New Zealand: Sheep and beef farm profit margins expected to fall
"It’s going to be another tough year for farmers", says B+LNZ’s chief economist Andrew Burtt.
"Farm-gate prices are expected to be similar to last season but increasing costs, driven by inflation and high interest rates, will continue to squeeze farm profitability.
"We’re forecasting farm profitability to fall by 31 per cent for the 2023–24 year, which follows a decline of 32 per cent in 2022–23 and means profits for farmers have more than halved in two years. This is a 15-year low, when you take inflation into account.
"The global outlook for the red meat sector remains fragile".
While demand is expected to recover slightly from last year, prices are expected to remain soft compared to the highs of two years ago, especially for lamb and mutton.
The pace of China’s economic recovery is uncertain, and the economies of other key markets remain relatively weak. Fellow red meat exporter Australia is also expected to be highly competitive in New Zealand’s key markets such as China.
"There are further short-term downside risks on these forecasts, should China not recover as quickly as forecast, and if Australia suffers a strong drought its red meat exports would be higher than expected in New Zealand’s key markets", says Burtt.
"New Zealand exports over 90 per cent of its meat production, so global economic conditions significantly influence farm-gate prices.
"While the sector faces a challenging year, this is balanced by strong longer-term fundamentals, and we expect an improvement as the economies of our key markets recover. The global population and demand for protein is expected to continue to grow and therefore the fundamentals for the sector remain sound.
"The sector has gone through turbulent times before, along with our processing and exporting companies, and while farmers are resilient, these are very challenging times".
Farm profit before tax for 2023–24 is forecast to average $88,600 per farm - however, after adjusting for inflation, this is equivalent to $54,800 per farm in 2004–05 terms, a 15-year low and 25 per cent lower than in 2004–05.
"Some farmers are likely to not make a profit this coming season", says Burtt.
"We expect profitability in all regions and farm classes will decline with sheep-dominant areas most affected, as lamb prices are likely to be flat for the coming season while beef prices are relatively good.
"This lower profitability comes at a time when many farmers are continuing to rebuild farms in the wake of last summer’s cyclones and preparing for potential drought conditions in the coming months as a result of El Niño, which will impact the timing of sales for example.
"The B+LNZ forecast does not take into account the potential increased costs facing farmers from the government’s regulatory reform agenda.
"In light of these challenges, it’s more important than ever that any regulations and rules are practical, fit for purpose and not adding unnecessary costs.
"Money management is going to be critical this year.
"Firstly, making sure every farm input is driving productivity and profitability and secondly, working proactively with bankers and accountants to best manage any debt and tax obligations".
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