farm my way back into profit.”

The bank manager gave him time and he more than repaid the confidence shown in his ability.

While the rate of on-farm inflation has slowed, total farm expenditure remains stubbornly high for 2024-25, driven by expected increased costs on average for farmers from interest payments. 

While interest rates have started to fall it will take time for significant relief to be felt by many farmers. . . 

Farm finance always seems to lag behind interest rate cuts.

The current lift in farmgate prices in New Zealand is being driven by a lack of domestic supply, exacerbated by the drought, rather than an increase in global prices.

Farmgate prices and store markets could be volatile this year due to lumpy supply as farmers look to rebuild from the drought and volumes are down anyway.

The lamb price is projected to be $130 per head, up just 1.1% from last season but still 8.2% below the five-year average. Mutton prices are expected to remain steady at $60 per head, which is 46% below the five-year average.

Steep increases in costs make the drop in price worse.

There are some positives. The all-beef price is forecast to be $5.35/kg, 4.3% above last season and 4.8% above the five-year average, reflecting strong demand in the United States, where the cattle herd is at its lowest level in over 70 years.

European and North American markets are also expected to remain solid for lamb.

There has also been a significant decrease in lamb processing in Australia in the past few weeks.

If this trend continues, that coupled with less expected supply from New Zealand, the European Union and United Kingdom, could see global lamb prices lift higher than currently forecast.

As sheep revenue represents about 42% of average farm revenue, what happens with these prices is key to the speed of a recovery in farm profitability.

Hard times for farmers has a wider impact. Lower incomes mean less to spend with those who service and supply us and they also result in less export income.

Export volumes for NZ red meat are expected to be lower in the coming season, with lamb down around 7%, mutton down 7%, and beef down 3%.

This is due to a significant decrease in sheep and cattle numbers driven by drought this year.  Lamb production is also expected to be down significantly due to the fall in ewe numbers and a lower lambing percentage because of the drought.

The outlook says the state of the global economy is mixed. Most economies are still in recovery mode, while others, particularly China, remain weak.

The challenge of reducing inflation is expected to be mostly “solved” in New Zealand’s key markets for the outlook period, barring any major event. There are also ongoing shipping issues with costs spiking to a new peak and potential risks in trade policies.

Farm returns are cyclical. What goes down, sooner or later, goes back up and most farmers will ride out the lows. But some are mining their equity and those at or near retirement will be facing some hard decisions.