With farm profitability forecast to drop sharply this year, a focus on costs and what drives them is top of mind for most farmers. Angus Kebbell summarises the key challenges

Challenges lie ahead for the red meat industry in the upcoming year. While there's an expectation of a modest recovery in demand compared to the previous year, prices are projected to remain relatively soft, particularly for lamb and mutton. The pace of China's economic rebound remains uncertain, and other key markets still grapple with economic fragility.

Projections from B+L indicate a significant decrease of -31% in Farm Profit Before Tax for the 2023-24 period, with an average of $88,600 per farm. When adjusting for inflation, this represents the lowest level of farm profitability in a decade and a half. This season, farmers will face considerable pressure due to decreased profits and cashflow, following a -32% decline in 2022-23, primarily driven by diminishing prices at the farm gate for lamb and sheep.

Australia has maintained its competitive edge in both beef and sheep meat exports throughout 2022-23, and this trend is expected to continue into 2023-24. This is attributed to several years of favourable weather conditions that have supported efforts to rebuild herds and the opening up of access to the Chinese market, which has reduced demand for New Zealand's exports.

The El Niño weather phenomenon further complicates the outlook for 2023-24, with farmers along the east coast potentially facing dry conditions that could affect the timing of sales and increase costs, depending on the severity of the situation.

Furthermore, there is significant downside risk to the industry's outlook. If Australia's reduction in its national sheep flock and cattle herd leads to increased global supply due to the El Niño impact on Australian farming, it may exacerbate these challenges. Additionally, the presence of high meat inventories and reduced demand in China could potentially take several months to resolve, adding an additional layer of risk to the industry's prospects.

Fluctuations in exchange rates have a significant impact on New Zealand's sheep meat and beef export earnings. New Zealand exports over 90% of its meat production, making it highly susceptible to currency movements. The trajectory of the New Zealand Dollar (NZD) is multifaceted, with it strengthening against the US Dollar (USD) but weakening against European currencies in comparison to the previous year. It is forecasted that the USD/NZD rate will increase by +3.7% for the 2023-24 season, reaching an average of 0.64 USD/NZD.

Predicting exchange rates is a complex task, even in stable global markets. The uncertainties stemming from the conflict in Ukraine, diverse international monetary policies, and the economic consequences of global inflation have contributed to a volatile environment for foreign exchange rate forecasts.

The projected gross farm revenue for the 2023-24 farming year is expected to average $654,400 per farm, representing a -3.0% decrease from the previous year. Within this revenue, income from sheep farming is forecasted to decline by -4.7%, with an average of $311,700 per farm. This decrease in sheep meat prices was particularly evident during the winter and early spring, which falls within the farm production and financial season from 1 July to 30 June.

Cattle revenue is also anticipated to decrease by -3.3%, averaging $181,500 per farm for the 2023-24 period. Together, revenue from sheep and cattle accounts for a significant portion of the total gross farm revenue, making up +48% and +27%, respectively.

In contrast, income from cash crops is expected to experience a modest +0.5 increase in the 2023-24 season, reaching a total of $61,100. This cash crop income accounts for 9% of the overall gross farm revenue.

It's worth noting that the gross farm revenue is allocated to various expenditures, including expenses for operating the farm business, such as wages, shearing contractors, maintenance, and agricultural services, followed by tax payments and debt servicing and of course living expenses.

Total Farm Expenditure is anticipated to see a moderate increase of +3.5%, amounting to an average of $565,800 per farm for the 2023-24 period. This upward trend in farm input costs is consistent across most categories.

This +3.5% rise in total farm expenditure follows a cumulative increase in farm spending since 2020-21, totalling over +16%. Notably, expenditures related to interest and rent have surged by approximately 37% since 2020-21, corresponding to the ascent of interest rates.

Fertilizer prices, on the other hand, are expected to experience a slight decrease from 2022-23, and there's a projected increase in the application of fertilizer volumes for this season, in contrast to reductions in the previous year. Expenditure on fertilizers, lime, and seeds is estimated to decline by -3.1%, averaging $93,900 per farm.

Interest-related expenses are anticipated to climb by +20% on average, reaching $79,000 per farm, constituting roughly 14% of the total farm expenditure.

The cost of shearing is set to increase by +2.9%, reaching an average of $28,900 per farm, which translates to approximately $5.88 per sheep shorn. In most farm categories, the cost of shearing surpasses wool revenue. However, for South Island high country farms, revenue from fine wools plays a significant role in the total gross farm income, although meat production revenue exceeds wool earnings. Farm Profit Before Tax is forecast to decrease for 2023-24 by -31% to an average $88,600 per farm.

With a change in Government that promises to deliver policies that are workable and supportive of farmers in this country, and let them get on and grow food, this could not be more relevant right now as we face significant challenges, both in the marketplace and what could be a warm, dry and challenging summer inside the farmgate.

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Angus Kebbell is the Producer at Tailwind Media. You can contact him here.