Lamb prices are high but industry remains buffeted by big crosswinds
The sheep industry in Zealand has been getting smaller ever since 1982 when sheep numbers reached 70 million. The latest numbers are 26 million in 2021, having dropped from 32.6 million in 2010. Yet sheep still earn over $4 billion of annual export income.
In recent months I have had plenty to say about both greenhouse gas policy and forestry as they are affecting and will affect all New Zealand agriculture. Here, I focus specifically on sheep farming to seek answers as to where the industry might head.
Focusing first on market returns, the last two decades have brought lots of good news. Lamb and mutton prices have risen faster than other pastoral products, including dairy, and at a considerably higher rate than general inflation. Yet somehow it has not been enough to stem the decline.
The key factors driving the decline have changed over time. Initially, it was the huge rural decline of the 1980s and the removal of the distorting subsidies of the Muldoon Government. Quite simply, those Muldoon policies, with payments for each extra animal carried, led to skinny underperforming sheep.
During the 1990s, the key driver was the march of pine trees across the North Island, but that stopped in about 1998 with declining timber prices.
Then there was the dairy boom, already under way in the late 1990s, and then continuing through to the middle of the last decade. Availability of irrigation together with new irrigation technologies were very important in Canterbury. Further south it was a diverse range of technologies that drove change. Despite lamb prices being good, wool prices were terrible, and the call of dairying was very strong.
Right now, those forces have changed again. There is zero conversion now occurring of sheep land to dairy, owing in large part to new regulations. However, the call of forestry is once again strong. Also, there is great concern about greenhouse gas levies, mainly methane but also nitrous oxide.
The forestry situation is complex and some might say crazy. As I write this, the Government is giving serious consideration to pulling so-called permanent pine forests from the Emission Trading Scheme. If this happens, all new pine forests will be for short-cycle production forests, typically of 28 years or in some cases a few more years. The irony is that this will encourage tree planting on the softer country which is easier to harvest and with a preference for land that is well-located relative to ports. Yet it is on hard erosion-prone hard hill country, far from ports, where land should be going into long-term pine forests.
Assuming that the Government sticks to its latest proposals, pine-production forests will stay within the ETS, but with carbon credits limited to the first 16 years. Depending on location, these credits will, at current carbon prices, be worth about $30,000 per hectare on most North Island farms but less in most parts of the South Island. That is enough to blow sheep farming away on most of the better sheep farming land. Of course, if the price of carbon rises much higher as the Government has said it wants to happen, then these returns will further increase. But it’s a game where the Government sets the rules and those rules can change.
The greenhouse gas story is also complex. A typical sheep emits about 12 kg of methane per annum, which may not sound much. It only stays in the atmosphere for about 12 years, but while it is there it does have a big effect.
One of the remarkable things about New Zealand sheep farming systems is that huge efficiencies have been made in relation to methane emissions. The emissions are in direct proportion to the amount of feed eaten. Remarkable improvements in productivity mean that a much greater proportion of the feed is now used to generate production, rather than simply maintaining bodyweight. This change has largely been driven by higher twinning rates and much higher lamb carcass weights.
According to industry body Beef+Lamb, each kg of lamb meat is now associated with 31 percent less emissions than was the situation 30 years ago. There has been very little publicity about this.
Linked to these changes, the invisible atmospheric cloud of methane sourced from New Zealand sheep has actually been declining, with the methane historically emitted by sheep now leaving the atmosphere faster than new sheep-sourced methane is entering the atmosphere.
The counter-balancing fact is that each newly emitted molecule of methane still causes warming that would not occur if it were not emitted. Accordingly, methane emissions from sheep cannot be simply ignored. We do need to continue the search for further reductions in emissions per unit of meat.
As I have said many times, nothing is simple when it comes to agriculture’s effects on climate. And anyone who thinks the issues are simple, does not understand the problem.
Currently, sheep farmers are nervous about what will come out of the current debate about whether agriculture will enter the ETS or whether the Government will accept the alternative proposals about to be submitted to Government by He Waka Eke Noa. Many farmers don’t like either option.
I have written elsewhere about those issues and so I won’t repeat that here. But those issues aren’t going away. What I will say here is that if agriculture does go into the ETS based on the greatly flawed concept of CO2 equivalence, then by the mid-2030s the sheep industry could well have been destroyed. We need to think carefully about that.
Let there be no doubt, sheep farming is the pastoral industry most at risk from misguided greenhouse gas taxes. The first to be destroyed will not be dairy; it will be sheep.
Somehow there has to be a reworking of basic thinking, The aim has to be to focus not on a methane tax which will destroy sheep faming, but on the funding of a methane levy to be invested in future development of emission efficiencies.
If hill-country sheep farming is destroyed, then it is a real puzzle as to what the hill country will be used for. It won’t be beef cattle because they face the same or even more environmental constraints as sheep. It won’t be dairy because, among the other factors, the topography is unsuitable. It certainly won’t be cropping. Will it be pine forests?
Returning to the markets, the long-term future for lamb looks particularly strong. New Zealand and Australia are the only big international traders. Sheep meat is highly regarded spanning a broad arc of countries from the Middle-East across much of Central Asia and through to Western and Northern China. All of those countries are constrained by their own ability to increase production.
If it was a simple case of aligning the supply of sheep-meats with all of the potential consumers, without politics getting in the way, then it would indeed be simple.
One of the big challenges right now is that New Zealand’s urban population does not understand how agri-food systems, from consumers right back to inputs on the farm, are what underpins the New Zealand economy. It is not just about what happens on the farm, but what happens along a value chain leading back from consumers through marketers, processors and farmers to the suppliers of fam inputs.
As I have said many times, New Zealand has an export-led economy. Without exports we have no money for imports. More than 80 percent of merchandise exports come from primary industries, with no obvious alternatives.
Currently, New Zealand is running big deficits on its external current account of about $20 billion per annum. It must be balanced by incoming capital. That is not sustainable. Either exports have to increase or imports have to decline. Given that situation, getting rid of the sheep industry does not seem to be the right way to go.