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Intensive sheep farms have been squeezed by dairy and are now drifting to beef with wool right out of the money

Intensive sheep farms have been squeezed by dairy and are now drifting to beef with wool right out of the money

This is the third article in a series investigating New Zealand’s pastoral sheep and beef farms. The first one was an overview of New Zealand’s 9200 commercial sheep and beef farms, and how the pastoral-farming area has declined over the last 30 years.  The second focused on the North Island hill and hard-hill country, now comprising approximately 4000 of these 9200 commercial farms. On those hill farms, key issues are land-use competition between pastoralism and production forestry, combined with retirement of the tougher country for carbon farming.

This time my focus is on the 4400 intensive farms spanning both North and South Islands. They are classified by Beef+Lamb as Classes 5-8, with Class 5 being the in the North Island and Classes 6-8 being in the South Island. That leaves 200 high-country and 600 South Island hill-country farms that need their own analysis, but that will have to wait.

These Beef+Lamb categories should not be confused with the New Zealand Land Resource Inventory classifications which also run from 1-8, but with Class 1 being the best and Class 8 suitable only for conservation.

Class 5 North Island finishing farms

These farms are typically small family farms, averaging around 290 hectares, carrying 2700 stock units, and employing about half a labour unit additional to the farmer.  In the last 30 years, the number of these farms has decreased from 3350 to 1045. Where have these farms gone?

The remaining farms have increased in size by about one third but that still leaves about 400,000 ha that has moved to other land uses. Urban development, lifestyle blocks, and some horticulture, including market intensive vegetable production, will all have contributed. Dairy conversions and dairy support blocks will also have contributed, particularly in Hawkes Bay and Wairarapa. But the overall North Island dairy area has not increased greatly in more than 20 years, so dairy cannot be the main reason. Sorting out the details of land-use change on this class of land would require more research.

On these North Island Class 5 sheep and beef farms that remain, there has been a drift towards beef over the last ten years. Sheep stock-units are down from 50% of total livestock units ten years ago to around 40% currently. Cattle stock units have increased over this period from 50% to 60% of total livestock units. For clarification, a livestock unit is based on the feed required by a typical ewe.  

 Wool income has been less than the cost of shearing for the last three years. With beef income now easily exceeding sheep income on these so-called ‘sheep and beef’ farms, they are now better described as ‘beef plus sheep-meat’ farms.

Over the last ten years, there have been fluctuations in net income but no clear trend. However, this is on a nominal basis before adjustment for inflation. Accordingly, an alternative perspective is that these North island intensive farms have been drifting backwards. The estimated profit by Beef+Lamb for 2020/21, from which farmers have to deduct their drawings, is $111,000.

 Over the last ten years, average debt has increased from $450,000 to $700,000, but net worth has increased from $3.7 million to $5.7milion.  Most of the increased net worth has come from increasing land values, with nearly all of this occurring in the first half of the decade. Low interest rates have been a factor in allowing these farmers to keep their head above water on a cash-flow basis

Class 6 Breeding and Finishing Farms

Class 6 farms are spread across the South Island. They have breeding stock and they also finish lambs and cattle. The farms average close to 500 hectares, they employ on average about 0.7   labour units additional to the farmer, and they carry about 4300 livestock units. Lambing percentage is typically 135-140 percent and calving around 85%. Approximately 60% of the livestock-units are sheep, with cattle a little under 40% and deer about 2%.  Sheep numbers have stayed relatively constant over the ten-year period but cattle numbers have increased by around 40%, leading to an overall increase in stocking-rate of about 15%.  Wool income has declined 70% over the last ten years and has been less than shearing expenses in the last two years. These farms have tended to be more profitable than most other types of sheep and beef farm. They have been averaging about $145,000 net income in recent years. Debt averages around $1.3 million, up from 560,000 ten years ago. Net worth is about $6.1 million, up from $4.9 million ten years ago.

Class 7 Intensive Sheep Farms

Class 7 farms are mainly in Southland, South Otago and West Otago. The decline in farm numbers over the last 30 years has been massive, dropping from about 3300 farms down to 1040. The remaining farms have increased in area over this time by about 30%, and now average about 250 hectares effective area. About 350,000 ha of this land-class has shifted to other land-uses over the last 30 years, with dairy conversions being the biggest contributor.

The remaining farms employ on average 0.3 labour units, and on average they run 2500 sheep plus 100 cattle. More than 75% of income comes from sheep, but wool income has been less than shearing expenses for the past two years. Net worth has remained almost static over the last ten years, increasing from $4.6 million to $4.7 million. Debt is up from $600,00 to $750,00. Net income has averaged about $100,000 over the last ten years with no clear trend but tends to be volatile, in part because of reliance on one income source, with this being sheep.

Class 8 Mixed Cropping

Class 8 farms are mainly in Canterbury. Since 1990, the area has declined from 251,0000 ha down to 184,000 ha, with dairying being the biggest cause of land-use change.

Individual remaining farms have increased from about 250 ha in 1990 to 400 ha currently. About 65% of income comes from crop, but animals are still of fundamental importance in maintaining soil fertility.

In the last ten years, there has been a continuing shift from sheep to cattle, with cattle increasing from one third of the livestock units ten years ago to two-thirds now. Most of these cattle are dairy young-stock held throughout the year plus non-lactating dairy cows in winter.

Debt on these Class 8 farms is unchanged over the last ten years at $2.85 million and net worth has increased from $7 million to $9.9 million.  Early in the decade, net income was averaging around $200,000 but in the last three years has averaged $110,000.

The Big Picture on Intensive Sheep and Beef Farming

Across New Zealand, the total land area used for intensive sheep and beef farms has declined from 2.5 million ha in 1990 down to about 1.3 million ha currently. The remaining farms have got bigger.   On these 4400 intensive commercial farms, there has been an ongoing drift towards cattle, particularly in the North Island. This drift is closely linked to the dairy industry. It includes dairy heifers, non-lactating cows, and male dairy progeny that are raised for beef.   On all of these farms, it currently costs more to shear the sheep than what the wool is worth.  The old maxim that survival is about cash, but wealth comes from capital gain, is still true.

Early in this article, I mentioned that I have yet to consider the changes that have been occurring on South Island hill and high country. That will be a markedly contrasting story.


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His previous articles on high-country issues are archived at https://keithwoodford.wordpress.com/category/the-high-country/. You can contact him directly here.

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53 Comments

Very interesting numbers. Just to be clear the beef and lamb “profit” number is before tax, drawings, capital debt repayment and farm reinvestment. This helps explain the decreases going on as once you deduct these parts, even excluding reinvestment, the actual income is almost minimum wage. This shows why succession is so hard - there’s simply no money. I heard a talk by someone on national radio this week, apparently a top person on succession on farms, who said the land had to have a zero value to allow family succession.
I’m not bagging farming at all but unless there is a large increase in actual profit the trend will continue and farms keep being amalgamated or change land use.

Jack L,

I have no connection to farming and find these figures for profitability quite staggering. As you say, they represent gross profit before all these deductions. That to me, simply isn't a proper business model with a very low return on capital and thus, as Keith says, almost entirely dependant on untaxed capital gains.

Yes - if you want to look it as a business they have allowed for interest cost but no management cost. If you assumed say $90,000 for a salary to run a $4 to $6 million dollar asset (thats low in the commercial word today)based upon a $110 to $140k surplus you are left with $20 to $50k to pay tax upon as profit. Then repay some principal, see the debt levels and the bank will want some principal plus do some capital reinvestment. Throw in a drought or 2, floods etc etc. and the result is obvious.
Would you pay $3 to $5 million plus working capital for this business??? with the only profit to come from land capital gains - sadly its as bad as a housing Ponzi scheme relying upon someone to turn up and you get your tax free capital gain (all your profit) in time but live very frugally on the edge for many years.
Succession - you have 2 sisters or brothers and are well educated or trained and now earn $80 to $120k package with 4 weeks annual leave, Do you want to take it over and pay out your siblings??

This is the real issue in rural dryland, hill country farming and no one will be straight up and say its not working - we need to do something. If we carry on the trend will continue and farms will amalgamate or change land use - simply based upon the lack of profit to allow things to function. This isn't about regulations etc as the trend has been happening for year.
I have a family member who is at Lincoln, from a irrigated, flat land farm - he was moaning that all his student mates there are on Government grants and he wasn't - I told him he should very grateful he comes from a very profitable farm. I asked who gets the grants - he thought about it and realised they were all from hill country farms.

"a $4 to $6 million dollar asset"

800 to1200 hectare??

See the areas in article much less than this.

Jack L,

How different are the figures for dairy farms? Is it reasonable to assume that for the less indebted farms, the current milk powder price gives the farmer a decent net income?

Yes, that is very much the case. High milk prices plus low interest rates mean that most dairy farmers are generating considerable cash surpluses. Right now, dairy farming is very profitable. Farmers have big tax bills coming up but are still able to pay down debt. Let there be no doubt, dairy is currently the engine room of the export-led economy.
KeithW

As per Keiths comment they are profitable and many have resources to do succession, adapt to new rules etc etc. Forestry also going very well on returns.

Land banking barely sustained by depleted farm incomes ravaged by rising liability costs caused by falling interest rates?

Over the last ten years, there have been fluctuations in net income but no clear trend. However, this is on a nominal basis before adjustment for inflation. Accordingly, an alternative perspective is that these North island intensive farms have been drifting backwards. The estimated profit by Beef+Lamb for 2020/21, from which farmers have to deduct their drawings, is $111,000.

Over the last ten years, average debt has increased from $450,000 to $700,000, but net worth has increased from $3.7 million to $5.7milion. Most of the increased net worth has come from increasing land values, with nearly all of this occurring in the first half of the decade. Low interest rates have been a factor in allowing these farmers to keep their head above water on a cash-flow basis

I would say there is a clear trend,that the numbers follow a clear strategy to minimise income tax.we should save our tears as most farmers have well honed skills at survival in a constantly changing climate and have learned some entrepeneur skills to earn extra income.

I imagine the Greens wealth tax would have resulted in a Guy Fawkes like party in the capital, if it had been a serious policy? Imagine earning your hard grafted $100 000 and being further taxed on the value of your property, over two million, I think it was?

no, because if there was a wealth tax , they would be claiming the interest paid as an expense.

??. Don't understand your comment? Are you saying the farm borrows money to pay the wealth tax and the interest is then tax deductible, until the equity in the property sinks are below the "wealth" threshold? I doubt many farmers would want to hand their property back to the bank for the privilege of working for minimum wage?

If you have a wealth tax , then the interest paid on a loan must be tax deductible, So they only pay tax on the gain above what they are paying at in interest etc , some have suggested also allowing for inflation. What i am saying is any wealth tax/ capital gains tax would have to be fair , and to be politically acceptable would probably lean towards favouring the propety owner. I think Winston pointed this out, in his opposition to the capital gains tax , that it wouldnt net as much as one would think from first glance., because of this.

Sorry. Still don't understand this relationship between the wealth tax and interest deductibility you are talking about? If you have 2 million worth of assets, every dollar of wealth over that figure attracts a tax. Regardless of whether the asset actually earned income. If the amount of wealth tax owed is above what can be afforded with free cash flow, obviously the balance of tax owing, must be paid though borrowing, digging into other reserves, or disposal of the asset? Of course to establish a value on the net wealth of a taxable entity, liabilities are deducted from equity. Interest deductibility is surely a side issue?

And now the poor old farmer has to turn around a subsidise urban EV's that are of no use at all on a hill country farm.

Aren't farm utes claimed as a business expense?

Yes but still a cash outflow.. the after tax cash flow still over $2k - basically walk into Remuera and hand it over to nearest EV owning knob

I'm no fan of EV owning knobs from Remuera but aren't there flows of money in the opposite direction as well? I.e town to farm. Would be interesting to see who subsidises whom the most...

Wasn't it Remuera tractor drivers that forced the govts hand in trying to wean knobs off their 2 tonne gas guzzlers in the first place? Farmers and tradies collateral damage.

Don't worry we now have a leader who busies herself with who legitimate ute users are - whilst tying to operationalise things. 'But after discussing it, debating it and working it through, it was going to be very difficult to operationalise,” she said.

“A large number of those buyers of those vehicles are not using them for the legitimate use as those who work in the primary sector and the trades.”

Some people thing it is really easy to change the climate back to the little ice but it not - there all sorts of tricky things like legitimate ute users to figure out.
https://www.newshub.co.nz/home/politics/2021/06/prime-minister-jacinda-a...

Not the best wording , but she is correct. Go to the nearest carpark , observe how many of the towbars on utes appear to have been used regularly , if at all . Observe how much wear and tear there is around the tailgate and doors , any working ute will have a few scratches and dings. If you find some of this evidence on more than 20 % of the utes, I will be surprised.

It is sad that you would worry about such things - let alone a PM! I guess once the apple sticker issue was owned it was time to move on to the next priority. People make decisions on, heaven forbid, what is best for them. Have you ever though that people may buy utes so they don't have to use a trailer?!

I'm not worried about it , you keep bringing it up in unrelated articles. Nobodies stopping anyone buying utes , they just pay for the extra Co2 emissions they produce.

You'll find utes are quite common on farms during your ute stalking. Charge farmers for ute CO2 - but don't pay for soil carbon or shelter belt sequestration - hardly seems like cricket? But I guess there is no pleasing the do gooders of this world who have the deluded belief they can change the climate.

Agree. If you're charging farmers for emissions, it is obscene to be nationalising the carbon stored on properties!

Yes , i have a ute i use on the farm . A Actyon , it does 8 litres/100 km, doesnt matter cos its secondhand anyway . The point is this tax is not aimed at farmers, or anyone that actually needs a ute , ( they will legitimately deduct the tax on it anyway ), its aimed at the leisure user and status symbol crowd, who a probably also the ones complaining the most. anyway not the focus of this article, So I'm not sure why its been brought up .

There is very little danger of experiencing the climate of the LIA anytime in the next few thousand years. It's more what can be done to slow planetary warming momentum, as we blow through 2-3-4degs.

Wool, particularly strong wool, will return to favour and when it happens it will one might rush for it. It is a valuable resource and it won't be long before we turn our backs on plastic carpets and overcoats.

I often think all that is needed to bring back wool on the int'l stage, is for NZ to heavily tariff imported synthetic fibers and synthetic fiber valued-added products. Wool fiber products would then get local manufacturing as well as R&D support. Wool has no equal for an abundance of reasons.

I think what will happen is niche users will couple up with individual farmers for reliable product, in fact it is already beginning. When happens it will be an explosion and we need to have a eye out for signs of it. I reckon in a couple of years, maybe even less if the covid thing goes on, as people seek to innovate. There will be people doing things we could never have dreamed of.

And yeah, I think all these years out from Rogernomics many can see that targeted tariffs do have a place.

Exactly.

Yes! Who needs market forces and the wisdom of crowds when you have omni potent, climate changing, winner picking politicans. Is there anything they can't do? Apart from figuring how not to pass the bill on to the grandchildren.

Better than than an effed planet, eh?

the market forces have said wool is worth nothing.

"The *distorted* market forces have said wool is worth nothing"...
The "free market" is a myth

Market forces say it's Ok to fill the biosphere with microplastics.

Planned economies are so much better for the environment - One hundred years of devastation - https://www.interest.co.nz/opinion/110926/brahma-chellaney-says-communis...

Who said anything about communism? The problem with planned economies has been the people running them. Whether this little issue can be surmounted, I'm not sure? But I do know the invisible hand takes zero account of human and biosphere survival.

Not to mention styrofoam and synthetic/glass insulation products. Grrrrr.

All these new builds, shoddy materials, probably will have the shortest lifespan of any time other than that of grass huts, and the styro under all that concrete. Does not bear thinking about when they start getting demolished maybe in another 1/4 century or so

Yes, does not bear thinking about.

Man I hope you are right, I tend to agree, Have thought about transitioning to self shedding, but feel in the 5-10 year transition time good wool will have made a come back and I won't be able to take advantage of it. Be great if some one could make a 20 micron perendale/romney!

return on capital is way out of whack, and means you cant borrow to buy a farm.
lets break it down to 1 ha, and be generous. we can raise 2 bulls per ha per year. we buy a weaner bull at $ 500, and send it to the works a year later for $ 1200. So $ 1000 per ha, a business valuation would put the farm value at $ 10 k per ha.(at best, more likely it would be less expenses).class 5 farms above are 12 to 19 k per ha, and averaging about 1.2 cattle per Ha, so bank manager slams the door on your way out.

certainly a funny way to make a living, but it has always been so. when I first went farming in w.wales my neighbour said "we farm for a bit of fun,now dont go trying to show us up"

It always has been about capital gain, it's just been left behind by the property boom

Exactly - whatever the numbers it doesn't stack up for the vast majority - there are some farmers - the top 20 - 30% who do very well.
Based on most of the comments so far it seems the best advice is to hope, pray and believe wool will come right and solve all the problems. Costs with wool will only go up (shearing) and to make any meaningful impact the price rise would have to be astronomical. The wool volume is now so low its almost a cottage industry on a world scale. As usual everyone avoids the profit issue and blames, markets(customers), plastics, regulations etc etc. This has been trending down for decades. The market will decide in the end and at the moment its clear where its leading.

As far as I am aware total world wool production provides about 15% of the worlds textile requirements so is unlikely to make much difference to other fibers. In other words it is not the saving fiber source, chances are fibers will come from vegetation.

There is a "boots on the ground" reason for wool falling out of favour...quite frankly any garment made out of wool shrinks terribly when washed unless you go to extraordinary lengths like hand-washing in tepid water. I prefer wool jerseys for their superior warmth but I only buy polyester jerseys for both their cheapness and the fact you can just throw them in the washing machine and they don't shrink. I know many others who do the same.
I, like many others I know, prefer a good lamb or hogget roast to any beef cut including steaks.

If you wash woollen garments on a 'wool' or 'handwash' cycle on a modern washing machine they do not shrink. I use them all the time for all wool, possum merino, cashmere etc and have never had a problem.

Farming debt, just like a lot if residential investors. One can only wonder what a universal land tax would do to the value of such investments.

Maybe the answer is spaced planting to just qualify for the carbon credits , yet still have room for pasture .
Good for erosion , emergcemcy feed , and shelter for the stock .
This was linked through my facebook , i have no connection to them , nor experience of their validity.
https://www.agribusinessgroup.com/news/carbon-farming-native-forests-two...