Promising outlook for the sheep sector
Falling production costs should lead to rising incomes for sheep farmers this year and in 2016
Published 28/10/2015 | 02:30
With Irish lamb prices largely unchanged from 2014 and reduced production costs due to lower feed and other input prices, the gross margin per hectare earned by Irish sheep farmers is forecast to be higher this year than in 2014.
The EU and Irish lamb price outlook for 2016 is relatively stable. There is the possibility of some modest weakening of European lamb prices as increases in EU production of lamb outpace growth in EU lamb consumption.
In 2016 the negative impact of possibly lower lamb prices on profitability of sheep production should be outweighed by the positive impact of lower input costs. Feed, energy and fertiliser prices are all expected to be lower in 2016 than in 2015.
The EU is a deficit market in sheep meat with consumption exceeding production, with the balance met by imports from the rest of the world. Each year imports make up close to 20pc of the sheep meat consumed in the EU.
This significant dependence on imports from the world market distinguishes the EU sheep meat market from most other EU agricultural commodity markets.
In contrast to the situation on cereal, butter and SMP markets, the internal EU price for lamb remains significantly higher than the prevailing world price for lamb (the New Zealand price).
Most imports of lamb into the EU are from New Zealand and enter the EU under what are called tariff rate quota (TRQ).
This system and high over-quota tariff rates largely protects EU sheep meat markets from the negative effects of world price movements.
Exports of sheep meat currently account for 80pc of Irish production and the main market for Irish lamb is the French market. In 2016 Irish lamb prices on the French market will continue to be boosted by the continued strength of the pound sterling versus the euro. The strong pound makes British lamb exports less price competitive on the French market where they compete with Irish lamb.
Production of lamb in New Zealand and Australia is forecast to contract in the short to medium term. With this development the outlook for world lamb prices would ordinarily be positive.
However, the on-going slowdown in the Chinese import demand for lamb and other agricultural and hard commodities means that improvement in world prices for lamb is less certain.
EU production of lamb in 2015 is currently 2pc to 3pc higher than in 2014. This increase is due to increases in breeding sheep numbers in the UK and other countries and a recovery in production in Southern Europe following the 2014 bluetongue disease outbreak. EU production of sheep meat is forecast to increase marginally in 2016. The outlook for growth in consumption of lamb in the EU remains subdued. Despite some signs of tentative recovery in the Eurozone economy demand for lamb is expected to only grow slowly in 2016.
The price of lamb relative to other meats has increased and this is likely to keep average per capita consumption of sheep meat well below the levels that prevailed prior to the recession.
The CAP reform agreed in 2013 will start to be implemented in 2015. Over the next five years most specialised sheep farms should gain as the direct payments per hectare that Irish farmers receive from the CAP are made more equal.
However, individual farm circum stances will vary and levels will decline where pre-reform entitlement levels per hectare were above average subsidy. The magnitude of change in subsidy received, including both increases and decreases, on most farms will not be dramatic.
With sheep and lamb prices largely stable in 2015 and 2016 income earned per hectare from lamb production will crucially depend on developments in the costs of production.
Assuming a normal weather year in 2016, developments in the prices of inputs will thus be the driving factor for income performance of the average sheep farm.
The outlook for input costs from the perspective of sheep farmers is benign. Falling oil prices reflected already in lower diesel bills should also begin to be seen in lower fertiliser prices as we move into 2016, while lower grain prices at harvest time in 2015 should be reflected in lower feed prices in 2016.
Overall the outlook for incomes in Irish sheep farming is enviably stable. Output prices are likely to remain largely stable, while the lower input costs in 2016 should help maintain income levels at close to if not above those earned in 2015.
Dr Kevin Hanrahan from the Agricultural Economics and Farm Surveys Department with Teagasc in Athenry, Co Galway