Financial Factors
1999/2000 Review
Revenue
Farmers are calling 1999/2000 the season of missed opportunities because the dry summer, high stock losses, and stock shortages made it difficult to capitalise on the higher product prices.
Gross farm revenue on the model farm rose by $49,200 (33%).
Cattle slaughter weights were down by 5-10% due to the carryover effect of a tough 1998/99 season, but this was more than compensated for by a 15-20% lift in cattle values. Weight gains for 20-month cattle in the summer/autumn of 2000 were disappointing but farmers were able to offload them onto a very strong store market. Prices of $1.65-$1.75/kg liveweight have been common for 20-month cattle, and traditional breed weaners fetched very high prices in autumn 2000.
Lamb slaughter weights on this class of property usually average 15-16 kg carcass weight. The 1999/2000 season was at the top end of this range, and around 0.5 kg above last season. This was attributed to the good pasture quality conditions for lambs from birth through to mid-summer.
The average lamb price per head rose by 10-15% on last season to $44-$48 net. Store lamb finishers have maintained their $10-$15/hd summer finishing margins and expect to reap the benefit of attractive winter contracts in 2000.
The late surge in wool prices has been welcome and should see the season average price slightly above that of 1998/99. Lambswool prices hit rock bottom earlier in the season and as a consequence, fewer lambs were shorn before sale. This partly explains the decline in wool production per sheep stock unit. Scanned empty ewes sold in-the-wool was also a factor.
Cattle revenue on the model farm is significantly up, from $47/cattle stock unit (csu) in 1998/99 to $75/csu in 1999/2000. However, the cost of replacements has also risen strongly. The specialist cattle finishers report that their margins have lifted in 1999/2000 but only by $50-$70/hd overall. This depends on when they purchased their replacements. Early buyers of weaners found a store market that had not gained full momentum, whereas those delaying purchases until autumn have faced rising per head prices and a shortage of quality stock.
Store cattle have been in short supply. A number of farmers have adopted a "wait and see" approach because they have the option of substituting extra dairy grazers. The store market is expected to remain strong throughout the 2000 winter.
On the surveyed farms, cattle returned $55-$60/csu on average across the wide range of systems adopted, compared to $48-$52/csu in 1998/99. The returns on intensive beef properties (over $70/csu) have not been seen since the last peak in beef profitability back in 1993 and 1994.
In response to the shortage of store cattle, some farmers have bought or retained extra breeding ewes. The average in-lamb ewe price has risen sharply late in the season. Before mating, quality 1-2 year ewes were fetching $35-$40/hd. After mating they were difficult to procure at less than $45/hd. Many expect prices for scanned in-lamb ewes to reach $52-$60/hd by mid-winter.
Expenditure
Intensive sheep and beef farmers are conditioned to exercise strict control over spending. They have not released the brakes on spending just yet. Excluding fertiliser and interest costs, farm expenditure rose by only $4,000 in 1999/2000.
Expenditure on most items has been controlled in line with budgets, with fuel being an exception. In this frame of mind, extra spending would only be contemplated where a short-term profit is assured. Extra nitrogen fertiliser and the lambing performance enhancer Androvax, meet this criterion. There was a catch-up on essential repairs and maintenance. Expenditure on animal health items, such as zinc for facial eczema control, reflected the fact that prevention was applied more widely. Farmers are still reluctant to spend on deferred maintenance.
Interest rates have risen sharply during the 1999/2000 year, a factor concerning farmers and the rural servicing sector, but the impact will probably not be felt until 2000/01.
Net Result
The net trading profit on the model farm for 1999/2000 doubled to $50,570.
Off-farm income ($9,000) contributed significantly to a net cash change of $15,900, after modest development ($5,000) and capital purchases ($6,000). The surveyed farmers intend to reduce short-term debt in the face of rising interest costs.
The surveyed farms were too variable to indicate any patterns in their results for 1999/2000.
2000/01 Forecast
Revenue
The surveyed farmers are budgeting for a further lift in cattle sales (13-15%), and a smaller lift in sheep returns. Provided the New Zealand dollar remains below US$0.52, farmers are confident of realising these expectations. However, the net margin is equally dependent on livestock purchase prices and it may be optimistic to expect these to fall from the very high trend set in autumn 2000. Many intend to rear a larger proportion of replacements this spring to spread risk.
The beef policies adopted by the model farm are very sensitive to trading
margins. The model forecast assumes that the margin on the store steers is reduced from
$350/hd in 1999/2000 to $250/hd in 2000/01. Similarly, the model assumes that strong
demand for weaner bulls will increase market prices by $34/hd. On this basis, cattle
purchases rise by $20,800 while cattle sales rise by $7,300. This causes gross farm
revenue to fall by $7,000 (4%) in the model, which implies that small lifts in returns are
expected for lambs, wool and grazing.
When interpreting this forecast it is important to note that demand for store stock is
influenced by feed supply as well as market prospects. A long, hard winter could offset
the expected increase in demand for store stock or, if prices are very high, then other
alternatives, such as dairy grazers, will be considered. However, farms with a beef cow
herd will not be affected, but the same cannot be said of calf rearers.
Expenditure
Farmers expect to pay more for fertiliser, fuel, freight, and capital purchases. However, they have indicated that they will try to make savings in other areas. Overall, surveyed farmers are budgeting on a small increase to total farm expenses, but the ability to hold expenses may be out of their control. The model assumes that cash farm expenditure will increase by 5%.
Most farmers have fixed mortgage debt interest rates for one or two years. The impact of rising interest rates depends on when these rates were fixed and for how long.
In the year following a lift in farm profits, there is normally a terminal tax carryover effect. In the model this contributes $3,700 to the rise in taxation in 2000/01.
Net Result
While the cash farm surplus is expected to be down by $13,300 (19%), this will still be regarded as a satisfactory result relative to the last five years. The uncertainties in this forecast are such that the model farmer would hold off on major spending decisions.
Farmers will probably proceed with some modest farm improvements in 2000/01, provided this would not cause their cash position to deteriorate.
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