- The Southland/South Otago intensive sheep and beef farm
- Key points
- Physical factors
- Financial position of the farm
- Issues and trends
- Budget
14 Southland/South Otago intensive sheep and beef
The Southland/South Otago intensive sheep and beef farm
This model represents the intensive sheep and beef farms in Southland and
South Otago, ranging in size from 100 to 300 hectares. The farms are on the
plains and downlands in normally ample summer rainfall areas.
The model is based on an effective area of 194 hectares, carrying 2125 ewes, and
530 replacement hoggets.
A variety of ewe breeds are run, with the breeding emphasis placed on lambing
percentage and lamb growth rates. Thirty percent of the ewe hoggets are mated,
producing a 75 percent tailing percentage.
The small cattle finishing enterprise is based on growing weaner bulls to
slaughter at 18 to 20 months of age.
Table 14.1: Southland/South Otago intensive sheep and beef model summary, 2005/06
| Effective area | 194 ha | Total stock units wintered | 2 636 su | |
| Opening stock wintered | Breeding cows | 0 hd | ||
| Breeding ewes | 2 125 hd | R1yr cattle | 30 hd | |
| Replacement ewe hoggets | 530 hd | R2yr cattle | 0 hd | |
| Other sheep | 25 hd | Other cattle | 0 hd |
Key points
- A drop of $11.70 in lamb price at the freezing works, continued low wool prices, and reduced ewe prices dropped the gross farm revenue by $26,000, or 12 percent in 2005/06 compared with 2004/05.
- Poor market information gave farmers little warning of the impending slump in lamb returns. This meant that little remedial action could be taken to reduce cash farm expenditure, which in fact lifted slightly.
- The ewe lambing percentage was 5 percent higher than the year before at 138 percent. The increased number of lambs helped to cushion the effects of lower product prices.
- The year’s trading produced a net cash deficit of $11,500 compared with a net cash surplus of $10,000 in 2004/05.
Table 14.2: Key parameters of the Southland/South Otago intensive sheep and beef model
| 2002/03 | 2003/04 | 2004/05 | 2005/06 | 2006/07f | |
|---|---|---|---|---|---|
| Effective area (ha) | 194 | 194 | 194 | 194 | 194 |
| Opening sheep stock units | 2 484 | 2 484 | 2 484 | 2 516 | 2 556 |
| Opening cattle stock units | 140 | 140 | 140 | 120 | 120 |
| Opening total stock units | 2 624 | 2 624 | 2 624 | 2 636 | 2 676 |
| Stocking rate (su/ha) | 13.5 | 13.5 | 13.5 | 13.6 | 14.0 |
| Ewe lambing (%) | 133 | 135 | 133 | 138 | 138 |
| Average lamb price ($/hd) | 60.00 | 61.40 | 61.94 | 50.19 | 55.69 |
| Average wool price ($/kg) | 3.12 | 2.92 | 2.72 | 2.55 | 2.72 |
| Total wool produced (kg) | 13 980 | 14 267 | 13 783 | 13 874 | 13 874 |
| Wool production (kg/ssu1) | 5.60 | 5.74 | 5.55 | 5.51 | 5.43 |
| Gross farm revenue ($) | 213 360 | 219 883 | 219 046 | 193 034 | 214 089 |
| Cash farm surplus ($) | 89 860 | 97 079 | 89 570 | 61 202 | 79 015 |
| Net trading profit ($) | 76 660 | 82 079 | 74 105 | 48 577 | 63 265 |
| Disposable surplus/deficit ($) | -1 440 | 14 646 | 1 772 | -19 490 | 14 134 |
Note
1 Sheep stock unit.
Symbol
f Forecast
Physical factors
Farmers went into the 2005/06 year with below-average brassica crops, excellent reserves of hay, silage and balage and with ewes two to five kilograms heavier than normal. This resulted in scanning percentages increasing by 3 to 5 percent on the previous year.
Winter weather was mild with fewer frosts and no significant snow falls. Ewe death rate was lower than normal up to the onset of Salmonella brandenburg in late winter. Reported cases of Salmonella brandenburg were almost double that of the previous season. The outbreak was characterised by a relatively small number of farms being significantly affected with up to 12 percent ewe losses on individual farms.
Lambing came and went with only one significant storm. The resulting ewe lambing percentage of 138 percent was up 5 percent on the previous year. Reasons for this lift are a combination of favourable weather, improving sheep genetics, and the increasing use of composites and better ewe mating weights. Hogget lambing is becoming a significant contributor to total lamb production.
From mid-December the summer was characterised by a month of wet weather alternating with a month of dry sunny weather. During the wet spells, lamb growth rates were slow, so lambs were killed later than normal. By early February most farmers were at least 500 lambs behind the normal kill pattern. By late March the feed situation was looking critical, with low average pasture covers, large numbers of lambs on farm, and delays of between two and three weeks to get killing space at the freezing works. But April and early May were warm and dry. Pasture growth rate was well above average, supplying a quality feed source for the additional lambs.
By mid-May the backlog of lambs had been processed, the ewes mated at good liveweights and farms entered winter with normal levels of pasture cover, reasonable winter brassica crop yields and ample supplies of hay and balage. Significant quantities were carried over from the 2005 winter.
Financial position of the farm
Review of 2005/06
Revenue
Gross farm revenue in 2005/06 dropped 12 percent to $193,000 ($73.20 per stock unit) from that achieved in 2004/05, due to a drop in lamb price of $11.70 combined with the continued slide in wool price by 17 cents per kilogram (greasy). The value of cull ewes dropped $3.70 per head.
The drop in gross farm revenue was cushioned to some extent by a lift of 5 percent in the ewe lambing percentage to 138 percent and a slight increase in lambs produced by hoggets. The model farm produced 135 more lambs for sale.
The lamb schedule fell weekly from late October to early January, and farmers took some time to realise and adjust. The result was that store lambs in late November and early December sold at prices similar to, or higher than, their works value when killed in February or March. The schedule has climbed by five or 10 cents per kilogram carcass weight each week from late April, instilling renewed confidence in the sheep industry.
Throughout the downturn in lamb values, the cattle schedule remained strong. The margin for finishing cattle has increased by $20 per head. Wool continued as a minor contributor to revenue with per head production back slightly and the average price dropping 17 cents per kilogram to $2.55 per kilogram greasy.
Table 14.3: Southland/South Otago intensive sheep and beef cash farm revenue
| 2002/03 ($) | 2003/04 ($) | 2004/05 ($) | 2005/06 ($) | 2006/07f ($) |
|
|---|---|---|---|---|---|
| Sheep sales less purchases | 154 050 | 156 315 | 162 416 | 140 948 | 159 041 |
| Cattle sales less purchases | 13 700 | 13 040 | 14 320 | 11 670 | 12 270 |
| Wool | 43 610 | 41 629 | 37 510 | 35 416 | 37 778 |
| Other income | 2 000 | 8 900 | 4 800 | 5 000 | 5 000 |
| Gross farm revenue | 213 360 | 219 884 | 219 046 | 193 034 | 214 089 |
Symbol
f Forecast
Expenditure
Cash farm expenditure increased by 1 percent to $42.74 per stock unit. Many farmers did not realise that the lamb price was dropping until late December or early January, by which time a large proportion of discretionary expenditure had already been spent on fertiliser, repairs, and maintenance, leaving limited opportunities to curb spending.
As a result, the ratio of cash farm expenditure to gross farm revenue is now at
a level of 58 percent compared with 51 percent in 2004/05. This is considered to
be unsustainable by industry commentators.
Fuel prices increased markedly during the year. This saw an increase of 38
percent for fuel purchases as well as significant increases in contractors’
prices for cultivation, and for hay and balage making.
Fertiliser expenditure was reduced by 22 cents per stock unit through reductions in autumn applications and less use of alternatives.
Net result
The cash farm surplus for 2005/06 was $61,200, a decrease of $28,400 from the previous year. The net cash change was a deficit of $11,500.
Forecasts for 2006/07
Revenue
Farmers on intensive sheep properties in Southland expect gross farm revenue for 2006/07 to lift by almost 11 percent, mainly through a recovery in the price of lambs. They are expecting an increase of $5.60 to $56.00 per head for lambs at the freezing works. Industry sources indicate that this may be a conservative expectation. As in 2005, the ewes were in excellent order at mating and farmers are anticipating a similar lambing percentage of 138 percent in ewes.
Farmers are hoping that the lower value of the New Zealand dollar will see the value of wool return to the level of 2004/05. The rise in beef schedule in April and May 2006 has increased farmers expectations of an extra $20 per head margin in the cattle finishing enterprise.
Expenditure
Cash farm expenditure is expected to be approximately maintained. Farmers expect increases in prices similar to the rate of inflation, with higher price rises where fuel is a significant component of the cost such as with agricultural contracting, hay and balage contracting, freight, and fuel. Farmers planned response to this is to cut discretionary expenditure, so that cash farm expenditure increases by only a small amount.
Net result
The cash farm surplus is expected to increase by $17,800 to $79,000 in 2006/07. A planned halving of capital purchases and reduction in development together with a $7,700 reduction in income tax will see an improvement of $33,600 in the net cash change compared with the 2005/06 year.
Figure 14.1: Southland/South Otago intensive sheep and beef profitability trends
Issues and trends
With the wool price lowering and shearing costs increasing, the cost of shearing and crutching now uses one-third of the income from wool sales. This ratio varies greatly between farms depending on the frequency of shearing and the amount of shearing and crutching done by farm staff. On the 20 farms surveyed the range of the ratio shearing costs/wool income was from 22 percent to 64 percent.
The morale of farmers and their confidence in the sheep meat industry has had a roller-coaster ride through the 2005/06 year. From high prices paid for over-wintered lambs in August/September, through the price crash with no warning in November/December, along a long flat period from January to April when most of the lambs were slaughtered, to price increases from late April to June. Farmers main complaint was the lack of warning of, and reasons for, the price drop in late spring from meat companies, and the fact that it was so severe relative to company predictions in early October. Most farmers realised the significance of the drop only when their first draft of lambs was killed in December or January.
Land prices have edged up by between 5 and 10 percent during the 2005/06 year. The rise is driven by demand for farms to convert to dairying and is not related to the return those farms generate from sheep and beef production.
Farmers are sick of the increasing and often irrational increases in compliance costs. Examples include the following. Fuel companies have recently stopped delivering petrol to on-farm underground tanks. The diesel has had the sulphur content reduced, which has led to fuel leakages at the engine’s fuel pump on older tractors. By next January all farmers who want to buy agricultural chemicals and animal remedies will need to have completed a one and a half day course and have suitably designed and locked storage for these items. If a farmer is installing a culvert in a creek he must get permission from three different government bodies at a cost of over $500 in permit fees. For the meat processing industry the cost of compliance is equivalent to $1 per lamb processed.
During the year the two major stock firms that service the sheep and beef sector in Southland amalgamated. Because the majority of staff remained with PGG Wrightson, most farmers have not had major concerns because they continue to work with the same stock agent. However, a significant number of farmers have had administrative issues with being assigned up to three different client numbers and finding it difficult to follow entries on monthly statements.
Just prior to Christmas, Environment Southland published a proposed variation to its water plan which will require the fencing of all watercourses to keep out cattle and deer on intensive sheep and beef farms. If adopted, this will impose significant fencing costs on this class of farm as well as a need to supply alternative stock water in many paddocks.
Farmers wonder how high the price of fuel will rise and what its flow-on effects into the cost of freight and contractors will be.
ACC continues to annoy farmers, with cases of up to three years’ premiums being charged at once, and in some instances low levels of payout when a farmer is unable to work due to injury.
Table 14.4: Southland/South Otago intensive sheep and beef budget
| 2005/06 | 2006/07f | |||||
|---|---|---|---|---|---|---|
| Whole farm ($) | Per ha ($) | Per su ($) | Whole farm ($) | Per ha ($) | Per su ($) |
|
Revenue | ||||||
| Sheep | 144 248 | 744 | 57.33 | 162 341 | 837 | 63.51 |
| Wool | 35 416 | 183 | 14.08 | 37 778 | 195 | 14.78 |
| Cattle | 21 900 | 113 | 182.50 | 22 500 | 116 | 187.50 |
| Grazing income | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Other farm income | 5 000 | 26 | 1.90 | 5 000 | 26 | 1.87 |
| Less | ||||||
| Sheep purchases | 3 300 | 17 | 1.31 | 3 300 | 17 | 1.29 |
| Cattle purchases | 10 230 | 53 | 85.25 | 10 230 | 53 | 85.25 |
| Gross farm revenue | 193 034 | 995 | 73.23 | 214 089 | 1 104 | 80.00 |
| Cash farm expenditure | 112 668 | 581 | 42.74 | 114 529 | 590 | 42.80 |
| Interest | 19 165 | 99 | 7.27 | 20 545 | 106 | 7.68 |
| Rent and/or leases | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Cash farm surplus | 61 202 | 315 | 23.22 | 79 015 | 407 | 29.53 |
| Stock value adjustment | 2 930 | 15 | 1.11 | 0 | 0 | 0.00 |
| Minus depreciation | 15 555 | 80 | 5.90 | 15 750 | 81 | 5.89 |
| Net trading profit | 48 577 | 250 | 18.43 | 63 265 | 326 | 23.64 |
| Taxation | 11 956 | 62 | 4.54 | 4 245 | 22 | 1.59 |
| Net trading profit after tax | 36 620 | 189 | 13.89 | 59 019 | 304 | 22.06 |
Allocation of funds | ||||||
| Add back depreciation | 15 555 | 80 | 5.90 | 15 750 | 81 | 5.89 |
| Reverse stock value adjustment | – 2 930 | – 15 | – 1.11 | 0 | 0 | 0.00 |
| Drawings | 42 500 | 219 | 16.12 | 42 500 | 219 | 15.88 |
| Principal repayments | 8 635 | 45 | 3.28 | 8 635 | 45 | 3.23 |
| Development | 2 800 | 14 | 1.06 | 2 000 | 10 | 0.75 |
| Capital purchases | 14 800 | 76 | 5.61 | 7 500 | 39 | 2.80 |
| Disposable surplus/deficit | – 19 490 | – 100 | – 7.39 | 14 134 | 73 | 5.28 |
Other cash sources | ||||||
| New borrowing | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Off-farm income | 8 000 | 41 | 3.03 | 8 000 | 41 | 2.99 |
| Other cash income | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Net cash change | – 11 490 | – 59 | – 4.36 | 22 134 | 114 | 8.27 |
Assets and liabilities | ||||||
| Farm, forest and building (opening) | 2 200 000 | 11 340 | 834.60 | 2 300 000 | 11 856 | 859.49 |
| Plant and machinery (opening) | 103 700 | 535 | 39.34 | 105 000 | 541 | 39.24 |
| Stock valuation (opening) | 204 975 | 1 057 | 77.76 | 207 905 | 1 072 | 77.69 |
| Total farm capital | 2 508 675 | 12 931 | 951.70 | 2 612 905 | 13 469 | 976.42 |
| Total debt opening | 193 000 | 995 | 73.22 | 193 000 | 995 | 72.12 |
| Equity | 2 315 675 | 11 936 | 878.48 | 2 419 905 | 12 474 | 904.30 |
Symbol
f Forecast
Table 14.5: Southland/South Otago intensive 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 | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Casual wages | 4 100 | 21 | 1.56 | 4 100 | 21 | 1.53 |
| ACC | 3 729 | 19 | 1.41 | 3 239 | 17 | 1.21 |
| Animal health | 11 400 | 59 | 4.32 | 11 700 | 60 | 4.37 |
| Breeding | 1 000 | 5 | 0.38 | 1 100 | 6 | 0.41 |
| Electricity | 2 900 | 15 | 1.10 | 3 100 | 16 | 1.16 |
| Feed (hay and silage) | 3 700 | 19 | 1.40 | 3 800 | 20 | 1.42 |
| Feed (crops) | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Feed (grazing) | 2 400 | 12 | 0.91 | 2 400 | 12 | 0.90 |
| Feed (other) | 800 | 4 | 0.30 | 800 | 4 | 0.30 |
| Fertiliser | 16 566 | 85 | 6.28 | 17 539 | 90 | 6.55 |
| Lime | 1 500 | 8 | 0.57 | 1 605 | 8 | 0.60 |
| Farm forestry costs | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Freight (not elsewhere deducted) | 2 400 | 12 | 0.91 | 2 750 | 14 | 1.03 |
| Re-grassing costs (contractors) | 6 000 | 31 | 2.28 | 5 700 | 29 | 2.13 |
| Shearing costs | 11 574 | 60 | 4.60 | 12 397 | 64 | 4.85 |
| Weed and pest control | 2 000 | 10 | 0.76 | 2 000 | 10 | 0.75 |
| Fuel | 9 000 | 46 | 3.41 | 10 400 | 54 | 3.89 |
| Vehicle costs (excluding fuel) | 6 200 | 32 | 2.35 | 6 200 | 32 | 2.32 |
| Repairs and maintenance | 10 000 | 52 | 3.79 | 8 000 | 41 | 2.99 |
| Communication costs (phone and mail) | 2 300 | 12 | 0.87 | 2 300 | 12 | 0.86 |
| Accountancy | 2 600 | 13 | 0.99 | 2 650 | 14 | 0.99 |
| Legal and consultancy | 500 | 3 | 0.19 | 500 | 3 | 0.19 |
| Other administration | 1 200 | 6 | 0.46 | 1 200 | 6 | 0.45 |
| Rates | 5 500 | 28 | 2.09 | 5 750 | 30 | 2.15 |
| Insurance | 3 800 | 20 | 1.44 | 3 800 | 20 | 1.42 |
| Water charges | 0 | 0 | 0.00 | 0 | 0 | 0.00 |
| Other expenditure | 1 500 | 8 | 0.57 | 1 500 | 8 | 0.56 |
| Cash farm expenditure | 112 668 | 581 | 42.74 | 114 529 | 590 | 42.80 |
Calculated ratios | ||||||
| Economic farm surplus (EFS1) | 11 655 | 60 | 4.42 | 26 681 | 138 | 9.97 |
| Cash farm expenditure/GFR2 | 58% | 53% | ||||
| EFS/total farm capital | 0.5% | 1.0% | ||||
| EFS less interest & lease/equity | – 0.3% | 0.3% | ||||
| Interest+rent+lease/GFR | 9.9% | 9.6% | ||||
| EFS/GFR | 6.0% | 12.5% |
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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