Redcliffs Station owners Ross and Jess Bowmar run 8500 stock units on the 1935ha property.
They are in the tail end of shearing and wool classing their merino wool, part of which is under a rolling 10-year Icebreaker contract.
"At the moment it’s about $5 a kilogram ahead of the market so it’s really significant," Mr Bowmar said.
"It’s like tens of thousands of dollars that we’re better off for that contract.
"Knowing the fine wool and meat commodity markets often go up and down together, having something fixed is quite valuable.
"It’s like fixing part of your mortgage rate so that you’re taking some of that volatility out."
Their merinos’ 18.5 micron wool goes to Icebreaker activewear with more fine wool heading to The Merino Company (NZM) for other brand partners or the Melbourne auction.
The hoggets, producing about four kilograms of greasy wool at 17.5 microns, are not contracted, but were in the past.
Mr Bowmar said their decision to work with leading Australasian sheep geneticist Mark Ferguson, from neXtgen Agri, was paying off during the leaner times.
The focus was on putting more fat, muscle and growth on their merino hoggets.
"Our hoggets are about 10 kilograms heavier now than what they were two years ago.
"So it just shows you the massive opportunity for farmers out there with genetics to make rapid progress."
Redcliffs produces about 3400 merino hoggets, including replacements. Those heading for the marketplace are kept over winter and slaughtered at about 20kg carcass weight.
This works out better than selling them in autumn as store lambs at $2.50/kg with the finished return a superior gross margin of about $100 per head.
Mr Bowmar said the genetic improvement would hopefully offset some of the "terrible" meat schedules with lamb down to the $6/kg to the $7/kg range in September.
"What happens when the lamb supply really starts coming on in the summer time? With the new season lambs hopefully the markets pick up. So that’s not great when you think we were getting $9/kg not so long ago. You have to try and be positive and hope it bounces back."
He said beef export markets varied overseas with the United States upbeat as it faced a beef shortage and record prices for young cattle.
That would bode well for New Zealand, he said.
Store beef yearlings were still selling for $3.50/kg to $4/kg liveweight, but there was a disparity in the market with prime animals making slightly below $5/kg to $6/kg across the meat companies.
Mr Bowmar said farmers were trying to get a fair price and produce animals desired by markets.
The mixed signals were almost producing two stories with farmers likely looking to adjust their sheep to beef ratio, he said.
"It depends if you’re a crossbred or fine wool farmer and it is probably not as bad necessarily for us fine wool guys at the moment as long as you’re contracted.
"Sheep are a lot more work so they need to see a significant increase in returns or their numbers will accelerate in the decline. Whereas the beef animals are less work and will probably take the place of the sheep."
Mr Bowmar, who is the Mid Canterbury Meat & Wool chairman for Federated Farmers, said farmers were being careful about spending and trying to save money.
"It’s obviously fairly challenging at the moment with the lower prices, just not having that revenue coming in on farm and doesn’t leave any head room in the cashflows at all.
"You’ve got a fairly rapid increase in the interest rates and we’ve had a rapid increase in on-farm costs and now we’ve got declining returns for our products so it’s a perfect storm in terms of squeezing out any margins."
He said fertiliser spending would likely remain low as incomes had come down.
Farmers would do more soil testing to see if they could stretch their budget further without impacting on productivity. No-one wanted to end up in that "downward spiral" of having no feed for stock, less money coming in and having to make more cuts, he said.
Farmers were shelving the replacement of farm machinery or farm trucks and dealerships were reacting by contacting them with deals.
Interest rates increases from below 3% to more than 8% might have softened slightly the past few months, but were still painful for many farmers.
"I think debt is the single biggest variable that separates those from feeling the pain from those that are not. Debt tends to be loaded on those who have aggressively expanded or on the younger farmers."
Mr Bowmar said farmers were under constant pressure from the government for compliance and regulations. More water testing and biodiversity requirements were also coming through the back door from banks and other firms.
Much of this environmental work was not necessarily wrong, but costs attached to them were not adding value, he said.
He said they had just got a sustainability loan allowing a deduction in their interest rate.
The Bowmars’ contracts with NZM had high benchmarks through the ZQRX and ZQ programmes which covered off the sustainability obligations at this stage.
"The premiums we get for the contract wool versus the auction market offset some of these additional costs as well. We’ve got to start doing water quality testing and start doing biodiversity monitoring and soil health. I would just like to make sure that anything we do is commercial and not an additional cost. That’s where farmers push back and rightfully so when it’s purely a cost."
Contract opportunities were not quite there yet for red meat, but some companies were making progress such as the Alliance Group with its Lumina lamb and Silere Alpine Origin Merino brand.
Many of these contracts were still tied to the meat schedule and its volatility removed their advantage. Negotiating a longer term contractual relationship would change the game for everyone in the supply line, he said.
"Rich people don’t feel downturns and that brings you in-elastic demand so you’re not so exposed to the whims of the commodity markets and inventory levels. I think this year is particularly challenging for lamb because we have the whole Chinese situation with their economy slowing down and on top of that we have the Australians increasing their sheep numbers and if it gets dry over there that’s only going to put more pressure on the market so it’s looking like it’s fairly subdued over the next six months."
He said the way forward was to convince buyers to spend more on lamb produced to the same standard and negotiate a multi-year contract for the upper end of the market.
That way farmers did not have to second-guess what their budget was going to be for the coming year. Having more security via contracts to remove some of these bumps was valuable especially for multi-generational farms, he said.
- By Tim Cronshaw
