SOURCES OF GROSS PROFITS IN SHEEPFARMING

Press, Volume XCIII, Issue 28002, 23 June 1956, Page 7

SOURCES OF GROSS PROFITS IN SHEEPFARMING

PATTERN ON WIDE RANGE OF FARMS

Interesting Sidelights

ANALYSIS BY SENIOR STATISTICIAN

Some figures supplied by Mr W. L. Keen (Senior Statistician to the New Zealand Meat and Wool Boards’ Economic Service), on the pattern of gross profits from sheepfarming, throw some light on the sources of revenue in this particular spheere of farming.

Mr Keen deals with the relative importance of various sources of gross profit on sheep farms, and his studies are based on figures from a wide range of farms. The term “gross profit’’ is used in preference to “revenue.” as the latter generally refers to “sales proceeds’’ only, while the former also takes account of opening and closing stocks, and offsets against the sales any purchases made during the year. Gross profit is thus the credit balance remaining in the various farm trading accounts when these have been drawn up in the usual form. Most sheepfarming accounts are drawn up under three main headings, which are:—(l) The wool account. (2) The sheep and lambs account. (3) The cattle account. For sheep farms which have various other minor sources of revenue, such as cash crops, dairy produce and small seeds, there may be a fourth trading account, which is referred to as “other account.” It is interesting to note that even on the smaller mixed sheep farms in the survey the gross profit from “other accounts” only comprises about 5 per cent, of the total gross profit, while it is less than 1 per cent, of the total on the large sheep farms.

Calculations of Gross Profit Some explanatory remarks on the various items mentioned above may be a guide. For example, “opening and closing stocks” refer to such items as livestock and dead stock. The latter may consist of such items, for example, as wool or grain, unsold at balance date. Valuation of this is usually at. or near, market price, estimated on a conservative basis. It is in the valuation of livestock, however, that inconsistencies and difficulties occur, as farmers are permitted to value their livestock at standard values, for taxation purposes. This system, while reasonably satisfactory for taxation purposes does not accurately measure the farmer's true income. However, all the farms concerned in this particular survey had their accounts drawn up under the “standard value” system, so values have been left as they appear in the accounts, thus avoiding the use of estimates. The present results therefore have the merit of being those shown by the farmer’s actual financial returns, in conformity with existing law and custom. The gross cost of livestock purchases form another item in the trading account.

A third series of items are those labelled as “proceeds of sales,” and in this category some of the items may have had various deductions made before the proceeds are credited to the trading account. Among these deductions may be freight charges, commissions., and levies (such as woolclassing and binning charges), which are normally deducted from the proceeds of sales. In the farms dealt with in this survey the net sales proceeds are used in each case, so that uniformity has been achieved.

Classes of Sheep Farms Sheep farms in the survey have been grouped into three classes, and these are:—(l) High country. (2) Hill country. (3) Fattening farms. The accounts for 1952-53 covered 27 high country, 85 hill country, and 132 fattening farms, to give a total of 244 sets of accounts. Separate figures are quoted for each of the three broad classes mentioned here. Total gross profits have been divided by the number of sheep wintered, to give a suitable unit of comparison. No allowance has been made for cattle wintered, and the averages have been based entirely on the sheep numbers (not on stock carried and converted into sheep equivalents). However, it may be of interest to quote the average ratio of sheep to cattle on each of the three classes. In 1953 the high country averaged about 42 sheep to the cattle beast, the hill country about 9 to 1, and on the fattening farms the ratio was about 20 to 1. For the four years from which results are available the gross profit per sheep wintered is shown below. In 1949-50 the high country figure was £2 0s 5d per sheep, the hill country showed £2 7s 3d,, and the fattening land showed a gross profit of £2 13s Bd. For 1950-51. the year of the wool boom, the high country figure rose to £3 4s 6d per sheep, the hill country to £5 0s 6d, and the fattening land to £5 9s Id. Sharp Fall

In 1951-52 the figures fell sharply, as follows: high country, £1 17s lid; hill country, £2 19s 2d; fattening land, £3 15s 2d; while for 1952-53 the high country figure was £2 2s 3d. the hill country was £3 5s 10s, and the fattening figure was £3 17s 7d. The most noticeable feature of this table is the sharp rise in gross profits in 1950-51. which was the peak season for wool prices. In the following season there was a sharp fall from these peak prices, and since then the variation from year to year has not been great. Expenditure per sheep, on the other hand, has been steadily rising year

by year. 'An interesting point is that the high country woolgrower whose income is nearly all derived from wool, did not fare as well as farmers from the hill country and fattening farms. The main reason for this is that fine wools (which comprise most of the highcountry clip) did not rise as high, in proportion, as the coarser types. After the boom period of 1950-51 the fine wools declined further than did the coarse wools. . Meat prices in this period did not fluctuate to the extent that wool prices did In general, meat prices were fairly steady due to the bulk purchase contract with the United Kingdom with an upward trend which resulted in a more favourable position for fattening farms by the 1952-53 season, in comparison with their status in 1949-50. It is interesting to study wool prices from 1949-50 to 1952-53. as shown by figures collected over this period. For instance, in 1949-50, fine wools averaged 59.8 d per lb, medium wools 32.7 d, and the average for the whole New Zealand clip was 37.93 d In 1950-51 fine wools were averaging 99d per lb. medium wools 77.2 d. and the overall average was 87.84 d per lb. The 1951-52 season saw fine wools at 49.9 d, medium at 35.4 d, and coarse wools averaging 40.19 d. In 1952-53. the figures were. 63.8 d for fine wools. 42.3 d for medium quality, and 46.19 d for the overall average.

Export Meat Prices The story in connexion with export meat prices over this period was shown by another set of figures. In 1949-05, quarter beef was realising £76 a ton, while lamb was selling at £lO5 a ton, and all meat averaged £B3 a ton. The 1950-51 values were: quarter beef £92 15s od. lamb £ll2 0s lOd, and the all-meat average was £93 4s 7d. A further rise was shown in the 1951-52 season, when quarter beef averaged £lOl 19s 2d. lamb averaged £129 8s Od; and all meat averaged £lOB Is 3d a ton. Again, in 1952-53, meat prices were up, with beef at £ll7 5s Bd, lamb at £147 17s Od. and the average for all meat was £l2l 14s 2d.

From these figures it is evident that gross profits on sheep farms do not move up or down an any predetermined ratio with the prices of wool and meat. A knowledge of the relative importance of each product in the total revenue of each type of sheep farm is necessary to give a clear picture of the situation.

For example, in the high country, over this four-vear period, wool has provided 85.7. 85.2, 80.2, and 86.3 per cent, respectively of the total gross profit. In the hill country the return per year from wool, in this period, has been 60.6, 70.1, 54.7, and 55.7 per cent, respectively, of the annual total. The figures for the fattening farms over the same period show that wool has provided 45.9 per cent, of the total in 1949-50, 61.4 per cent, in 1950-51. 43.4 per cent, in 1951-52. and 45.4 per cent, in 1952-53. Normally, then, it can be said that in high country wool provides about 85 per cent., in hill country, about 55 to 60 per cent., and on fattening country about 45 per cent, of the total gross profits. In the latter type of farming it is evident that the sale of fat lambs provides the greater part of the revenue.

In addition to fat lambs, this latter type of farm also has breeding ewes and cattle to sell. The Norlh Island handles far more cattle than the South, and the revenue from these is thus much greater on the average in North Island districts than in the South.

Averages, of course, may conceal wide divergencies from normal practice. but in a survey covering a fairly wide range of farms, classified under the three headings used, these figures should convey some picture of the facts.

Other figures have been collected which give a fair picture of the percentage ratio of expenditure to gross profit per sheep on the three types of farm.

In the high country over the four years of the survey, the percentage of expenditure to gross profit was 41. 30. 60, and 54 per cent, respectively. Hill country showed the figures of 45, 27, 60, and 57 per cent, in this period, while the fattening farms had to spend 53, 35, 59. and 56 per cent, of their gross profits per sheep to meet their operating costs. The ratio of expenditure to profit has therefore, tended to rise somewhat in the period covered by these figures.