Meat and Wool NZ's New Season Outlook

11 July 2006

Meat and Wool New Zealand's 2006-07 New Season Outlook

Sheep & Beef Farm revenue up on the back of a weakening NZ dollar.

The Sheep and Beef Farm outlook is for a 6 per cent lift in gross farm revenue to $4.6 billion at the farm gate. $3.6 billion or 78 per cent of these receipts are spent on farm operating expenditure that range from shearing to local authority rates. The remaining $1.0 billion (22%) is farm profit before tax which is spent on mortgage repayments, taxation, capital equipment replacement and then the farm family living expenses.

This information is from the Meat & Wool New Zealand's Economic Service which has just completed its 2006-07 New Season Outlook for sheep and beef farms.

The overall outlook is for a weakening of the NZ dollar which is consistent with other commentators and this underpins the forecast recovery back to the 2003-04 farm profit before tax level.

At the per farm level, farm profit before tax is forecast to increase 28.5 per cent to $67,100 per farm from the previous year's 8 year low in flation adjusted terms.

Exchange Rate Impact

As 80 per cent or more of meat and wool production is exported each year the exchange rate has a major impact on prices received at the farm gate.

Exchange rates used in the annual price forecasts for 2006-07 were US 61.4 cents (-6%); UK 33.4 pence (-8%) and 0.46 Euros (-12%) to the NZ $.

If the season "average" exchange rate decreases 5 per cent from those forecast then gross farm revenue is estimated to increase $21,500 (+7.2%) per farm or $329 million in aggregate at the farm gate. However, the imported component of farm inputs would cost more increasing farm expenditure by $1,620 per farm.

Farm Gate Price Outlook

• Wool: The forecast season average auction wool price for 2006-07 is for an increase of 5.2 per cent.

The outlook for 2006-07 is for continued demand for NZ wool from overseas buyers keeping pace with supply. Exports to China were up 47.1 per cent to 33,100 clean tonnes and exports to Italy increased 20.9 per cent to 12,700 clean tonnes for the 11 months to May 2006.

• Lamb: The outlook for 2006-07 is for the all grades season average price of lamb to average $64.00 per head up $7.00 on the previous year. This increase comes from expectations of a more favourable exchange rate.

The 2006-07 fundamentals in the key EU markets remain sound and are expected to lead to the stabilising of offshore lamb prices. Prices during 2005-06 in the EU markets were volatile from CAP reform adjustments that impacted on frozen lamb prices. In particular, EU farmers have become market focused with assistance now aimed at single farm payments not linked to production but to land and environment management. This has led to a clearance of domestic lamb and volume pressures have ultimately manifested themselves in weakening price levels.

Chilled lamb made up 19 per cent of lamb exports for 2005-06 and compares with 17 per cent of exports for 2004-05.

• Beef: The NZ beef price outlook for 2006-07 reflects the expectation of an easing in the US beef price. The US market accounts for around 50 per cent of beef exports and has a major influence on NZ farm gate prices. The forecast weaker NZ dollar against the US dollar than last year underpins the forecast 5.8 per cent lift in the farm price for Bull beef (270-295 Kg) to 321 cents per kilogram.

The outlook for 2006-07 is the key markets of North Asia (Japan/Korea) are likely to come under pressure when the US re-enters these markets currently predicted to occur in late July 2006. The increased volume from US re-entry is likely to lead price decreases. However, while there may be an initial softening of price, overall prices are expected to remain above pre-BSE levels in North Asia.

In the US, prices for lean ingredient beef reached record levels in the US in recent years as the liquidation phase of the US beef cattle cycle ended and US beef farmers began retaining heifers in response to strong cattle profitability. In addition, beef demand was strong. Subsequently, as domestic beef production increased, supplies of lean beef increased and prices fell. For 2006-07 the US manufacturing beef price is forecast to fall 3.0 per cent and follows a 5 per cent decrease from 2005-06.

ENDS

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