New Zealand: High inflation and lower livestock prices could lead to a drop in farm profits

The Beef + Lamb New Zealand (B+LNZ) 2022-23 report says the farm's pre-tax profit is estimated at $146,300, down 31 percent from 2021-22 and below the average of the last five years.

Farm profit before tax is equal to the gross income of the farm minus the total expenses of the farm. Farm profits are used to pay taxes, pay off debts, and buy fixed assets for the farming business, such as farm equipment.

“Inflationary pressure is causing farm costs to skyrocket, offsetting the benefit of what has historically been a pretty good sales margin,” says B+LNZ chief economist Andrew Burtt.

The projected surge in global mutton and beef trade is supported by broadly strong fundamentals in key markets, with demand projected to recover while global supply levels remain capped.

This follows a sharp drop in demand for mutton earlier in the season before CHINA relaxed its zero covid policy.

"With 85 percent of New Zealand's mutton exports coming from China, this affected EXPORT earnings, which were a third lower compared to the same period last season," the report said. However, a recent case of bovine spongiform encephalopathy in Brazil has added fuel to the fire in the global beef market.

As falling selling prices reduce income, farmers have sought to cut costs by postponing repairs and maintenance and reducing fertilizer use, but inflation and rising input prices outweigh cost-cutting initiatives.

Total spending has risen to an average of $531,500 per farm in 2022-23. Spending on fertilizer, lime and seeds is projected to increase by 6% to average $102,100 per farm after a 15% increase last season. This is the largest spending area for sheep and beef farms, accounting for about 19% of farm spending in 2022-23.

Rising interest rates and an increase in overdraft credit are projected to increase interest costs by 12.5% ​​compared to last season, averaging $54,000 per farm. As farmers refinance and extend their overdrafts while earning lower prices, cash flow management will become a challenge this season.

In addition to the financial pressure farmers face, the full impact of Cyclones Hale and Gabriel is not yet known. Weather events such as Cyclones Hale and Gabriel and floods in January mean farmers will be rebuilding vital infrastructure, driving up repair and maintenance costs significantly, with much of that spending coming from long-term overdrafts.

Meanwhile, conditions in Otago and Southland are extremely dry, putting farmers under varying pressures.

B+LNZ CEO Sam McIvor says the severe financial hardship faced by farmers is another reason why the government should put a hold on a number of environmental policy changes.

“Farmers are already feeling overwhelmed by environmental policy changes, in addition to declining incomes and high inflation on farms. Some of them are now also facing the need to rebuild their businesses after severe weather events such as cyclones.” McIvor says. This means that two-thirds of the New Zealand sheep herd and two-thirds of the New Zealand beef cattle are in areas that are either affected by cyclones or suffer from very dry conditions. When farmers are affected in this way, it has a domino effect on the economy as a whole, including farm service businesses such as veterinarians, trucking companies, shearers and many others. Simply put, the prime minister must put an end to the tsunami of laws and regulations which constrain the export sector of food production. It is time to get behind the sector so that farmers can get through this financially challenging time, plan ahead and ensure the sustainability of their business in every sense of the word,” said the expert.