Interest rates, drought conditions and a sluggish Chinese economy are hitting hard on the profit margins of beef and sheep farmers in New Zealand.

Despite a slight increase in average revenue (1.1%) Beef + Lamb New Zealand (B+LNZ) is forecasting another challenging season for such producers when farm expenditure is expected to rise 1.8%. Average farm profits before tax are forecast to drop 7.4% to $45,200/farm.

Such are the high costs involved in farming down under, particularly as a result of interest rates, that profitability remains at levels similar to those last seen in the 1980s and 1990s.

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The farmer owned industry organisation added that profitability could be better than forecast if interest rate cuts are faster and deeper, and lamb prices improve due to lower global supply.

However with a new report from B+LNZ highlighting the reduced demand for lamb and mutton from their biggest export market, China, values are expected to remain below the five-year average.

The NZ lamb price is projected at $130/head, up just 1.1% from last season but still 8.2% below the five-year average. Mutton prices are expected to remain steady at $60/head, which is 46% below the five-year average.

Kate Acland, chair of B+LNZ acknowledged the sector’s current difficulties but remains optimistic about the future.

“It’s been a tough year for many in the industry, and the upcoming season is also shaping up to be challenging.

“However we are starting to see some positive signs in the market, we know our sector is strong, resilient, and will bounce back even if it may still take some time,” she said.

The B+LNZ outlook shows that the all-beef price is forecast to be $5.35/kg, 4.3% above last season and 4.8% above the five-year average, reflecting strong demand in the US where the cattle herd is at its lowest level in over 70 years.

The report adds that European and North American markets are also expected to remain solid for lamb.

In the last few weeks, there has been a significant decrease in lamb processing in Australia.

B+LNZ said that if this trend continues, that coupled with less expected supply from New Zealand, the EU and UK, could see global lamb prices lift higher than we are currently forecasting.

As sheep revenue represents about 42% of average New Zealand farm revenue, what happens with these prices is key to the speed of a recovery in farm profitability. Export volumes for New Zealand red meat are expected to be lower in the coming season, with lamb and mutton down around 7% and beef down 3%.

B+LNZ said that this is due to a significant decrease in sheep and cattle numbers driven by drought this year.

Lamb production is also expected to be down significantly due to the fall in ewe numbers and a lower lambing percentage because of the drought.

“While the current forecast for profitability this coming year are sobering, there are a number of factors that could see the recovery be more rapid than anticipated and the medium-term the outlook for our red meat exports remains strong,” the organisation said.