Farmers wary of lamb contracts

01-12-2008 | Not Specified

Past bad experiences are holding back some North Island farmers from taking up lamb contracts.

Dannevirke farm consultant Greg Sheppard has noticed that farmers are reluctant to sign up to contracts, mainly because they have been burned in the past. On the other hand some farmers think it wise to sign part of the lamb crop up to a fixed price given the economic climate. Recession and feed issues are creating most of the uncertainty.

Feed is tight in many eastern parts of the North Island and it may be difficult to find finishers. However, Sheppard is optimistic that store lamb prices will remain strong despite some areas already being drier than normal.

He picks that if meat companies pay around $4.50/kg CW in January then store lamb prices may stay around $2/kg LW.

At this margin there is money to be made in finishing. If store lambs are $1.80/kg LW and schedule prices in the $4.40/kg CW mark there should be around $18/head to be made.

A calculation by an Ashburton-based farm consultant shows that there should be a return of around $0.18/kilogram drymatter consumed from finishing lambs. This takes into account killing charges and animal health. This is based on taking a 28kg store lamb to a 17.2kg CW lamb.

The rule of thumb is that lamb value goes up one dollar for every one-cent fall against the United States dollar. If true then the dollar plunge from $0.78 to $0.55 should mean lamb is worth another $23/head for meat sold in US dollars. The higher lamb prices this year reflect this to a certain extent.

Sheppard is confident that the eastern lower North Island district lambing percentage average will be well back-around 105% down from 120%.

Some farmers have only just finished docking. Fewer lamb numbers should increase competition for throughput.

Sam Benoit, sheep and beef consultant with Sheppard Agriculture, is constantly reviewing the lamb market.

"If the lamb schedule holds and there is sufficient feed about, there should be good prices for store producers and reasonable margins to be made by lamb finishers."

The recent experience of drought might spook farmers away from buying in lambs to trade however, if there is a hint of a dry period.

He believes contracts are good for both breeders and finishers and is pleased that more contracts are available for farmers. Sam does suggest that farmers retain a good level of flexibility and only commit a safe percentage of lambs to contracts. He comments that defaulting on contracts, as seen recently in bull calf markets, is bad for the market as a whole as it undermines the confidence of the industry.

Farmers should consider what penalties there are if they can't supply contracted lambs. Murray Behrent, Group Livestock Manager, Alliance, says they take a case-by-case approach to this.

"If farmer's have to pull out because of severe drought then that is okay as long as Alliance get first option on buying the store lambs.

"If it is a genuine case then they won't be disadvantaged in future years."

If farmer's renege on a deal without due cause and sell elsewhere Alliance has a policy that the following year the farmer would have to go back on to the Year One contract rate (currently $3.50/head premium). Farmers that supply for more than one year can get the $5.25/head premium.

His mantra is "we commit; they commit".

Silver Fern Farms' Backbone Partnership Agreements are a contract to supply the specified stock. SFF spokesperson Brent Melville says that all events of non-supply will be investigated and appropriate action taken in order for the contract to be fulfilled. In certain circumstance this might include legal action. However, like Alliance, they will look at the specific cases.

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