May 26, 2020

 

New Zealand livestock farm profits plummets by 20%

 

 

New Zealand's livestock farmers will face inflation-adjusted pre-tax farm profits drop by a fifth this year, lower by NZD25,800 at NZD104,400 for the season ending June, reported NZ Herald.

 

The grimmer outlook from Beef+Lamb New Zealand reflects the impact of drought and the outbreak of the COVID-19 health crisis, disrupting what was otherwise a record start to the season for livestock farmers and primary exporters.

 

Chief economist Andrew Burtt said demand from China was "severely curtailed" during the second quarter and he expects the economic toll of the virus in both Europe and the US to also sap demand for red meat exports for the rest of the season.

 

Despite the disruption, he said the fundamentals for demand remain solid and he is forecasting export receipts for beef, lamb and mutton of almost NZD9 billion this season, supported by the strong start and the weak New Zealand dollar.

 

Still, under an assumed exchange rate of US$0.61, gross farm revenue is forecast to decline 3.8% to an average NZD597,600 per farm due to lower returns across beef, sheep and wool.

 

Beef prices, which reached records during the first half of the season, are now being affected by COVID-19 disruptions and cattle revenue is expected to drop 6.4% to NZD151,500 per farm. Beef+Lamb expects beef receipts to contribute about 25% of farmer revenues this season.

 

Farmgate returns for sheep, which account for almost half of all gross farm revenue, are expected to be down about 4.2% at NZD293,900 per farm, with fewer prime lambs and sheep sold than during the prior season.

 

Beef+Lamb also expects wool revenue to be down 4.7% at NZD36,100 per farm this year, as the fibre remains in decline across almost all classes of fine, medium and coarse wool, offsetting an increase in the average volume sold.

 

Aggregate sheep and beef farm revenues at the farm gate for the year are forecast to be up 3.4% to NZD5.9 billion, of which NZD4.2 billion will be spent on farm inputs, an inflationary increase of 1.8%.

 

That translates to an average of NZD457,100 per farm, with major cost items including fuel, fertiliser and seeds.

 

Beef+Lamb said that fuel has seen the largest increase for the season, jumping 8.6% and now accounting for 3.1% of total farm expenditure—or about NZD14,170 on average.

 

While servicing interest on loans will account for about 11% of overall farm expenditure, this was actually down 5.9% at NZD52,700 per farm, reflecting lower interest rates, the report noted.

 

Burtt said a continued shortage of pork in China, as a result of the African swine fever virus, is expected to underpin a recovery of demand for New Zealand sheep and beef product exports, with Chinese pork production expected to be down 40% on pre-swine fever levels.

 

"During 2019, Chinese consumers were increasingly turning to sheepmeat and beef as alternatives to pork. As economic activity recovers following COVID-19 being brought under control, demand for meat is expected to similarly recover."

 

He said shifting market access dynamics also have the potential to change the distribution of beef exports this season, with US exports constrained due to the closure of meat processing plants on the back of COVID-19.

 

"This may increase competitive pressure for NZ beef in some markets but has the potential to create opportunities in others."

 

He noted that a significant reduction in Australian sheepmeat and beef production will also provide some support for demand for New Zealand red meat in key markets during 2020.

 

"How the situation develops from this point is uncertain given COVID-19, however, the NZ livestock production and red meat processing sectors continue to work hard to deliver products that meet customer needs."