Meat & Wool NZ economic service executive director Rob Davison said uncertainty in the global economy and the timing and strength of New Zealand's economic recovery made it extremely difficult to forecast where the New Zealand dollar would go during the next year and how farm-gate returns would 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," Mr Davison said.
The New Zealand dollar was 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, he said.
"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 [and is] weighted towards the equity markets, oil, mineral and metal commodity trends, not New Zealand's soft agriculture commodities," he said.
Because of the likely short-term exchange rate volatility and its effect on farm-gate prices and farm profit, Meat & Wool's economic service looked at several exchange rate scenarios.
Based on an optimistic exchange rate mid-point for the year of 63c/US dollar, up 8 per cent on last year, the forecast price per head of lamb of $80 was down 10 per cent on 2008/9'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, he said.
"A higher exchange rate for 2009/10 centred around 67c/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 [down 18 per cent]," he said.
Revenue and stock would also be affected by the retention of stock to rebuild flock numbers, but lower inflationary pressures and interest rates should abate from the previous year's highs, Mr Davison said.
Federated Farmers national president Don Nicolson said the scenarios were only predictions but farmers needed to have the ability to plan budgets for this season and the predictions would provide a good indication for farmers.
Mr Nicolson advised farmers to work out budgets using the lowest prediction.
It cost some Southland farmers between $50 to $60 to produce a lamb, so they would not be making a lot this season if the average price paid for a lamb was only $73, he said.
The demand for New Zealand farm products on the overseas market had picked up, Mr Nicolson said.
However, the exchange rate was hampering farmers' ability to achieve good returns, he said.
There were other additional costs looming on the horizon for farmers.
These included the introduction of the Emissions Trading Scheme, which had the potential to push up energy costs.
Local body rates had also soared in some areas including southern Southland.
Some farmers had received invoices for rates that had more than doubled since last year, he said.
The price of oil also seemed to be on the rise, he said.
It also appeared interest rates had bottomed and might be trending upwards again.
"Let's hope they [Meat & Wool] are undershooting the targets," Mr Nicolson said.
Knapdale farmer Mike Mouat said the exchange rate was going to "hurt" farmers.
"One would like to think that they [Meat & Wool] were wrong [with their predictions].
Unfortunately I think they are dead right," Mr Mouat said.
He agreed that many farmers would be keeping a higher proportion of replacements this season as they had culled ewes and potential replacements during past seasons because of the poor prices lamb was fetching.
Now there had been one good year, farmers were keen to build up numbers again.
"It will take a long time for numbers to build up again," Mr Mouat said.
He said his lambs were fetching an average of between $105 and $110 last year, which was exceptional.
However, Mr Mouat pointed out last year was a year of exceptional lamb prices and for many years before that sheep farmers had been receiving prices that in some cases did not even cover their production costs.