Countdown to much lower and more unstable lamb prices

Press, 30 August 1985, Page 11

Countdown to much lower and more unstable lamb prices

By

HUGH STRINGLEMAN

Drastically low sheepmeats schedule prices for next season — which starts in one month — could also be subject to wide swings under the influence of a floating dollar. Changes in the value of the dollar will be magnified in the farmers’ schedule: twice the effect in lamb prices and 10 times the effect in mutton prices, according to the director of the Meat and Wool Boards’ Economic Service, Mr Neil Taylor.

In spite of any efforts of Meat Board staff to keep changes in the 1985-86 schedule to a minimum, the ebb and flow of currency movements could result in schedule prices reeling like a drunken sailor.

No price stabilisation scheme will be operating for the producer, only a rudimentary price smoothing system in its first year of operation. Under the national pooling system, advance payments will be 80 to 90 per cent of predicted market returns for the various grades.

The Meat Board has already indicated that these advance payments could be less than the supplementary minimum price levels which operated until September 30, 1984.

But all sheep farmers and their financiers must realise that these prices will be still ex-scales and not exworks, as they were under the S.M.P. scheme.

At the beginning of the 1984-85 season the Meat Board changed the schedule

to ex-scales, raising prices about 60c a kg but requiring meat companies to deduct killing charges before payment to farmers.

In the process the PM grade price went from 146 c a kg to 139 c net. From the new, much lower prices in the 1985-86 schedule, farmers will still be required to pay killing charges — at present around $8.44 for a 13kg PM carcase.

The advance price for PM grade is therefore likely to be closer to 80c a kg, if the ex-scales schedule price is between 140 to 150 c. Perhaps the end of season payout will add a further 10c to 20c a kg.

The cash flow implications for each farmer, and for the whole rural community, are horrendous. Whether meat companies can even think about raising their killing charges again, when their clients have suffered a drop in schedule equivalent to the average kill charge, is another story altogether. And even though something around $8 a head will have been wiped off the value of the meat (down from $lB net for a 13kg PM lamb to $10), farmers will still be exposed to further reductions because of currency changes. Mr Taylor explained to the recent Meat and Wool Boards’ Electoral Committee meeting that a high “gearing” multiplied any currency changes when they were reflected in the schedule.

Between f.o.b. and farm gate, processing and handling charges remain fixed in the short run, he said, and the schedule was essentially the residual of f.o.b. returns less charges. Mr Taylor demonstrated the effects on the schedule of 10 per cent changes in exchange rates, taking as his base the 1984-85 f.o.b. returns per kilogram on bone-in product. © A 10 per cent devaluation would lift average lamb schedule prices by 21.7 per cent, mutton prices by 130 per cent and beef prices by 13.5 per cent, he said. ® A 10 per cent revaluation (upvaluation) would depress lamb by 20 per cent, mutton by 120 per cent and beef by 12.2 per cent. © Assuming a net schedule price of 120 c a kg for PM lamb, a 10 per cent devaluation would lift this to 146 c and a 10 per cent revaluation would depress it to 96c, Mr Taylor demonstrated.

© Assuming a 10c a kg net mutton schedule, a 10 per cent devaluation would lift this to 23c and a 10 per cent revaluation would drop it to minus 2c a kg. Because the average lamb or mutton schedule prices are an amalgam of returns from many different markets and product forms, Mr Taylor also included a detailed examination of actual exchange movements this year on the returns from some actual markets. He assumed the PM grade carcase had an approximate value landed in

the United Kingdom of 50 pence per pound (transport and wholesale costs adds a further lOp inside the U.K.), and from that c.i.f. value must be deducted 14p a pound for freight and insurance.

The return at f.o.b. in New Zealand of 36p was in February at the exchange rate of 0.42 worth 190 cents a kg; less costs from scales to f.o.b. of 20c and processing (killing) costs of 63c to leave a market return of 107 c. This compared with the true net or ex-works schedule to farmers at the time of 139 c a kg, of which 19c was lump sum payment from the Government and 13c was coming from the M.I.S.A. (No. 2). So in February, Mr Taylor explained, that market was returning 77 per cent of the PM schedule.

In April the exchange rate had fallen to 0.37, increasing the f.o.b. return to 214 c a kg and the market return net of costs to 131 c, which was 94 per cent of schedule.

In June, with an exchange rate of 0.35 New Zealand cents to the U.K. pound, the f.o.b. return on a Smithfield PM lamb was 227 c and the market return net of costs was 144 c, which was 104 per cent of the lump sum-sup-plemented or producers’ schedule. The New Zealand dollar began to rise again relative to the pound and at the moment it is worth about 0.39, which works back to 203 c a kg f.o.b. or 120 c a kg net, for a market return of 86 per cent of the schedule price.

This is only one market and although it is relatively high priced it is also contracting.

The same exercise on the YL lamb returns from another “good” market (selling in U.S. dollars) highlights even more violent movements in the market percentage of the schedule and shows the potential for large swings in the “puremarket” schedule for next season.

A constant return from the market place of 100 U.S. cents a kg varied from 213 c N.Z. f.o.b. in February (exchange rate 0.47) to 217 c in April (exchange rate 0.46) to 225 c in June (exchange rate

0.445) and is 187 c now (0.53). After deduction of the costs to f.o.b. of 100 c, the market share of the YL schedule (146 c net with the lump sum) was 77 per cent in February, 80 per cent in April, 86 per cent in June, but only 60 per cent today.

For this exercise the amount that an overseas customer was paying was held steady during the seven months and all the fluctuations in returns were due to movements in the exchange rate.

The implications for the national pool system and those who set the prices are obvious. Had the advance payments for the start of a new year been set in June, when the dollar was weakest, they might be anything up to 20 per cent too high today, if the overriding objective is to ensure that the grade pools never end up with a deficit at the end of a year. The hands of the pool planners have been tied because of the massive deficits in the M.I.S.A. accounts, the determination of farmers not to create further deficits and the lack of any stabilisation input from the Government.

A Meat Board member, Mr Mervyn Barnett, explained to the electoral committee that various options for the pool had been considered. A 12-month rolling pool proposal had been rejected because it relied heavily on the accuracy of forecasting, not only production but also forward markets and exchange rates for 12 to 18 months in advance. “The board believes that placing reliance on such forecasts is suspect and as a result this scheme would be vulnerable to price fluctuations so that misleading signals could be built into and become entrenched in the schedules of payments to producers,” he said. Instead an advance payment with end of season payout system will be adopted and the board wants it “flexible.”

The schedule prices will be set conservatively and will take account of the assessed market requirements, the optimal grade mix, the estimated production by grade, and inducements required to alter the production mix.

The board will have to operate in forward exchange markets to hedge against changes in currency relativities.

“Changes to the schedule will be as infrequent as possible to provide a reasonable degree of price stability and equity between producers supplying product at different times of the year,” he said. Companies will be able to contract with producers for specialty carcases and offer premiums over the related standard grades in the pool schedule. But all this product will have to go through the pool. The companies will take the contracted carcases out of the pool at the standard buy back prices, which the chairman of the board, Mr Adam Begg, has said will not be less than the carcase grade prices. The premiums to the producers will go direct to them from the companies and not come into the pool. End of season payments will be calculated by December 1 and distributed through the companies to their suppliers. The assessments will be made after taking account of the estimated value of carryover stocks, pool marketing and administration costs and any retention for marketing reserves.

In the example used by the board to show how pool returns would be paid, the average advance payment for the P grades was assumed to be 140 c a kg exscales (compared with 202 c for PM at present). An end of season payment of 15c was also used in the example given.