Schedule prices for beef have remained strong on the back of dairy farmers culling cows early. With the South Island particularly short of cattle, schedule prices rose sharply as supply shortened heading into winter along with strong demand for chilled beef.

Store cattle were also well sought after in the autumn. Loss of dairy grazing contracts forced graziers to compete in the store cattle market, along with those making a shift to cattle to take advantage of higher margins.

The strong cattle prices once again underpinned returns for farm businesses in 2016. Beef revenue is expected to maintain most of its 2015-2016 gains through to 2017, when global beef prices are expected to soften as supply increases.

Sheep meat prices throughout 2016 trended downward due to resistance to frozen product in China. Recent prices are the lowest since the drought affected the 2012-2013 season. Lamb was particularly affected by early lamb traded into a weakening frozen export market and declining demand from the UK and China, as they both increased processing of their own flocks.

As a percentage of total stock units (su) carried, those farm businesses that were able took the opportunity to double their deer ratio to 5.1%, taking advantage of strong venison and velvet prices. This was at the expense of sheep enterprises. This looks to be part of a strategic risk response to lower lamb and sheep meat prices.

Across all farm classes, total farm stock units decreased from 10.3 su/ha to 9.7 su/ha in response to the dry autumn and early winter conditions.

The outlook remains positive for 2017 with a predicted softening of beef pricing being offset by a rise in lamb prices due to lower supply and increased Chinese demand. There is difficulty in assessing the effect on the lambing percentage after many areas experienced facial eczema challenges.

The results from the average of our top 10% of clients show better per ha income despite higher debt levels and a higher cost base. This indicates that despite a higher cost structure, these farm businesses were able to generate a better return on assets of 7.8% and a return on equity of 12.9% for the 2016 year compared to others in the pool. This also highlights that despite the softening in returns, these farm businesses are heavily investing back into their businesses to achieve better than average returns.

The top 10% of farm businesses experienced less volatility in returns in comparison to other businesses surveyed from 2012-2016, utilising good decision making to generate superior returns, whilst mitigating falling returns when faced with adverse climatic and market conditions.

Cattle

Beef profitability in 2016 on a cattle gross income/CSU basis, continued to remain at the upper end of the last five years surveyed. Margins per head reflected the strong schedule and store prices in the autumn, further supported by a weakening New Zealand dollar. Limited availability should ensure good returns for breeders, however, competition for store stock is likely to reduce the margins for those finishing farmers.

The US market in 2016 has seen some resistance to pricing with hesitant buyers. Internally the US has seen grinding of more cuts which compete directly with New Zealand product. US beef is having to compete strongly with cheap chicken and pork, as the market tries to forecast how much stock is being held for the demand ahead, especially as supply from Australia falls.

For the second season in a row, beef and veal export receipts are projected to be higher than lamb and mutton export receipts.

Sheep and Wool

Returns from sheep and wool were back up to those achieved in 2015, driven by lower lamb production and weak demand for sheep meat. These results were significantly lower than those produced in 2011 and 2012. Sale volumes of lamb decreased 5% off the back of lower lambing percentages, averaging 127.8%.

Mutton returns were back 17% on 2015’s levels. For the third consecutive season China was New Zealand’s largest mutton market. With 70% of export volume heading to China, diversification in terms of cuts will be needed to mitigate the growing resistance to frozen product.

The recently signed agreement with China to allow future trade in higher value New Zealand chilled meat exports has the potential to raise lamb prices by 10% next season. A slowdown in China’s pace of slaughtering its own flock, and reduced supplies here and in Australia due to a lower sheep flock, are all positive indicators for lamb producers looking towards 2017.

Wool returns trended upwards with pricing and volumes up 12% on the five-year survey average. Crossbred wool prices show considerable downside risk, as seasonal production volumes swell and Chinese buying activity remains quiet.

Economic Farm Surplus/ha

This is our major measuring statistic. Economic farm surplus (EFS) is inclusive of wages, including a managerial wage where appropriate, and excludes interest and rent costs.

EFS in 2016 was $275/ha, a decrease of 27% over 2015’s results. The decrease was primarily due to the weakened returns for sheep meat and associated co-products. However, it is important to note that strong beef revenues buffered some of the downside risk masking the reduced returns from the sheep enterprise.

Return on Equity

Total assets employed (average) rose from $4.594m in 2015 to $4.709m in 2016 on the back of increased QVs.

Plant and vehicle values decreased, indicating farm businesses are taking the opportunity to defer replacement and upgrading of plant and vehicles as discretionary income falls.

Long-term debt remained relatively static at $1.497m with farm businesses investment in a holding pattern as uncertainty over lamb returns continues. Overall return on equity employed fell from 6.7% in 2015 to 4.2% in 2016.

Debt Servicing/Gross Farm Income (GFI) % (interest only) decreased from 14.2% in 2015 to 14.0% in 2016, which is a reflection of static term debt levels carried by farm businesses.