Intensive sheep and beef provide cash but wealth depends on capital gain

Intensive sheep farms have been squeezed by dairy and are now drifting to beef with wool right out of the money

 This is the third article in a series investigating New Zealand’s pastoral sheep and beef farms. The first one was an overview of New Zealand’s 9200 commercial sheep and beef farms, and how the pastoral-farming area has declined over the last 30 years.  The second article 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.

This time my focus is on the 4400 intensive farms spanning both North and South Islands. They are classified by Beef+Lamb as Classes 5-8, with Class 5 being the 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 Beef+Lamb categories should not be confused with the New Zealand Land Resource 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 290 hectares, carrying 2700 stock units, and employing about half a labour unit additional to the farmer.  In the last 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 400,000 ha 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 Hawkes 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 these North Island Class 5 sheep and beef farms that remain, there has been a drift towards beef over the last ten years. Sheep stock-units are down from 50% of total livestock units ten years ago to around 40% currently. Cattle stock units have increased over this period from 50% to 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 last 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 sheep-meat’ farms.

Over the last ten 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 North island intensive farms have been drifting backwards. The estimated profit by Beef+Lamb for 2020/21, from which farmers have to deduct their drawings, is $111,000.

 Over the last ten years, average debt has increased from $450,000 to $700,000, but net worth has increased from $3.7 million to $5.7milion.  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 cash-flow 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 500 hectares, they employ on average about 0.7   labour units additional to the farmer, and they carry about 4300 livestock units. Lambing percentage is typically 135-140 percent 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 ten-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 last ten 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 farm. They have been averaging about $145,000 net income in recent years. Debt averages around $1.3 million, up from 560,000 ten years ago. Net worth is about $6.1 million, up from $4.9 million ten years ago.

Class 7 Intensive Sheep Farms
Class 7 farms are mainly in Southland, South Otago and West Otago. The decline in farm numbers over the last 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 250 hectares effective area. About 350,000 ha 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 last ten years, increasing from $4.6 million to $4.7 million. Debt is up from $600,00 to $750,00. Net income has averaged about $100,000 over the last ten years with no clear trend but tends to be volatile, in part because of reliance on one income source, with this being sheep.

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

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

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

Debt on these Class 8 farms is unchanged over the last ten years at $2.85 million and net worth has increased from $7 million to $9.9 million.  Early in the decade, net income was averaging around $200,000 but in the last three years has averaged $110,000.

The Big Picture on Intensive Sheep and Beef Farming.
Across New Zealand, the total land area used for intensive sheep and beef farms has declined from 2.5 million ha in 1990 down to about 1.3 million 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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