Exchange rate will determine farm-gate returns

MEDIA RELEASE

26 AUGUST 2009

Exchange rate will determine farm-gate returns over coming year

In-market prices for lamb and beef are expected to remain solid in the coming year, and exchange rates are likely to have the greatest impact on farm-gate returns, according to Meat & Wool New Zealand’s New Season Outlook for 2009-10.

Meat & Wool New Zealand Economic Service Executive Director, Rob Davison says despite the weakened global economy, the good retail and wholesale lamb prices achieved in the last year look set to remain though the recession places a ceiling on beef prices, especially in the North Asia and European markets. There may be slight firming of in-market wool prices, which saw a significant drop last year, particularly for medium and fine wool.

Mr Davison says uncertainty in the global economy, and the timing and strength of New Zealand’s economic recovery make it extremely difficult to forecast where the New Zealand dollar will go over the next year and how farm-gate returns will be affected.

“We expect the New Zealand dollar to remain volatile over 2009-10, and it has trended upwards in recent months against the continuing weakness of the US dollar. Currently the New Zealand dollar is also being supported by higher commodity prices and equity markets as a lead economic indicator of a recovery in New Zealand’s trading partners’ economies. This should provide support for more positive in-market pricing for meat and wool products.

“However, in practice the exchange rate is uncertain and there is concern the New Zealand dollar seems to be following the Australian and Canadian exchange rate trends weighted towards the equity markets, oil, mineral and metal commodity trends, not New Zealand’s soft agricultural commodities. Because of the likely short-term exchange rate volatility and its effect on farm-gate prices and farm profit, we have looked at several exchange rate scenarios in 2009-10.”

“Based on an optimistic exchange rate ‘mid-point’ for the year of 63 cents/US dollar, up 8 per cent on last year, the forecast per head lamb price of $80 is down 10 per cent on 2008-09’s seven-year high of $89.  Beef prices would be expected to be down 11.7 per cent based on the mid-point exchange rate.

“A higher exchange rate for 2009-10 centred around 67 cents/US dollar and its associated cross rates would see beef prices compared with last year drop 17.1  per cent and lamb prices drop to $73 per head (-18%).”

The table below illustrates the sensitivity of farm gate prices under a range of US exchange rates and associated cross rates.

Mr Davison says sheep and beef farmers will see revenue and profit affected by the higher exchange rate and retention of stock to rebuild herd and flock numbers, but lower inflationary pressures and interest rates should abate from the previous year’s highs.

“While the 2009-10 lamb crop is expected to be ahead of last year’s, an increase in ewe lamb retentions will reduce the number of lambs available for export slaughter (-2.2%). We also expect a 4.8 per cent decrease in export cattle slaughter from the high last year.”

Based on a 63 cents/US dollar exchange rate, gross farm revenue at the farm gate is forecast to decrease by $300 million to $4.25 billion (-6.7 per cent), while total expenditure is forecast to decrease slightly (-1.9 per cent). Sheep and beef farm profit per farm is expected to drop from $56,600 (2008-09) to $39,900 (2009-10). The average sheep and beef farm currently carries 2,770 sheep and 280 beef cattle.

“Sheep and Beef farm income will also be strongly dependent on the value of the NZ dollar at the height of the production season. Farm gate prices for lamb and beef in the last half of 2008 rose significantly with the rapid depreciation in the value of the $NZ dollar at that time.

“In contrast, prices for inputs used on sheep and beef farms should remain relatively constant in 2009-10, which is a welcome relief from the 9.7 and 7.6 per cent increases experienced in the previous two years,” says Mr Davison.

“However, farmers will be cautious about any extra spending with a forecast decrease in revenue, and the need to recoup cash and restore balance sheets after poor profitability in 2006-07 and 2007-08.”

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