Wednesday, April 24, 2024

THE BRAIDED TRAIL: Wealth depends on capital gain

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This is the third article in a series investigating New Zealand’s pastoral sheep and beef farms. The first one was an overview of NZ’s 9200 commercial sheep and beef farms, and how the pastoral farming area has declined over the past 30 years. The second focused on the North Island hill and hard hill country, now comprising approximately 4000 of these 9200 commercial farms. On those hill farms, key issues are land-use competition between pastoralism and production forestry, combined with retirement of the tougher country for carbon farming.
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This time my focus is on the 4400 intensive farms spanning both North and South Islands. They are classified by Beef + Lamb NZ (B+LNZ) as classes 5-8, with class 5 being in the North Island and classes 6-8 being in the South Island. That leaves 200 high country and 600 South Island hill country farms that need their own analysis, but that will have to wait.

These B+LNZ categories should not be confused with the NZ land inventory classifications, which also run from 1-8, but with class 1 being the best and class 8 suitable only for conservation.

Class 5 North Island finishing farms

These farms are typically small family farms, averaging around 290ha, carrying 2700 stock units and employing about half a labour unit additional to the farmer. In the past 30 years, the number of these farms has decreased from 3350 to 1045. Where have these farms gone?

The remaining farms have increased in size by about one-third, but that still leaves about 400,000ha that has moved to other land-uses. Urban development, lifestyle blocks and some horticulture, including market intensive vegetable production, will all have contributed. Dairy conversions and dairy support blocks will also have contributed, particularly in Hawke’s Bay and Wairarapa. But the overall North Island dairy area has not increased greatly in more than 20 years, so dairy cannot be the main reason. Sorting out the details of land-use change on this class of land would require more research.

On the class 5 sheep and beef farms that remain, there has been a drift towards beef over the past 10 years. Sheep stock units are down from 50% of total livestock units 10 years ago to around 40% currently. Cattle stock units have increased over this period from 50-60% of total livestock units. For clarification, a livestock unit is based on the feed required by a typical ewe.

Wool income has been less than the cost of shearing for the past three years. With beef income now easily exceeding sheep income on these so-called sheep and beef farms, they are now better described as ‘beef plus sheepmeat’ farms. 

Over the past 10 years, there have been fluctuations in net income but no clear trend. However, this is on a nominal basis before adjustment for inflation. Accordingly, an alternative perspective is that these farms have been drifting backwards. The estimated profit by B+LNZ for 2020-21, from which farmers have to deduct their drawings, is $111,000. 

Over the past 10 years, average debt has increased from $450,000-$700,000, but net worth has increased from $3.7 million to $5.7m. Most of the increased net worth has come from increasing land values, with nearly all of this occurring in the first half of the decade. Low interest rates have been a factor in allowing these farmers to keep their head above water on a cashflow basis

Class 6 breeding and finishing farms

Class 6 farms are spread across the South Island. They have breeding stock and they also finish lambs and cattle. The farms average close to 500ha, they employ on average about 0.7 labour units, and they carry about 4300 livestock units. Lambing percentage is typically 135-140% and calving around 85%. Approximately 60% of the livestock units are sheep, with cattle a little under 40% and deer about 2%. Sheep numbers have stayed relatively constant over the 10-year period, but cattle numbers have increased by around 40%, leading to an overall increase in stocking rate of about 15%. Wool income has declined 70% over the past 10 years and has been less than shearing expenses in the last two years. These farms have tended to be more profitable than most other types of sheep and beef farms. They have been averaging about $145,000 net income in recent years. Debt averages around $1.3m, up from 560,000 10 years ago. Net worth is about $6.1m, up from $4.9m 10 years ago.

Class 7 intensive sheep sarms

Class 7 farms are mainly in Southland, South Otago and West Otago. The decline in farm numbers over the past 30 years has been massive, dropping from about 3300 farms down to 1040. The remaining farms have increased in area over this time by about 30%, and now average about 250ha effective area. About 350,000ha of this land class has shifted to other land-uses over the last 30 years, with dairy conversions being the biggest contributor.

The remaining farms employ on average 0.3 labour units, and on average they run 2500 sheep plus 100 cattle. More than 75% of income comes from sheep, but wool income has been less than shearing expenses for the past two years. Net worth has remained almost static over the past 10 years, increasing from $4.6m-$4.7m. Debt is up from $600,000-$750,000. Net income has averaged about $100,000 over the past 10 years with no clear trend but tends to be volatile, in part because of a lack of diversification options.

Class 8 mixed cropping

Class 8 farms are mainly in Canterbury. Since 1990, the area has declined from 251,0000ha down to 184,000ha, with dairying being the biggest cause of land-use change.

Individual remaining farms have increased from about 250ha in 1990 to 400ha currently. About 65% of income comes from crops, but animals are still of fundamental importance in maintaining soil fertility.

In the past 10 years, there has been a continuing shift from sheep to cattle, with cattle increasing from one-third of the livestock units 10 years ago to two-thirds now. Most of these cattle are dairy young-stocks held throughout the year, plus non-lactating dairy cows in winter.

Debt on these class 8 farms is unchanged over the past 10 years at $2.85m and net worth has increased from $7m-$9.9m. Early in the decade, net income was averaging around $200,000, but in the past three years has averaged $110,000.

The big picture on intensive sheep and beef farming

Across NZ, the total land area used for intensive sheep and beef farms has declined from 2.5 million ha in 1990 down to about 1.3m ha currently. The remaining farms have got bigger. On these 4400 intensive commercial farms, there has been an ongoing drift towards cattle, particularly in the North Island. This drift is closely linked to the dairy industry. It includes dairy heifers, non-lactating cows and male dairy progeny that are raised for beef. On all of these farms, it currently costs more to shear the sheep than what the wool is worth. The old maxim that survival is about cash, but wealth comes from capital gain, is still true.

Early in this article, I mentioned that I have yet to consider the changes that have been occurring on South Island hill and high country. That will be a markedly contrasting story.

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Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at kbwoodford@gmail.com  Previous articles can be found at https://keithwoodford.wordpress.com

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