Rollercoaster ride on the price of sheep hurts farmers

OPINION: Crikey, there are some angry sheep farmers out there. Since writing about last season’s lamb price debacle and the dampening effect it is having on this season, I have been contacted by several irate farmers.They’ve got plenty to be upset about. The price of prime lambs has gone from $150 a year ago to $90 now. Store lambs from the East Coast hills that were fetching $100 last year are going for $50.

The farmers feel frustrated at their helplessness. They feel they are just pawns in the meat industry’s hands. With hindsight, it’s clear now the meat companies paid too much for lambs last season. But in their defence, at the start of season they were getting returns that warranted those prices.

The trouble started when the British and European markets pushed back. The companies did not react quickly enough – in fact, they refused to believe the first signals were more than just market “noise”.

And when they did react, the companies moved too slowly. The lamb price came down gradually, no company prepared to give their rivals a chance to gain at their expense.

For at least eight weeks the prices for lambs in New Zealand, did not reflect what customers were prepared to pay for the meat half a world away.

This year, prices more accurately reflect an export market that has settled at a lower level. But both the winners and losers of last year are hurting.

The meat companies’ losses were massive – $120 million to $150m is a conservative estimate for the “Big Four”. They were left with a lot of meat in storage they will be feeding into the market this year and they will want to recoup their losses.

The winners were the farmers, particularly the hill country breeders who have struggled through some tough drought years in the past decade. They used that extra income to repair their balance sheets.

But not all farmers did well. The finishers were caught when prices fell. They paid high prices for the breeders’ lambs, but couldn’t make a profit after growing those lambs to market weights.

No one can know the true cost of this. One finisher I spoke to put it at $250m; another thought it might be half that.

Now it is the breeders’ turn to hurt. The finishers don’t want to be caught out again and prices are low. There are some pretty glum farmers at the Feilding and Stortford Lodge stock sales.

One farm consultant points out the prices still leave a margin for finishers, giving the example of a 28 kilogram store lamb bought for $2.10 a kg growing at 150 grams a day and selling at 18kg carcassweight at $4.70 a kilogram in early March. This is a margin of $22.40 a lamb.

All farmers appear to have suffered from a sudden upturn in the price of supplies. One farmer who spoke to me complained some service agencies saw the increased lamb prices of early last season as an opportunity to increase, for example, the cost of a popular drench by 12 per cent, dog rolls by 10 per cent, dog biscuits by 7 per cent and shearing oil by 16 per cent.

Overshadowing all this is the prospect of another drought.

The hills from Hastings south are drying off, with coastal farmers worst hit. I’ve been told of a Porangahau farmer who has already sent his ewes to better grazing elsewhere.

Crops sown in the first week of October are just emerging. Crop failures are being reported and many finishers are saying they may be accepting only a quarter of their usual lamb drafts.

Back to the industry crisis: How can a repeat of last year’s fiasco and the harm it caused be avoided?

Beef + Lamb New Zealand chairman Mike Petersen says the answer is in the hands of the meat companies. The reason they behave so erratically is because there are too many meat plants to process a dwindling supply of lambs, he says.

“I don’t know who’s going to make the first move. But if there was a move to get rid of excess capacity, that would make a huge difference in the behaviour between farmers and meat companies.”

A lot will depend on how well the companies can recover this year. If the balance sheets are still shaky, and their banks are less than happy, plant closures may happen.

In the meantime, farmers must accept the price drop. However, as Petersen points out, $90 for a lamb is still pretty good, compared with the $50 they were getting just four years ago.

But if last year’s $150 and this year’s $90 could have been averaged out at $120, everyone would have been happy.

– © Fairfax NZ News