New Zealand: High inflation and reduced livestock prices could see farm profits fall
The Beef + Lamb New Zealand (B+LNZ) Mid-Season Update 2022-23 says that farm profit before tax is estimated at $146,300, a 31 percent decrease from 2021-22 and below the average for the past five years.
Farm profit before tax is equal to gross farm revenue minus total farm expenditure. Farm profit is used to meet taxation payments, personal drawings, debt repayments, and the purchase of capital items for the farm business such as farm machinery.
"Inflationary pressure is causing on-farm costs to increase sharply, eroding the benefit of what are still historically pretty good farm-gate returns" says B+LNZ Chief Economist Andrew Burtt.
The forecast uptick in global sheepmeat and beef trade is supported by generally solid fundamentals in key markets, with demand projected to recover, while global supply levels remain tight.
This follows a stark drop in demand for sheepmeat at the start of the season before China relaxed its Zero-COVID policy.
"As 85 percent of New Zealand’s mutton exports are to China, this impacted export receipts, which were one-third lower compared to the same period last season," says Burtt.
However, a recent case of bovine spongiform encephalopathy (BSE) in Brazil has added fuel to a tightening global beef market.
As falling farm-gate prices lead to a decrease in revenue, farmers have sought to reduce costs by deferring repairs and maintenance and reducing fertiliser use, but inflation and the increasing price of farm inputs are outweighing cost cutting initiatives.
"Overall expenditure has increased to an average $531,500 per farm in 2022-23", he says.
"Fertiliser, lime, and seeds expenditure is forecast to increase by 6 per cent to average $102,100 per farm, following a 15 per cent increase last season.
"This is the largest area of expenditure for sheep and beef farms at around 19 per cent of farm expenditure in 2022-23".
Interest rate rises and increased overdraft borrowing is forecast to increase interest expenditure 12.5 per cent above last season - averaging $54,000 per farm. As farmers refinance and extend overdrafts while receiving lower farmgate prices, managing cashflow will be a challenge this season.
To add to the financial pressures facing farmers, the full impact of Cyclones Hale and Gabrielle is not yet known.
"Weather events like Cyclones Hale and Gabrielle and flooding during January means farmers will be rebuilding vital infrastructure, this will significantly lift repairs and maintenance expenditure and much of this spending will be on extended overdrafts," says Burtt.
"Slips and silt destroyed farm infrastructure and stock losses are not fully accounted for after Cyclone Gabrielle. The economic impact on the supply chain for agriculture will be felt for years to come".
Meanwhile, conditions are extremely dry in Otago and Southland placing a different pressure on farmers.
B+LNZ CEO Sam McIvor says the significant financial pressures farmers are facing are another reason the Government should put brakes on its raft of environment policy changes.
"Farmers are already feeling overwhelmed with the environment-related policy changes, on top of reduced revenues and high on-farm inflation. For some, they’re also now faced with having to rebuild their businesses after severe weather events like the cyclones," says McIvor.
“Almost one-third of New Zealand’s sheep and half of New Zealand’s beef cattle are in the North Island regions that were subject to a state of emergency following the cyclones.
"Another third of New Zealand’s sheep and one-in-seven (14 percent) of New Zealand’s beef cattle are in Otago and Southland.
"This means two-thirds of New Zealand’s sheep flock and two-thirds of New Zealand’s beef cattle are in areas either suffering from the effects of the cyclones or suffering very dry conditions.
"When farmers are impacted in this way, it has a knock-on effect to the wider economy including businesses that service farms like vets, trucking companies, shearers and many more.
"Simply put, the Prime Minister needs put a stop to the tsunami of legislation and regulations that is constraining the food producing export earning sector.
"This is the time to get behind the sector, so farmers can navigate this financially challenging time, plan ahead, and ensure their businesses remain sustainable in every sense of the word".
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