Sheep and beef profits increase by 11%

Sheep and beef profits increase by 11%

Mike Petersen, Chairman, Beef+Lamb NZ

Beef and Lamb NZ's mid season update is a stark contrast to the new season price review of their products they forecast in September.

While it would have been produced before the September storms which decimated over a million lambs, the difference in what farmers have been receiving and what they forecast is significant.

The sensitivity of our products to currency fluctuations, which have been one of the main emphasis of the earlier report, appear today to have been insignificant.

A world wide shortage of sheep meats and wool stocks that have been run down were in evidence in the spring, but were not predicted to have the influence they obviously have.

Are farmers served well by Beef and Lambs Economic service in predicting future market trends, so they can plan well for the year ahead?

Sheep and beef farmers are in line for their best profits for five years, but even so returns on their farm values are likely to be under 1 per cent on average. Average sheep and beef farm profits are expected to be up about 11 per cent to $67,600 for the June year 2011, on the back of high lamb, mutton and wool prices and a drop in fixed term bank interest rates, according to Beef+Lamb New Zealand. Mutton prices are at record highs because of a global shortage and wool prices are forecast to be up 40 per cent this year, the best in about 20 years, as buyers scramble for supplies.

In its mid-season update, Beef+Lamb's Economic Service said lamb, mutton, beef and wool prices were all up on last season, though offset by an extremely high New Zealand dollar. But production and profits have also been held back by the spring storms, and in some regions stock numbers have been low after several seasons of drought. Returns on the farm's value were about 0.5 per cent in the past year, so even though this year's forecast would be better, it would only lift returns to about 0.6 per cent, Economic Services director Rob Davison said.

Farm spending was being held back as farmers paid back debt built up in the bad years, he said, especially those farms hit by three years of drought such as on the East Coast of the North Island. The poor returns on capital reflected rising land prices, in part because of a 19 per cent fall in land available for sheep and beef farming in the past 20 years, as cities expanded and more land went into forestry and dairying.

However, Mr Davison said all signs suggested lamb prices would remain strong for some time, because of tight global supplies.The report forecasts lamb to sell for an average $95 a head this year, up 18 per cent on the last June year, assuming an exchange rate of US76c. A global shortage of mutton led to record prices in the December quarter.Mutton was selling for about $90 a head in November, up 70 per cent on the same month last year, though prices have since eased. The Economic Service forecast an average per head price of $70 for the year, much closer to the price of lamb than usual.

Wool returns were expected to boom more than 40 per cent this year, with total exports forecast to hit about $800m this June year. Prices have rocketed up after buyers ran down their inventories to extremely low levels as they tried to cut debt during the recession.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

I need to know if the prices are demand driven, or driven by speculation. Its hard to believe that strong wool prices are up when the worlds housing market looks like s@%t.  If we are getting less than %1 return on these prices, then Im hoping its the first if its the second then we are in it way too deep.

This guy would suggest its speculation driven - thanks to the Fed - "the food bubble".

http://www.zerohedge.com/article/ratigan-and-fleckenstein-explain-feds-role-recent-food-price-ignited-revolutions 

 

 

Of course. It's never ultimate scarcity. Has to be something else. Floods, cyclones, cold snaps, biofuels, they don't matter.

To an economist.

What are world grain reserves down to, Kate? Rice?

This is more like the problem:

http://earlywarn.blogspot.com/2011/01/expensive-potatoes-cheap-french-fr...

When you have treee times too many people on the planet, you cannot escape ultimate scarcities. Some you can adapt to - food is a bit of a problem.

 

 

On the other hand, how many rabbits, hares, possums, deer, thar, chamois, goats go to rot every year in this country? Or vegetables and fruit rotting or simply dumped to hold up prices? How much food could much of the western world free up if they weren't obsessessed with becoming overweight and/or obese? I reckon there's plenty of capacity out there...

 There is an argument that speculation drives prices of freely tradable commodities like corn wheat and soya. But at some point the product has to be delivered this creates a limit to the speculation, we need the spec cash to create enough liquidity in the market.

These prices have risen between 60 and 110% in the last 12 months.  But so have dairy products and there is not the level of speculation in dairy.  Only end users can bid on global dairy trade and there is'nt really a futures market.

 It only takes a 1% rise or fall in supply to create a shortage or glut, a consequence of the low food reserves the world now has.  There has been drought in Russia and South America as well as adverse weather here and in Australia, this has created a huge shortage of grain for human and animal consumption.

http://www.bloggingstocks.com/2011/02/06/governments-stockpile-food/

http://www.reuters.com/article/2011/02/04/bangladesh-tender-idINSGE71304...

Governments are stockpiling food as supply going forward is very uncertain.

This link shows that 2010/11 forecast is'nt going to help.

http://www.igc.int/downloads/gmrsummary/gmrsumme.pdf

I would say real demand is driving prices and this is probably worse than if speculation was.  Regulation can stop speculators. It's much harder to increase supply.

 

well put.

I think it's all about the margins, as you say with your 1%.

Can anyone plan well for the year ahead. Farming is a weather dependent,exchange dependent and demand dependent business. There are many factors out of our control.

If it wasn't for the shortage of sheep product in Australia we wouldn't be getting such high prices for old ewes. And the same goes for more ability to sell 2ths for slaughter

Aj I think it is a mixture of both demand driven and speculation driven, though there are some good initiatives with wool at present due to the hard work of some people passionate about wool industry.The trick will be to supply markets with what they want and to sell good quality, consistant product all year round. 1984-85 surplus per hct before tax $70.60  2006-2007$16.40 relying on memory

One of the issues with farming is that historically post war was a boom time with UK the only market really,then we entered the subsidy period where farmers didn't have to perform hugely to maintain income.Subsidies off in the 80's and there I believe a mistake was made there should have been Capital gains tax introduced and that would have put the focus into farming for profitability not capital gains.

Now that bank lending come to a virtual halt and profitability been abysmal, the focus is starting to turn to the issues of productivity and returns, but we have been caught with our pants down and there is a desperate scrabble to repair a severely damaged industry, and there will be a lot of catch up to do. And we can't rely on one offs Like Aust to plug the gap .Just my opinion.

Jared makes a good point. Most of NZs ag commodity exports are traded directly to the end user whom has to secure their margin via a genuine wholesale/retail price. In the case of sheepmeats and beef there is ample evidence of both NZ and international supply being historically low ie USA cattle herd lowest since 1958 and Aussie ewe flock lowest in 105 years.Coupled with the emergence of Asian demand on top of steady western consumption means welcome price rises for long suffering farmers.

I for one dont rely on the economic service predictions. They are a piece in the puzzle but with easy online access to NZ/overseas market information, its quite possible to draw your own conclusions and have them updated on a daily not 6 monthly basis. As for the above article how can they estimate cull ewes at $70? Anyone with access to any market report knows that even a skinny old girl is $90 to north of $140 for the big old dears. How can they be so out of touch?

Question.

Are farmers served well by Beef and Lamb economic service.

Answer.

Probably not.

Therefore whats the point. SS, your last paragraph says it all. Information is readily at your disposal if your interested in looking and if your not, you probably won't take much notice of Beef and Lambs figures either. Why are they so out of touch?. Is it because they don't want to raise farmer expectation and/or is it because MIA members sit around the board table fiddling in a farmer funded organisation.

Remember the last M&W referendum. Wool levies voted out and if my memory serves me correctly farmers nearly voted out meat levies by a margin of 54% in favour of a continuation on meat. Hardly a resounding mandate.