[This is the second part in a series of four. Part one focused on dairy, this part two focuses on sheep, beef and dairy support, and part three will be on horticulture, arable and processed crops.]
Introduction
New Zealand is a nation rich in renewable resources. In fact we rank number 1 for renewable resources (on a per capita basis) according to the World Bank’s Wealth of Nations report.
We have plenty of land and water whereas a host of other counties are a bit short.
How New Zealand unlocks these resource endowments is strategically important for the country’s long-term success. In many ways our renewable resources are New Zealand’s winning lottery ticket if GDP per capita aspirations are to be achieved.
A key component is irrigation.
As we highlighted back in June, over the last five years there has been a 17 percent increase in the land area in New Zealand under irrigation to 721,700 hectares, as well as a shift to more efficient irrigation systems.
Additionally there are currently plans in place for 16 new water storage and irrigation schemes around the country.
If completed, these have the potential to nearly double the total irrigable land to 1.38 million hectares, or 12 percent of New Zealand’s total agricultural land.
Sheep, beef, and dairy support
Trying to standardise the assumptions and returns across the different schemes for sheep, beef and dairy support, as well as arable/ processed vegetable operations, proved to be too difficult.
This was due to a much wider range of possible livestock and cropping rotation policy options that could be employed.
Many scenarios also analysed part irrigation of a farm’s flat area. Under this situation the return to the irrigated part of the farm cannot be looked at in isolation, as it affects the whole farm system.
There are benefits to the non-irrigated part of the farm too, particularly where the irrigated part is of sufficient scale to provide more flexibility in the farming operation to respond to market signals, as well as to maximise total farm output.
For example, depending on the weather and relevant prices, lambs and calves can be finished instead of being sold, and store and breeding stock can be fed better at key times of the year to improve lambing and calving percentages.
We have pulled out a couple of the different scenarios from the schemes we looked into to show some of the possibilities.
The three modeled options we have chosen and their key production and price assumptions are below.
The full Income and Production Statements are included in the appendix on page 14. (You will need to download the .pdf attachment to read those.)
1. A 50 percent irrigated 400ha farm with arable and livestock under the Central Plains Water Limited scheme.
Key production assumptions are 4,454 stock units wintered at 15.4su/ha grazing area with 2,100 ewes lambing 150 percent, 475 hoggets lambing 100 percent, grazing 200 dairy calves for 15 weeks and 475 dairy heifers for 12 months.
Crops include 72ha wheat and barley (at $380/t at 9t/ha and $440/t at 8.5t/ha respectively), 28ha lucerne and 44ha winter brassica.
Price assumptions are $6 and $6.5/kg (shoulder of season) for prime lambs, $2.7/kg for store lambs, $4/kg for wool, $4.25/kg for prime beef, $6/wk for dairy calves and $10/wk for dairy heifers.
2. A fully-irrigated 300ha farm with livestock finishing under the Hawke’s Bay Ruataniwha water storage scheme.
The operation comprises bull and lamb finishing, along with the production of spring barley.
Running 18 su/ha, 13 tDM/ ha gross pasture production, supplemented with brassica feeding in early winter and 25 ha feed barley at 7 t/ha.
Livestock are 5,500 lambs finished to 18.2 kg average carcass at a $32.60 margin and 450 weaner bulls purchased at 100kg live weight and finished to 310 kg carcass with a $915 margin. No dairy support.
Price assumptions the same as model 1.
3. A 900ha livestock finishing farm with 200ha irrigated and 700ha non-irrigated under the Hawke’s Bay Ruataniwha water storage scheme.
Key production assumptions: 700ha dryland pasture production 8tDM/ha gross with a lift from additional pasture renewal and better grazing management.
200ha irrigated high quality pasture producing 13tDM/ha gross. In total 5,400 ewes lambing at 147 percent, 1600 hoggets lambing 68 percent, 3,250 trading lambs finished to 19.5 kgs, 450 yearling bulls finished as two-year olds at 320kg carcass.
Dryland pasture renewal through brassica and pasja. No dairy support. Price assumptions the same as model 1.
Key financial parameters that fall out of these models are in the table below. We have also added the 2011-12 results from irrigated farms in Beef + Lamb New Zealand’s survey of Class 6 South Island finishing breeding farms.
These are generally extensive finishing farms, encompassing some irrigation units and frequently with some cash cropping.
Carrying capacity ranges from 6 to 11 su/ha on dryland farms and over 12 su/ha on irrigated units. Mainly in Canterbury and Otago we have picked out the ones where some irrigation is being undertaken.
As the above table shows there’s quite a range in the bottom-line results: from $1,013 to $363 per hectare, before tax, interest and any managerial salaries are paid out.
There was a large range of assumed managerial salaries, which dropped the returns further when they were deducted.
While it is very difficult to draw comparisons across the different results, some general observations from here and other material examined were:
1. Part irrigation of a larger livestock farm that improves farm policy flexibility and helps mitigate against dry conditions generally lowers risk and provides higher per hectare returns compared with a fully irrigated property.
2. Over time, as skills and confidence grow, the irrigated area on a livestock property tends to gravitate toward the most profitable enterprise depending on market conditions i.e. lamb finishing versus specialist cropping. This highlights the improved flexibility irrigation provides farmers and the ability to set up a farm to maximise production and profit every year, instead of trying to mitigate dry conditions.
3. Solely dedicated livestock finishing operations didn’t tend to fare well, with the model we chose (2: Fully-irrigated in the Hawke’s Bay) being the poorest performing even when adjustments are made for different managerial salary assumptions. One of the main reasons for the poor returns across a number of finishing models was high water requirements, which increased irrigation charges.
4. In some cases the rates of return for individual livestock farm policies were lower than without irrigation. This highlighted the productivity boost in a normal year wasn’t always sufficient to compensate for increased costs and additional capital invested.
5. Farmer productivity around production parameters was key to making a success of a new irrigation scheme. For the three models we chose, top management results were assumed in all. Reducing farm production to average levels often cut the return on marginal capital invested to convert to irrigation to a level below the cost of capital i.e. rural term loan rates.
We also took a look at the returns of irrigated and non-irrigated Class 6 farms in 2011-12 from the Beef + Lamb NZ survey to assess differences in farm performance (see appendix, page 15 for the detailed Income and Production statements). The prices received for prime stock where very similar to those assumed in model 1, with the only material difference being a wool price of $4.30/kg.
It is important to note the farms are only identified as having irrigation, not the area irrigated. But as 20 percent of the area on these farms are identified as being flat, it would probably be safe to assume somewhere around this proportion of the area is irrigated.
Interestingly, comparing the bottom lines for the averages showed a difference of only 6 percent, or $19 per hectare.
Gross revenue is 30 percent higher on the irrigated farms, which is largely driven by more cropping and dairy grazing. While net meat production is also 15 percent higher at 175 kg/ha, compared with 152 kg/ha on non-irrigated properties, this doesn’t show up in extra revenue.
We suspect this was due to the unsustainably high store stock prices during this season, which probably reduced margins for this particular year. A more favourable year for finishing margins would likely boost revenue with this higher production.
On the cost side, the irrigated farms have higher costs per ha for most categories.
Overall total farm working expenditure is 36 percent, or $175/ha higher. Nearly half of the difference is irrigation charges at $79/ha, but other areas of higher expenditure include higher direct cash crop expenses of $40/ ha and depreciation of $53/ha with a larger area cropped.
Remember – these are averages and the numbers we presented above were for top performance, which added $50 to $150 per ha in extra profit assuming other things remained the same.
[The next installment will focus on horticulture, arable and processed crops.]
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This article was first published in the ANZ Rural Focus. It is reprinted here with permission. The full Report is here.
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