Fixed costs key to sheep profitability in 2010

In the sixth article looking at farming profitability in 2010, Farmers Weekly and consultant Andersons look at finished sheep enterprises

Finished lamb prices peaked at over 440p/kg deadweight in 2009 and have remained above 2008 prices since. Current prices are around 315p/kg – some 15% higher than the same time last year.

“A favourable exchange rate making exports more competitive and continued falling sheep numbers both in Europe and New Zealand are the main factors – which look set to continue into 2010,” says Andersons’ David Siddle.

But few finished lamb producers will have seen a positive margin, despite higher prices, he says. EBLEX figures suggest that, once family labour, rents and interest on working capital are taken into account, production costs are over 400p/kg. Single Farm Payment income continues to artificially support finished lamb enterprises.

“In 2010, costs of production should ease, particularly in terms of feed and fertiliser costs. Should the recent trend of higher prices continue then we are hopeful that top-third producers will be able to produce positive net margins after all costs,” says Mr Siddle.

DEFRA census information suggests a further, significant fall in the size of the UK breeding sheep flock, which shrank 5% to 14.8m ewes in 2009.

“In hill areas in particular we expect this downward trend to continue, not only due to negative margins, but the difficulties of attracting skilled labour. Perhaps more controversially, agri-environmental scheme payments often offer considerable incentives to significantly cut stock numbers,” Mr Siddle says.

A key factor in sheep producers’ profitability in 2010 will be fixed costs. “The most profitable sheep producers will continue to be those who are able to achieve high output levels per ewe while employing well-controlled levels of variable and fixed costs.

“Recent analysis shows fixed costs are the main cost element in all sheep systems and account for the greatest variation between flocks. Producers may have more to gain by benchmarking and analysing the fixed costs they employ, rather than focusing on lambing percentage and input use.”