The Situation and Outlook for Sheep 2004/05
A. Kinsella & L. Connolly
Introduction
The analysis in this paper spans two quite differing agricultural policy regimes in the sheep sector. Ewe and rural world premium payments continue for 2004, while the implementation of decoupling in 2005 will begin a period of immense change within the agricultural sector. In previous years the main analysis related to the overall margins for the sheep enterprise. Owing to the introduction of this additional variable ‘decoupling’ into the equation in 2005 it was decided to extend the analysis as put forth in previous years so that comparisons can be made between years. Therefore, in forecasting results for 2005 the ‘direct payments’ element has been retained as part of the gross output figure but with special emphasis now being placed on the market based components.
Data from farms with sheep enterprise recorded in the Teagasc National Farm Survey (NFS) were used as the basis for analysis in this paper. Estimates for 2004 and forecasts for 2005 are calculated based on previous years sheep enterprise NFS data, applying change co-efficients and price indices and input from sheep specialists.
Sheepmeat Market
The EU Sheepmeat Forecasting Group have predicted that the EU sheep market is expected to remain stable in 2004/05. Sheepmeat production is forecast to increase by under one per cent to reach 1.03 million tonnes, while consumption is expected to remain static at approximately 1.28 million tonnes. EU self-sufficiency therefore is forecast to remain at just above 80 per cent resulting in an import requirement of approximately 250,000 tonnes. The EU Forecasting Group have forecast rises in sheepmeat production in 2004 in Ireland and Spain of 6 per cent and 2 per cent respectively. New Zealand exports of sheepmeat to the EU in the first eight months of 2004 were 5 per cent lower than for the similar period in 2003.
The forecast for the medium to long term is that EU sheep production will decline, whilst demand remains strong resulting in a positive outlook for the EU sheepmeat sector. Self-sufficiency in EU sheepmeat is likely to decline, which should impact positively on Irish sheep producers both on the domestic and export market. Sheepmeat prices should remain firm and the price differentials with competing meats should be maintained.
UK sheepmeat production is forecast by MLC [1] to remain stable in 2004, while imports are expected to increase by 2 per cent on 2003 levels. Exports from UK are forecast to remain static at 77,000 tonnes in 2004. Consumption in the UK is forecast to increase by 10,000 tonnes supplied mainly by higher imports. The UK continues to be the main destination for New Zealand lamb accounting for almost half the total in 2004, an increase of 5 per cent on 2003.
French production is forecast to decline again in 2004 (-2%), as is consumption of sheepmeat. Supplies of sheepmeat to France from New Zealand and Australia are also likely to decline in 2004.
Quotas for sheepmeat agreed under the current WTO agreement with Australia and New Zealand will have a major impact on both supply and price levels. Recent sheep industry projections by the Australian meat industry forecast an increase in sheepmeat production of over 37 per cent by late 2008.
In Ireland lamb disposals have been higher in 2004 than in 2003 viz 2.309 million head up to end of October 2004 compared to 2.062 million for the same date in 2003, an increase of 12 per cent. Cull ewe slaughterings up to late October 2004 were 376,646 head compared to 321,612 in 2003 – an increase of 17 per cent. Live exports also increased in 2004 by almost 40,000 head, these being mainly breeding ewes. This has resulted in almost 100,000 extra breeding ewes gone out of the system in 2004 compared to 2003. In addition to this higher disposals of mid-season ewe lambs will result in lower carry over of ewe lambs and hoggets to spring of 2005. The data from the meat export plants and live exports therefore suggest a sizeable reduction in the ewe breeding flock and lamb crop for the 2004/05 production year. Decoupling is a major contributory factor especially in hill flocks. It is also likely that there will be considerable decline in flock numbers.
Lamb slaughterings also increased to early November 2004. There are a number of reasons for this – the main ones being that 2004 was a relatively good grass producing year compared to 2003 and secondly sheep producers fed more concentrates. However, the higher kill in mid to late 2004 will result in fewer lambs for slaughter in the last two months and also a much smaller carry over to spring of 2005 compared to 2004. This should mean favourable prices for finished store lambs and the early lamb crop of 2005.
Lamb prices to early November 2004 were 1.6% down on the same period in 2003. On a seasonal basis prices were up 3% in the first quarter of 2004, followed by a decline of 3 per cent for early lamb, with average prices for mid-season lamb virtually static.
Sheep and Flock Numbers
| Applicants claimed | Ewes claimed (‘000) | |
|---|---|---|
| 1993 | 52,955 | 5,338 |
| 1998 | 44,583 | 4,889 |
| 1999 | 43,707 | 4,762 |
| 2000 | 41,177 | 4,499 |
| 2001 | 38,632 | 4,262 |
| 2002 | 36,089 | 3,887 |
| 2003 | 34,910 | 3,891 |
| 2004 | 34,821 | 3,936 |
Sheep flock and ewe numbers shown in Table 4.1 are based on applications for payment of ewe premium. The trend in the number of sheep flocks which has been in decline since 1993 continued in 2004 with a fall to 34,821 flocks. Ewe numbers seem to have bottomed out with a small increase in 2004. Average flock size continues to change with 113 ewes in 2004 compared to 100 in 1993. Of the 35,000 sheep flocks in the country, approximately 13,000 or 37% have under 50 ewes. Many of these small flocks are managed by elderly or part-time farmers and the likelihood is that these will exit from sheep production post decoupling of direct payments in 2005.
Sheep Margins
The ewe premium and rural world premium have been fixed at €21 and €7 respectively since 2002. In addition €1.26 extra to be paid per ewe from the National Envelope in 2004. Gross margin data for the main sheep system are shown in Table 4.2. All per ewe data are based on per ewe joined except for Hill-Blackface, where it refers to per ewe claimed for premium.
| 2002 | 2003 | 20041 | 20052 20053 | |
|---|---|---|---|---|
| Early Lamb | 71 | 83 | 78 | 56 (82) |
| Mid-season lamb | 75 | 73 | 71 | 47 (72) |
| Hill-Blackface | 40 | 34 | 32 | 3 (32) |
Actual margins are presented for 2002 and 2003 with estimates for 2004 and forecasts for 2005. The lowland systems are based on National Farm Survey data from flocks on better soils with a wide use range.
Margins for the early lamb system increased in 2003 but are estimated to have declined in 2004. This is due to higher production costs and a 3 per cent decline in lamb prices in the April to May period compared to 2003. However, the outlook for 2005 is positive due to the large volume of lamb disposals in 2004. Mid-season is the predominant lowland system and margins for this system are shown to be relatively static from 2002 to 2005. Gross margin per ewe is estimated to have declined slightly in 2004 due to the higher volume of concentrates fed and static lamb prices. The fixing of the ewe premium has resulted in more stability in sheep margins. The year 2004 was a good grass growing year, which aided earlier disposals of lamb.
In 2005 the ewe premia will be decoupled and this will have a dramatic impact on the gross margin per ewe and results in a reduction of approximately €25 [2] per ewe on lowland system and €29 [3] for blackface system. Direct payments per ewe for the lowland systems formed one-third of gross profit for 2004. The estimated overhead costs per ewe in 2003 were €36.30 for mid-season lamb resulting in a net margin of €36.20 per ewe. Direct payments therefore contributed 70 per cent to net margin for main lowland system.
The actual gross margin for Blackface Mountain system in 2003 was €34 per ewe and 2004 was very similar at €32. Direct payments per Blackface Mountain ewe were €29.40, which means that this system has a positive “market based” gross margin of €3 i.e. market output from sales was just about sufficient to cover production costs. Overhead costs for this system were estimated at €14 per ewe in 2003 resulting in a net margin of €20 per ewe compared to a direct payment of €29 per ewe i.e. €9 per ewe of the direct payment was used to cover production costs. It is not difficult therefore to forecast a major decline in ewe numbers in this system following full decoupling with a gross margin per ewe of €3.
The trend for output, cost and gross margins per ha for the main lowland system is shown in Table 4.3 for farms on the better soils.
| 2003 | 20041 | 20053 | |
|---|---|---|---|
| Gross output | 980 | 986 | 1008 |
| Direct costs | 334 | 354 | 364 |
| Gross margin | 646 | 632 | 644 |
| Overhead costs | 323 | 330 | 330 |
| Net margin | 323 | 302 | 314 |
Both gross and net margins are estimated to decline in the current year and increase slightly in 2005 but still remain below 2002 margins. It should be noted that, for comparison purposes, direct payments are included in output for all years in Table 4.3. In 2005 direct payments will be decoupled and therefore will be excluded from output in the coming year.
| 2002 | 2003 | |
|---|---|---|
| Gross output | 110 | 110 |
| - Direct Payments | 25 | 25 |
| Market Output | 85 | 85 |
| Concentrates | 14.7 | 16.3 |
| Winter forage | 3.8 | 3.2 |
| Pasture costs | 6.6 | 7.0 |
| Other direct costs | 9.9 | 11.5 |
| Direct Costs | 35 | 38 |
| Gross Margin | 75 | 73 |
| Market based Gross Margin | 50 | 48 |
| Overhead costs | 37 | 36 |
| Net Margin | 38 | 36 |
| Market based Net Margin | 13 | 11 |
The trend in output, costs and margins per ewe are detailed in Table 4.4 for mid-season lamb. Although gross output and market output remained similar for 2002 and 2003 there was however an increase of 9% in direct costs. The main element contributing 11% to this change was concentrates, increasing from €14.7 to €16.3 ewe. Another contributing factor was ‘other’ direct costs, which includes livestock expenses, casual labour, transport and other miscellaneous direct costs. These contributed 16% to the overall change in direct costs.
As a result of increased costs the gross margin fell from €75 to €73 between 2002 and 2003. Overhead costs declined by 3%, so resulting in an overall decline in net margin of 5%. The market based net margin declined from €13 to €11, a 15% decline. This is quite a significant decrease, particularly in light of the new policy regime of decoupled payments which will come into effect from 2005 onwards. Overhead costs per ewe have already been reduced between the two years, from €37 to €36 but further emphasis will need to be placed on managing the overall production cost elements.
Summary
The EU Forecasting Group have forecast rises in sheepmeat production in Ireland in 2004 of 6 per cent. Self-sufficiency in EU sheepmeat is likely to decline. This should impact positively on Irish sheep producers both on the domestic and export market. Sheepmeat prices should remain firm and the price differentials with competing meats should be maintained.
In Ireland lamb disposals have been higher in 2004 than in 2003, an increase of 12 per cent (up to end of October 2004). Cull ewe slaughterings up to late October 2004 were 376,646 head compared to 321,612 in 2003 – an increase of 17 per cent.
The data from the meat export plants and live exports suggest a sizeable reduction in the ewe breeding flock and lamb crop for the 2004/05 production year. Considerable decline in flock numbers is also likely. Favourable prices for finished store lambs and the early lamb crop of 2005 will result from the much smaller carry over to spring 2005 compared to 2004, especially as only 18% of slaughtering in Ireland occur in the first quarter [4] . The influence of the home market is also increasing with one out of every three lambs being exported.
The downward trend in the number of sheep flocks since 1993 continued in 2004. Ewe numbers appear to have bottomed out with a small increase in 2004. Average flock size continues to change with 113 ewes in 2004 compared to 100 in 1993. Thirty seven per cent of the 35,000 sheep flocks have under 50 ewes.
Margins for the early fat lamb system increased in 2003 but are estimated to have declined in 2004 due to higher production costs and a 3 per cent decline in lamb prices in the April to May period compared to 2003. The outlook for the early fat lamb system in 2005 is positive due to large volume of lamb disposals in 2004.
Margins for the mid-season system, the predominant lowland system, are shown to be relatively static from 2002 to 2004 with decline in 2005 following decoupling. Gross margin per ewe is estimated to have declined slightly in 2004 due to higher volume of concentrates fed and static lamb prices. The fixing of the ewe premium has resulted in more stability in sheep margins for the mid-season system.
Direct payments per ewe averaged €25 for the lowland systems and formed one-third of gross profit. The estimated overhead costs per ewe in 2003 were €36.3 for mid-season lamb resulting in a net margin of €36.2 per ewe. Direct payments therefore contributed 70 per cent to net margin for main lowland system.
The actual gross margin for blackface mountain system in 2003 was €34 per ewe and 2004 was very similar at €32. Direct payments per blackface mountain ewe were €29.4, which means that this system has a positive “market based” gross margin i.e. market output from sales was just about sufficient to cover production costs. Overhead costs for this system were estimated at €14 per ewe in 2003 resulting in a net margin of €20 per ewe compared to a direct payment of €29 per ewe i.e. €9 per ewe of the direct payment was used to cover production costs. Based on these figures the forecast is a major decline in ewe numbers in this system following full decoupling.
For mid-season lamb both gross and net margins are estimated to decline in the current year, but still remain below 2002 margins. Between 2002 and 2003 mid-season lamb gross output and market output remained similar but there was an increase of 9% in direct costs. Gross margin fell from €75 to €73 between 2002 and 2003. As a result of increased costs the overhead costs declined by 3%, so resulting in an overall decline in net margin of 5%.
Acknowledgements
The co-operation of the Department of Agriculture and Food, the Central Statistics Office and Bord Bia is acknowledged for supplying the data used in compiling these estimates. Thanks are due to Maurice Roche for provision of the National Farm Survey data and to Denis Kelleher for technical assistance. Valuable comments provided by our colleagues Gerry Scully, Resource Centre, Athenry and Andrew Kinsella, Wicklow are also acknowledged.
