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Sheep-farming retreat will continue despite excellent meat prices, with carbon farming the mega-force

Sheep-farming retreat will continue despite excellent meat prices, with carbon farming the mega-force

In recent months, I have written four articles focusing on the sheep and beef industries across New Zealand. My main focus has been to identify the current situation and to document how the situation varies for different classes of land across the country. Here I return to the overall big question: what is the future of the sheep industry?

There are two parts to that question. The first is the market opportunities. The second is about competing land-uses.

Market opportunities

Apart from some dry hill and high-country farms lying east of the South Island Main Divide, wool is largely irrelevant. Fine wooled merinos are big contributors on low rainfall South Island farms and I expect that to continue. But elsewhere, wool no longer makes a worthwhile contribution to farm income. We can always live in hope, but that is not the basis on which to make land-use decisions.

I remain an optimist in regard to sheep meats, but there is one big caveat. Without China, we would be in big trouble. If we cannot manage the China relationship, then it will be a disaster for sheep farmers.

According to MPI in their latest ‘State of Primary Industries’ (SOPI) publication, 43% of export lamb income and 80% of mutton earnings in the 12 months ending March 2021 came from China. Quite simply, there are no alternative markets that could take that product.

Neither Europe nor the UK want more sheep-meat products from New Zealand. They will make sure that any free-trade agreements are not actually free when it comes to sheep meats. North American lamb markets have been an industry project for the last 50 years and with considerable success, but further increases will only come slowly.

The biggest potential new markets are in the Middle East with Iran the greatest potential prize. However, the Americans control the global financial system and none of our financial institutions wish to tangle with the Americans in relation to Iran. The financial risks of getting the money from Tehran to New Zealand, without the Americans grabbing it, are too great. So, as long as the Americans say ‘don’t go there’, we snap to attention.

Returning to China, there is huge natural alignment between what we produce and what China wants. Ironically, some of the big users are Chinese Muslim communities including ethnic minorities in the north and west.  It is easy to forget that China has something more than 25 million Muslims and they don’t eat pork.

But China does not have to purchase our sheep meats. It will hurt us a lot more than it will hurt them should they close down the trade. 

 If we upset the Chinese sufficiently, then they will treat us like they are treating our Australian cousins across the Ditch. I heard former Australian Prime Minister Kevin Rudd, who himself speaks Mandarin and in an earlier life was a diplomat based in China, say recently that you can disagree with China but you do need to show respect in how you do it. I thought that summed up the situation rather nicely.

Accordingly, my optimism relies on the belief that we have some wise heads in our Government when it comes to China. But it is a tricky game.

To those who say that we should never have developed the Chinese market for sheep meats in the first place, I say that actually we didn’t. Rather, the Chinese came to us. For the last 10 to 12 years they have offered the best prices, particularly for mutton and the lamb forequarters.  

I recall one meat company CEO telling me some ten years ago that his Board put a limit on how much he could sell to China because of the risks of a concentrated market.  A few months later he had to tell the Board that unless they raised the limit, he could not be price-competitive in purchasing livestock and the company would have to cease operating.

Forestry is going to be the big competing land-use

The price of carbon is rising and the carbon value of timber is closing in on $50 per tonne. Two years ago it was less than $25. Just a few weeks ago it was around $37. Yes, the world has changed.

Carbon markets are artificial markets controlled by Governments. There lies the risk. However, it would be politically untenable for the Government to allow that market to crash. The big advantage of growing trees for carbon is that you don’t have to wait for the trees to grow and be harvested. The cash flows each year.

I expect we will see farmers increasingly planting pine forests on the steeper North Island hills. It’s simple economics.  In the South Island, the plantings will be less but they will still occur. However, I would have considerable reservations if this should also occur on the better country.

For those who think that lumber will always earn big dollars, I say: ‘Be wary!’  Right now, the majority of our logs end up in China where the main use is formwork allowing concrete structures to be built. It won’t always be that way. 

Accordingly, it is likely that new forestry is going to be more for carbon sequestration than lumber. That means it won’t be earning foreign exchange.  That is a worry.

Most urban New Zealanders have yet to figure out that their lifestyles are dependent on the foreign exchange earned by primary industries. MPI has calculated that in this last year 83% of our merchandise export earnings came from primary industries. The sheep and beef industries alone earn about $10 billion of export income from meat plus by-products such as skins, offal and wool.

That 83% figure is remarkable. The source is MPI. They also say in their SOPI publication that it has been increasing each year for the last nine years. The agricultural sun does not want to set.

Sheep versus beef

This is another of those imponderables. However, it will be the market that will be the determining factor. The calculations are much easier and decisions are more revocable than for forestry. I expect most farmers will work it out OK as to what is best for their own situation. As with most other primary industry products, China is also our biggest beef destination. But the dominance is less than for sheep.

The big leverage for beef is the supply of unused bobby calves from the dairy industry.   There are somewhere around two million calves each year that get killed at a few days of age. That is not going to be allowed to continue for much longer.  It is all about getting the breeding sorted out for a dual-purpose industry.

Returning to the big picture

The tide is running against the sheep industry. This is ironic given that sheep meat prices are excellent. But I have not given up on sheep. Particularly in the South Island, sheep will often still be the most logical choice. But overall, I see nothing that gives confidence that there will be any turnaround in sheep numbers.

That all leaves me a little sad.  I think New Zealand still needs a vibrant sheep industry as one key part of our export-led economy. It can be an amazing meat. New Zealand could be the world-leading marketer of a niche product.


*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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33 Comments

Concerning trade with Iran. You've just cited that market as being a potential boon for sheep farmers, with the primary force stopping us trading with them being the US sanctions. My question is how come unilateral sanctions by the US hindering our development into an export market are glossed over, but when China is doing something domestically that we don't like then we gripe, even though we are beholden to their trade. Furthermore it is characterized as 'brave' to stand up to China, but questioning the legitimacy of US sanctions on Iran as they pertain to OUR trade is not considered to be worthy of courage, bravery or anything mentionworthy. I'm astonished by the self defeating hypocrisy of hammering the only trade partner that keeps sheep farmers in business in this country, all the while being hamstrung to diversify into other markets by constraining sanctions initiated by the US. This is a big problem. I feel uncomfortable about it. We should be finding creative ways of trading with who we want, diversifying away from China and getting out from under dependence on both China and US in the process.

Keith,
I know my question is slightly left field from the focus of your article.
When carbon was $22-$25 tonne buyers up here were paying $6,000 to $9,000 effective plantable ha.
With carbon now trading $47 to $50 tonne what impact if any will this have on land prices?
Asking because land values obviously affect the ability of beef and sheep farmers to compete.

Even at higher carbon prices higher land values depress your return. Once prices get above the $9k mark you have to have a timber return as well or else it doesn't add up. In fact as land price increases the % of return attributed to carbon decreases and the timber return makes up a larger portion of the return. I know the Carbon farming people and they are starting to really struggle to be able to buy land at these prices and make it stack up for plant and leave. The timber story is what you believe the future holds - some are very bullish, some not but that's a personal investment decision everyone has to make - your outlook on that will determine the amount you are prepared to pay - just like Sheep - does it have a good future or not?

Wilco,
Yes, prices will increase with current carbon prices.
That is the short answer.
I need to do some figuring before giving a longer answer.
KeithW

"Most urban New Zealanders have yet to figure out that their lifestyles are dependent on the foreign exchange earned by primary industries"

Exactly right
Ultimately every (country) has to grow/mine/steal resources to fund a standard of living ...

So how high you set living standard expectations depends on how far you push the degradation of your resource base (or someone elses) to do so ...

Townies cant make the link and the Greens arent aware there is one

The greens point out that organic and "green" product commands a higher price, therefore we are better off complying with carbon emissions etc, so it's hard to see how anyone can say they are unaware .

Talk is cheap for chardonnay-sipping clueless "green" townies.

"Right now, the majority of our logs end up in China where the main use is formwork allowing concrete structures to be built"
I wonder what that means in terms of the carbon impact of those trees...? Should the carbon credits be discounted somehow if they go on to enable an activity that is carbon intensive?
(I'm still noy entirely sure how the carbon credit system works here)

False economies,
The carbon credits are discounted for harvested timber.
That is why much more can be claimed for permanent forests than harvested forests.
For production-based forests you can only claim the benefits for the first 17 years, because thereafter the average carbon that is stored will only be that amount.
Once harvested, it is assumed that the logs rapidly release their carbon.
Keith W

Thanks for the reply Keith. If I can be cheeky and ask a follow up...what would happen (to carbon credits etc) if something like mountain pine bark beetle got in and decimated our forests? (Or for that matter something like a massive fire, flood or cyclone)

False economies,
I am not an expert on this but my understanding is that if a forest is destroyed by some natural event then under the ETS the owner has four years to replant. Credits then resume when the forest is at the same level of biomass as prior to that event. Similarly, if a forest is severely damaged then the credits cease until the forest returns to its previous state. I know that this was what the Govt planned to do but I have not seen the final legislation to confirm that this is the current reality.
Keith

Legislation is passed. Regs come in 1 January 2023. Details on these coming soon but look very practical.

There is a lot of country in NZ that is almost, or is uneconomic to farm. All it will take is an increase of fertilizer price and it is all over. Not to mention every time there is a high rainfall event and a few more million tons of top soil disappears. What a lot fail to realize is NZ has very little stable agricultural land. Think about how much tractor country there is. From what I can understand we can not even grow enough cereal crops to meet our bread demand. To say to the hill country farmer that they should not plant trees is to admit you do not understand the problems facing many farmers in the hills.

Agree the fact is a lot of hill country is unprofitable. You can make a living, just, but it’s hard. The farmers I see who have planted trees for carbon and timber are very very profitable now. The number grow every month who see the opportunity and are getting in. They certainly weren’t driving down the road last Friday!!! It’s not all or nothing and is the opportunity of a lifetime for landowners if they can get their heads around it.

"farmers I see who have planted trees for carbon and timber are very very profitable now."

FOR NOW

Carbon farming is a one off enrichment of a single generation to allow for continued burning of fossil fuels. This is why many farmers oppose it, it does nothing for future generations. It does nothing to reduce fossil fuel green house gas emissions. Pinus radiata plantations add nothing to a landscapes biodiversity.

The end use of our pine plantations currently is for boxing (formwork) to hold concrete (a big CO2 emitter) in China (a human rights abuser)!

The fact that we in New Zealand facilitate all these transactions with products that we supply make us inherently responsible as well.

We should stop trying to ignore this....

Not sure if your reply is aimwd at me...i never said we shouldn't plant trees. Quite the opposite, we sgould be planting them anywhere that's suitable including lots of places in urban areas which are just left for grass to be mowed and poisoned

Nothing aimed at anyone. Its native and exotic planting. Water issues solved. Lifes easier, farm side more profitable. I'm focused on helping people on the land and don't care about ideology.

'Carbon farming' is no such thing, just the death rattle of a dying industry less than 150yrs old and the final indignity to a wilderness lost to profit over all else. Soon to be been and gone like typewriters and film cameras. They cleared it, how about they restore it? I have no confidence that the collective wisdom of those involved is sufficient to enact a solution beyond grotty pine simply for the last drop of blood that can be wrung from it while the opportunity persists. When the credits stop, what then? Just suckle taxpayer teat forever?

I’ve just been sitting in a pub listening to someone whose small block mixed stand of timber has been eaten by the Black Death and is lying on the ground.
Lotto Tickets would be preferable..

Don't be too hasty, there is the beginning of a return to uses for strong wools. It would be a shame that there will be even less of it now.

Before WW2 USA consumption of sheep meat was around 5-7%, based on the stats of the day. Now it is less than 2%, but then consider the different populations. If the USA could lift to 3% NZ would be hardpressed to satisfy the market. USA lamb is large, fatty and bony, meaning individual cuts are over big and expensive for a family budget. NZ lamb cuts are smaller, leaner and tenderer and as unit cheaper. There is though a disincentive with the grass fed odour of NZ lamb. All of those challenges existed similarly in Germany too up until the late 1970s when good marketing of good product saw that market rise in terms of tonnage within the then EEC, to second behind the UK. There remains still huge potential in the USA & Ca nada.

I agree that there is ongoing potential. But it has taken a great deal of work to get the US and Canadian markets to where they are today. There have been some very competent people working away at that for the last 30 years. For a while we did run into some headwinds in the US when Bill Clinton put on new tariffs in the late 1990s, but the WTO ruled they had to be removed. (The tariff's were actually Bill's response to an urgent need to shore-up support from some Mid-West senators at a time when he was under a lot of scrutiny in relation to a certain dalliance with Ms Lewinsky.)
Here is a quote by me from 2013 about NZ's prices for lamb sold in Canada relative to other meats.
"I then started by showing some supermarket slides I took in Canada a couple of years back. I showed some New Zealand lamb in consumer-ready packs and selling for Canadian $17.60 per kg. I then showed local Canadian beef at $12.40 per kg and Canadian pork at $6.37 per kg. The message I wanted to get across is that someone in the industry (in this case the NZ Lamb Company, which is a consortium of most of the big players within the NZ industry), must be doing something right to have lamb positioned in this way relative to other meats."
That article containing that quote was posted here at Interest.co.nz way back in 2013, and looking back, I see it was the first of more than 200 articles I have written at this site It actually surprised me when I went looking for it to see that I have been writing at interest.co.nz for so long!
https://www.interest.co.nz/rural-news/64074/keith-woodford-says-meat-ind...
KeithW

Clinton’s intervention saw those funds generated ladled back to the American producers. All that did was to allow them to produce more of a type of product from which the market had already well and truly turned its back.A very good example of how intervention with subsidies, ignores realities, creates fruitless distortions, and are basically self defeating. It is unfortunate that the nature of US lamb, hefty sized cuts, fatty, coarse texture, ( you would be forgiven for mistaking a lamb from Iowa for a NZ ML mutton carcass) has created something of longstanding stigma, reaching back to that WW2 era and before, that both types of NZ lamb has to push against. The gradual transition from frozen to chilled volume has provided a good vehicle for this though.

Grass fed odour???
Oh, yum

It is a real issue. Just ask the Japanese.
KeithW

Also ram lambs and crypt orchids are a problem.

Canopy cover only needs to be 30% to qualify for carbon credits, so sheep or beef farming could continue on well spaced farm forestry. Would require more fencing or guards intially, but probably beneficial on most land anyway, to combat pests.

The common sense way to look at this is to integrate forestry in to the farm business. This option is open to all farmers who want to stay on the land. There is no compulsion to sell to forest companies. There are many benefits to adding income diversity.

I agree that this is the way for many farmers to go.
Keith W

100% agree. The inability of some to take opportunity is breathtaking. Stopping people sell their land or change landuse to forests reaks of Soviet Russia. Its the landowners choice in a market economy. Unless we dramatically improve profit on a lot of hill country there will be a lot more desperate people. No fault of gobmvernment, regulation etc. Its what the market wants, will pay and can you produce this profitably. The market will sort this out in the end.

I think many are wary of anything that requires more paperwork , or gives anyone an opportunity to check on what they are doing . I know semi retired farmers who gave it up because they didn't want to be bothered with the Nait paperwork. I also know "greenies"with land , who would benefit from carbon credits , but are wary of "the system"
Somehow the Government needs to convince these types that it won't turn into a giant hammer held over their heads, without been so lax that false credits are claimed. .

100% agree. The process to get credits is very hard and detailed. To be honest its beyond the capacity of most land owners and even is hard for those who do it full time!! This is a major flaw. Changes are coming in but there are around 3 people in Wellington who work in a room with no windows who need to go and be replaced with a want to help people instead of if in doubt kick it out attitude and zero communication skills.

Another point for consideration is that pastoral farming is the most benign food production system there is in terms of environmental impact. The beef and lamb GHG calculater has our farm at -2tonne/ha C because of trees already on the farm. Worldwide there is more carbon in soil than trees and atmosphere combined. The deepest carbon rich soils all formed under grassland not forests. (The bugger of this whole dichotomy is that forests end up pitted against grassland. Both are necessary. Diversity is gold standard. A University of California, Davis study found grasslands to be a more reliable carbon sink than forests in drier climates, largely due to the fire risk. And there is a significant difference between carbon sequestration and biodiversity restoration potential of native forests vs monoculture forestry. More complex than trees vs grass).
There is a developing understanding of how to manage grasslands for soil Carbon sequestration. If carbon is to be part of our future incomes then any proven soil sequestration will ultimately recieve credits too. This already happens overseas. Wilmot cattle company in Australia received $Au 500,000 for 40,000 tonnes of sequestered soil carbon achieved through grazing management. There is debate over protocols, but we have instigated "Ecological Outcome Verification" with the Savory Institute which has established our 2020 soil C levels to 300mm soil depth - ideal would be 1m but the tools for measuring C at this depth are rare in NZ - in 2025 the measurements will be retaken.