Sheep and beef farmers are looking at a hefty pay cut of about $67,000 this season as inflation and rising costs bite into their expected pre-tax farm profits.
Beef + Lamb New Zealand (B+LNZ) foreshadows a gross profit per farm for 2022-23 of $146,300, a 31% fall on the previous season’s bountiful $213,400.
That will take farmers below average profitability over the past five years.
The picture is only slightly less bleak for Canterbury and Marlborough farmers with farm profit before tax falling 25% to $148,900 per farm. Gross farm revenue in the regions is forecast to rise 2% to average $954,000 per farm for 2022-23, as cattle and crop revenue bolster a 9.5% fall in sheep revenue.
B+LNZ says the outlook for global sheepmeat and beef trade is improving.
However, it won’t at this stage prevent farmer profitability falling sharply because of reduced livestock prices and continued high inflation.
Farm profit before tax is calculated on gross farm revenue minus total farm expenditure and is used by farmers to meet their taxation payments, personal drawings, debt repayments, and to buy farm business items such as farm machinery.
Chief economist Andrew Burtt said inflationary pressure was causing farm costs to rise sharply and erode the benefit of still historically pretty good farm-gate returns.
Improving signs for global sheepmeat and beef trade was supported by "solid fundamentals" in key markets, with demand projected to recover and global supply to remain tight, he said.
This follows a stark drop in demand for sheepmeat at the start of the season before China relaxed its zero Covid-19 policy.
"As 85% of New Zealand’s mutton exports are to China, this impacted export receipts, which were one-third lower compared to the same period last season," Mr Burtt said.
However, a recent case of bovine spongiform encephalopathy (BSE) in Brazil has added fuel to a tightening global beef market.
Closer to home, the falling farm-gate prices are expected to lead to lower revenue, with farmers looking to reduce costs by deferring repairs and maintenance and reducing fertiliser use.
Nonetheless, inflation and rising prices for farm expenses are outweighing cost-cutting initiatives.
Mr Burtt said overall spending had increased to an average $531,500 per farm in 2022-23.
"Fertiliser, lime, and seeds expenditure is forecast to increase by 6% to average $102,100 per farm, following a 15% increase last season. This is the largest area of expenditure for sheep and beef farms at around 19% of farm expenditure in 2022-23."
Interest rate rises and increased overdraft borrowing is expected to increase interest expenditure 12.5% above last season — averaging $54,000 per farm.
B+LNZ says managing cashflows will be a challenge this season as farmers refinance and extend overdrafts while receiving lower farmgate prices.
Adding to the financial pressures facing farmers is the unknown full impact of Cyclones Hale and Gabrielle.
"Weather events like Cyclones Hale and Gabrielle and flooding during January mean farmers will be rebuilding vital infrastructure, this will significantly lift repairs and maintenance expenditure and much of this spending will be on extended overdrafts," Mr Burtt said. "Slips and silt destroyed farm infrastructure and stock losses are not fully accounted for after Cyclone Gabrielle. The economic impact on the supply chain for agriculture will be felt for years to come."
Meanwhile, conditions are extremely dry in Otago and Southland, placing a contrasting pressure on farmers.
Chief executive officer Sam McIvor said the financial pressures farmers were facing were another reason the Government should put brakes on its raft of environment policy changes.
He said two-thirds of the national sheep flock and two-thirds of beef cattle were in areas suffering from the effects of cyclones or dry conditions.
