2007-08 Mid Season Update

Media Release

__5 February 2008

2007-08 Mid Season Update

The latest Meat & Wool New Zealand economic forecast for sheep and beef farmers is a stark reminder of the challenging times facing the sector as a result of a high New Zealand dollar and increasing costs.

Meat & Wool New Zealand chairman, Mike Petersen, said increasing on-farm costs like transportation and fertiliser combined with the high New Zealand dollar were cancelling out the benefits New Zealand sheep and beef farmers might have expected from better in-market prices.

Meat & Wool New Zealand still remains confident that better global demand for protein and the growth in developing markets will ensure better sheep and beef returns within the next 2 to 3 years. However the high exchange rate has been a significant issue for the sector for some time now, and this latest update reinforces the message conveyed to the Governor of the Reserve Bank six months ago.

“Sheep and beef farmers are under extreme pressure and this forecast must signal to Government and other agencies that the sector cannot sustain any more costs in the current environment. If there are lower export earnings, that will have a far-reaching impact on all New Zealanders,” Mr Petersen said.

The year-to-date in-market prices were very positive, but the combination of the high New Zealand dollar and increased operating costs was wiping out the gains.
* Wool market prices from July 2007 to December 2007 were up 3.7 per cent, but the exchange rate appreciated 7.9 per cent and eroded the New Zealand dollar price to a 3.9 per cent decrease at FOB.
* In-market lamb prices for this season to date are up 7.6 per cent on the same period last year but in New Zealand dollars, the FOB lamb price is down 0.3 per cent as a result of the high New Zealand dollar.
* Lamb skins bottomed out in February 2007 at $2.90 per skin at FOB but prices for the new season have increased 117 per cent to $6.30 per skin in New Zealand dollars.
* In-market beef prices for North America continue to hold near historical high levels but when converted to New Zealand dollars are down 10 per cent.

Meat & Wool New Zealand Economic Service Executive Director, Rob Davison said a continuation of the current high exchange rate (US 77 to 79 cents) would make for the third worst year in 50 years of forecasting. This was an extreme contrast to the dairy industry.

“Dairy has enjoyed the doubling of its world prices which far exceed any of the negative exchange rate effects – but other export sectors haven’t had that luxury,” he said.

For the year to December 2007, dairy receipts were up $1.3 billion and the rest of the pastoral sector was down $700 million leaving a net pastoral sector increase of $600 million.

In addition to the exchange rate, the extremely dry summer conditions in most regions were forcing an early slaughter of stock at lighter weights.

“If the dry conditions continue this may force the slaughter of some capital stock which will cut into the productive capacity of the sector in 2008-09 and this will have flow-on effects into the future.”

Mr Davison said on-farm costs were forecast to increase an estimated 4.2 per cent before the recently announced steep increase in fertiliser prices and this will put real pressure on sheep and beef farm operational expenditure. Since 2000-01, on-farm inflation has increased 22 per cent and run above the consumer price index.

Mr Davison said the good profit levels early in 2000 were underpinned by a lower New Zealand dollar and low inflation.
“If we had those economic conditions today, sheep and beef farm profits before tax would be a lot higher than in early 2000. The factors at play here are the lift in offshore prices, increased on-farm productivity and processing efficiencies.

“So while in-market prices are heading the right way, it is imperative that New Zealand sheep and beef farmers and the industry as a whole, start to see those gains for themselves.”

ENDS

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