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• The Southland/South Otago hill country sheep and beef farm
• Key points
• Physical factors
• Financial position of the farm
  • Review of 2005/06
  • Forecasts for 2006/07
• Issues and trends
• Budget

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13  Southland/South Otago hill country sheep and beef

The Southland/South Otago hill country sheep and beef farm

This model represents 750 farms in the moderately rolling clay downlands to steeper hill properties in South Otago and Southland. The farms are spread throughout the Clutha (44 percent), Southland and Gore (56 percent) districts. The properties tend to be larger sheep and beef units (over 3500 stock units) with a reliable summer rainfall. Winters can be wet and cool. The farms have mostly cultivated pastures, with the balance in improved, but steeper hill and tussock blocks. Pastures have been regularly and well-fertilised.

The typical production system is breeding ewes, some hoggets lambing, and the majority of lambs finished, but some store lambs can be sold each year. There is a herd of breeding cows with the best calves finished. There may also be some trading of cattle.

Table 13.1: Southland/South Otago hill country sheep and beef model summary, 2005/06

Effective area	710 ha		Total stock units wintered	6 035 su
Opening stock wintered			Breeding cows	89 hd
Breeding ewes	4 310 hd		R1yr cattle	70 hd
Replacement ewe hoggets	1 200 hd		R2yr cattle	0 hd
Other sheep	73 hd		Other cattle	3 hd

Key points

• Lambing percentage lifted to 132 percent with expectations for another good lambing in 2006/07.
• Farmers were perturbed by the rapid fall in export lamb price, the speed of which caught many unawares.
• Gross revenue fell 16 percent in 2005/06 compared with 2004/05, resulting in a cash deficit of $15,000.
• The difficulty in obtaining qualified staff and the cost of qualified staff remains an issue that is affecting management and policy decisions on farm.
• Anthelmintic resistance is a huge concern with farmers using more faecal farm egg counting, reduction testing and quarantine drenching.

Table 13.2: Key parameters of the Southland/South Otago hill country sheep and beef model

	2002/03	2003/04	2004/05	2005/06	2006/07f
Effective area (ha)	710	710	710	710	710
Opening sheep stock units	5 110	5 256	5 150	5 206	5 207
Opening cattle stock units	937	901	865	829	855
Opening total stock units	6 047	6 157	6 015	6 035	6 062
Stocking rate (su/ha)	8.5	8.7	8.5	8.5	8.5
Ewe lambing (%)	129	126	130	132	135
Average lamb price ($/hd)	58.02	55.34	60.14	49.86	54.78
Average wool price ($/kg)	3.45	3.01	2.86	2.61	2.68
Total wool produced (kg)	25 562	26 173	26 288	26 385	25 926
Wool production (kg/ssu1)	5.00	4.98	5.10	5.07	4.98
Average R2 yr steer ($/hd)	737	683	785	763	760
Average cull cow ($/hd)	460	488	511	500	500
Gross farm revenue ($)	442 635	404 214	465 999	389 668	419 106
Cash farm surplus ($)	155 855	129 712	175 184	93 675	120 821
Net trading profit ($)	140 651	105 165	150 574	69 821	100 924
Disposable surplus/deficit ($)	3 840	5 999	47 508	– 15 094	23 212

Note
¹ Sheep stock unit.
Symbol
^f Forecast

Physical factors

The autumn of 2005 was dry and sunny, but cool. Grass cover on farm was good and there was a surplus of conserved feed for sale, particularly balage. The condition of livestock was good and farmers were happy with feed reserves for the winter. The winter of 2005 was mild, dry and sunny. Cool conditions prevailed for May and June, while July and August were also dry and sunny with temperatures at above-average levels. Early September continued this trend until lambs started arriving.

In the third week of September, it turned cold with south easterlies predominating. Snow, frosts, hail, and cold winds claimed some lambs, but losses were within the “normal” range. A 132 percent lambing was recorded in 2005/06, 2 percent higher than the previous year, at 130 percent and significantly higher than the 126 percent in 2003/04.

October was cool with below-average rainfall and the more easterly regions in Otago became dry. November and December had periods of sunny warm conditions, intermittent with cool, wet conditions. December also saw some severe, but isolated, heavy rainfall causing flash flooding. This resulted in damage to recently cultivated paddocks, culverts and fence lines.

Grass growth was generally good except in some easterly areas, due to dry conditions. Although grass growth was good, farmers reported some difficulty in growing lambs, most likely due to weather conditions. This resulted in a late flow of lambs to processing plants, and consequently some delays in processing of stock from the start of February.

The autumn of 2006 was warm and mild, which set farms up well for the 2006/07 year. Brassica crop growth rates had responded well to these conditions. Capital stock going into winter 2006 were in good condition, grass cover was above-average and reserves of conserved feed and brassica crop yields were adequate.

Wool production for the season was similar to the previous season at 5.07 kilograms per sheep stock unit. Any change in wool production is more likely to be from shearing pattern changes or differing numbers of lambs shorn than from conditions conducive to more wool growth. Stocking rate has remained the same as the previous year at 8.5 stock units per hectare.

Financial position of the farm

Review of 2005/06

Revenue

Gross farm revenue decreased to $390,000, down 16 percent on the previous year. Sheep sales (net of purchases) declined 18 percent to $52.00 per sheep stock unit and wool sales declined 8 percent to $13.00 per sheep stock unit. Cattle sales net of purchases decreased 14 percent to $57.00 per carcass.

Average lamb value declined 17 percent to $49.90 per head compared with $60.10 in 2004/05, with 26 percent of total sale lambs sold as stores. Store lambs averaged around $46.00 per head (34 kilograms per head liveweight at $1.36 per kilogram) and finished lambs around $51.00 per head.

Wool production was similar to 2004/05 but the wool price decreased 8.7 percent to $2.61 per kilogram. Wool makes up 18 percent of gross farm revenue. The previous year wool revenue was 16 percent of gross farm revenue. Wool harvesting costs increased 6 percent to $4.80 per sheep stock unit.

Other farm revenue, which is made up of rebates and miscellaneous sales, decreased 47 percent to $5,200.

Table 13.3: Southland/South Otago hill country sheep and beef cash farm revenue

	2002/03 ($)	2003/04 ($)	2004/05 ($)	2005/06 ($)	2006/07f ($)
Sheep sales less purchases	291 249	275 323	326 429	268 563	293 480
Cattle sales less purchases	49 045	46 460	54 584	47 087	50 733
Wool	86 911	78 779	75 185	68 865	69 482
Grazing income	2 903	0	0	0	0
Other income	12 527	3 652	9 804	5 153	5 411
Gross farm revenue	442 635	404 214	465 999	389 668	419 106

Symbol
f Forecast

Expenditure

Cash farm expenditure ($253,000) was similar to the previous season at $41.90 per stock unit. By early January 2006 the decline in lamb prices became evident and farmers reduced expenditure where they could. However, a large amount of expenditure is either non-discretionary or occurred earlier in the season, making it difficult to adapt spending patterns quickly.

Labour costs increased by 4 percent with a higher proportion paid as casual wages. Sourcing labour continues to be an issue. Increases also occurred in electricity up 17 percent to 62 cents per stock unit and shearing up 6 percent to $4.81 per sheep stock unit.

Fuel and vehicle costs again increased as the effects of higher oil, diesel and petrol prices showed through. Vehicle costs have increased 12 percent to $2.27 per stock unit and fuel is up 33 percent to $2.47 per stock unit. Some of the increases in cash farm expenditure were off-set by a decline in animal health expenses (down 4 percent), feed costs (down 3.5 percent), lime (down 66 percent), farm forestry (down 23 percent), weed and pest control (down 7 percent), and repairs and maintenance (down 21 percent).

Interest costs have increased to $7.13 per stock unit, and account for 11 percent of gross farm revenue. The model has not increased in size and industry commentators feel the debt loading remains relatively low. Anecdotally, farms in this class have increased in size and debt loading.

Net result

The cash farm surplus has declined 46 percent to $93,700, or $15.50 per stock unit. After drawings, principal repayments, capital purchases, tax, and development are deducted, the disposable deficit was $15,100 in 2005/06 compared to a disposable surplus of $47,500 in 2004/05.

Forecasts for 2006/07

Revenue

Gross farm revenue is expected to increase by about 8 percent to $419,000. A combination of factors contributes to this expectation. Lambing percentage is expected to increase by 3 percent to 135 percent. Average works lamb price is projected to increase by $5.50 per head to $56.60 per head. The proportion of store lamb sales reduces from 26 percent to 20 percent of total lambs sold, and the store lamb price is expected to increase 3.5 percent to $47.90 per head. This is a reflection of high store lamb prices paid in the 2005/06 year prior to the collapse of the works price in early January. This combines to increase sheep revenue by $25,000.

More hoggets were mated for September 2006 lambing, up from 29 percent of the hogget mob to 35 percent. Farmers are continuing to improve the management of mated hoggets and more are grazing out dry hoggets in spring to reduce the risk of under feeding. Wool production may decline slightly but price is expected to improve by seven cents per kilogram to $2.68 per kilogram. Cattle income and other income will remain at similar levels.

Expenditure

Farm working expenses will be held to a similar level to last year although wages, electricity, fertiliser, and fuel are expected to increase while animal health, feed, weed and pest control, and repairs and maintenance are expected to decrease.

Net result

Cash farm surplus is expected to increase 29 percent to $120,800. After drawings, principal repayments, capital purchases, tax, and development are deducted the disposable surplus is expected to be $23,200.

Figure 13.1: Southland/South Otago hill country sheep and beef profitability trends

Issues and trends

The key issue this year was the sharp fall in the export lamb schedule and the fact that market intelligence did not predict the magnitude of the situation. Prior to December, farmer confidence was good and sheep sales reflected this. The prices paid for store lambs and all-counted prices for ewes with lambs at foot were higher than would later be justified.

Farm improvements such as repairs and maintenance, fertiliser, and capital purchases continued prior to December, but were curtailed, where possible, after December. The situation did not become apparent early enough in the season to allow best financial management.

There appears to be a decline in the proportion of lambs sold as stores. Farm improvements resulting in a better ability to finish lambs may be responsible for this as well as the imperative to increase sale lamb value.

Farmers are guardedly optimistic about lambing performance and lamb prices for the new season, but remain cautious about price predictions. Average lamb prices can be increased with careful placement of lambs in appropriate markets. A good example of this is heavy-weight lambs. These are penalised by the main processors but contracts have been available that will significantly increase their value. Farmers are prepared to place lambs where best value is obtained. Sales of ewe lambs for breeding continue for those with good genetics.

Management practices such as shearing patterns and animal health procedures are continually reviewed with the objective of reducing costs without adding significantly to risks. Anthelmintic resistance is a huge concern with farmers using more on-farm egg counting, reduction testing and quarantine drenching. Salmonella brandenburg is expected to become an increasing problem and veterinary clinics report little change in vaccine sales to date.

The farms in this model are large and they require a continued level of permanent and casual staff. Obtaining experienced staff has been difficult so farmers are examining the opportunities for reducing the number of times livestock need to be handled. The value and role of breeding cows on this class of farm is becoming clearer, and this may see an increase in breeding cows over time. The value of the cow is not only in pasture management and utilisation, but also in reducing the labour requirements.

There is little change in the area of brassica cropping but second cropping is certainly declining due to increased infection of dry rot. Fertiliser sales are reported to be back 15 to 20 percent and this is supported in the model budgets. Fertiliser expenditure is expected to increase in 2006/07 but stock sale price expectations will need to be realised first.

Farmers are concerned about increasing compliance costs and compliance requirements that do not take sufficient recognition of the impact on farm operations. Some farmers feel the increasing urbanisation of district authorities is creating a gap between rural and urban communities.

Table 13.4: Southland/South Otago hill country sheep and beef budget

		2005/06			2006/07f
	Whole farm ($)	Per ha ($)	Per su ($)	Whole farm ($)	Per ha ($)	Per su ($)
Revenue
Sheep	276 075	389	53.04	300 920	424	57.79
Wool	68 865	97	13.23	69 482	98	13.34
Cattle	53 053	75	64.00	56 903	80	66.55
Grazing income	0	0	0.00	0	0	0.00
Other farm income	5 153	7	0.85	5 411	8	0.89
Less
Sheep purchases	7 512	11	1.44	7 440	10	1.43
Cattle purchases	5 966	8	7.20	6 170	9	7.22
Gross farm revenue	389 668	549	64.57	419 106	590	69.14
Cash farm expenditure	252 986	356	41.92	253 575	357	41.83
Interest	43 007	61	7.13	44 710	63	7.38
Rent and/or leases	0	0	0.00	0	0	0.00
Cash farm surplus	93 675	132	15.52	120 821	170	19.93
Stock value adjustment	4 035	6	0.67	7 403	10	1.22
Minus depreciation	27 889	39	4.62	27 300	38	4.50
Net trading profit	69 821	98	11.57	100 924	142	16.65
Taxation	15 799	22	2.62	13 944	20	2.30
Net trading profit after tax	54 022	76	8.95	86 980	123	14.35
Allocation of funds
Add back depreciation	27 889	39	4.62	27 300	38	4.50
Reverse stock value adjustment	– 4 035	– 6	– 0.67	– 7 403	– 10	– 1.22
Drawings	47 010	66	7.79	46 050	65	7.60
Principal repayments	15 000	21	2.49	17 140	24	2.83
Development	6 390	9	1.06	5 650	8	0.93
Capital purchases	24 569	35	4.07	14 825	21	2.45
Disposable surplus/deficit	– 15 094	– 21	– 2.50	23 212	33	3.83
Other cash sources
New borrowing	0	0	0.00	0	0	0.00
Off-farm income	3 165	4	0.52	2 800	4	0.46
Other cash income	0	0	0.00	0	0	0.00
Net cash change	– 11 929	– 17	– 1.98	26 012	37	4.29
Assets and liabilities
Farm, forest and building (opening)	3 945 840	5 558	653.88	3 985 000	5 613	657.36
Plant and machinery (opening)	185 926	262	30.81	182 000	256	30.02
Stock valuation (opening)	523 482	737	86.75	526 747	742	86.89
Total farm capital	4 655 248	6 557	771.44	4 693 747	6 611	774.28
Total debt opening	503 000	708	83.35	505 000	711	83.30
Equity	4 152 248	5 848	688.08	4 188 747	5 900	690.97

Symbol
^f Forecast

Table 13.5: Southland/South Otago hill country sheep and beef expenditure

		2005/06			2006/07f
	Whole farm ($)	Per ha ($)	Per su ($)	Whole farm ($)	Per ha ($)	Per su ($)
Farm working expenses
Permanent wages	17 802	25	2.95	19 250	27	3.18
Casual wages	4 767	7	0.79	5 546	8	0.91
ACC	4 506	6	0.75	3 058	4	0.50
Animal health	18 707	26	3.10	17 519	25	2.89
Breeding	1 931	3	0.32	1 879	3	0.31
Electricity	3 741	5	0.62	4 227	6	0.70
Feed (hay and silage)	9 233	13	1.53	8 426	12	1.39
Feed (crops)	0	0	0.00	0	0	0.00
Feed (grazing)	3 500	5	0.58	3 395	5	0.56
Feed (other)	1 991	3	0.33	1 637	2	0.27
Fertiliser	46 434	65	7.69	50 936	72	8.40
Lime	5 500	8	0.91	6 240	9	1.03
Farm forestry costs	3 102	4	0.51	1 990	3	0.33
Freight (not elsewhere deducted)	6 336	9	1.05	6 365	9	1.05
Re-grassing costs (contractors)	14 205	20	2.35	13 873	20	2.29
Shearing costs	25 038	35	4.81	25 983	37	4.99
Weed and pest control	9 230	13	1.53	8 520	12	1.41
Fuel	14 902	21	2.47	17 239	24	2.84
Vehicle costs (excluding fuel)	13 704	19	2.27	13 160	19	2.17
Repairs and maintenance	18 586	26	3.08	15 620	22	2.58
Communication costs (phone and mail)	3 279	5	0.54	2 983	4	0.49
Accountancy	3 623	5	0.60	3 483	5	0.57
Legal and consultancy	1 171	2	0.19	800	1	0.13
Other administration	2 427	3	0.40	2 370	3	0.39
Rates	9 535	13	1.58	9 700	14	1.60
Insurance	6 114	9	1.01	6 245	9	1.03
Water charges	0	0	0.00	0	0	0.00
Other expenditure	3 621	5	0.60	3 130	4	0.52
Cash farm expenditure	252 986	356	41.92	253 575	357	41.83
Calculated ratios
Economic farm surplus (EFS1)	37 828	53	6.27	70 634	99	11.65
Cash farm expenditure/GFR2	65%			61%
EFS/total farm capital	0.8%			1.5%
EFS less interest & lease/equity	– 0.1%			0.6%
Interest+rent+lease/GFR	11.0%			10.7%
EFS/GFR	9.7%			16.9%

Notes
¹ EFS (or Earnings before interest and tax) is calculated as follows: gross farm revenue plus change in livestock values less working expenses less depreciation less wages of management (WOM). WOM are calculated as follows: $31,000 allowance for labour input plus 1% of total capital as managerial reward. An upper limit for WOM of $75,000 has been set.
² Gross farm revenue.
Symbol
^f Forecast

Contact for Enquiries

Farm Monitoring Programme Manager
Monitoring and Evaluation
MAF Policy
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0623
Fax: +64 4 894 0741
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