The contributors to profitable sheep businesses

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Opportunities for producers to expand their sheep enterprise

Report authors: Greg Kirk and Paul Omodei, Planfarm Pty Ltd

At present prices for sheep, wool and grain in WA, sheep can match or exceed crop margins in the wool belt and western parts of the CSZ, making the sheep enterprise more financially attractive. This is a change from the past five years, when on average cropping margins have substantially exceeded sheep margins.

This report uses historical financial and production data and interviews with top sheep producers to identify opportunities for WA producers to expand their sheep enterprises.

Download the full report.

Farm business owners seasonally allocate scarce land resources between various production enterprises. Recent historical prices in WA have favoured cropping as the dominant land use however increasing returns for sheep and wool have made the sheep enterprise more attractive.  

To identify opportunities for WA farmers to expand their sheep enterprises, the Planfarm database of financial and production records from over 350 farm businesses was examined for the period 2011-2015, and 23 top sheep producers were interviewed.  The analysis focused on farm businesses in the H4 (medium rainfall woolbelt), the M4 (medium rainfall cereal zone) and L4 (low rainfall cereal zone) agricultural zones.

Over the 2011-2015 period, on average cropping margins have exceeded sheep margins by approximately $100/ha for the average mixed farming operation across the survey region. This has provided little incentive for change in enterprise mix from crop to sheep and this is reflected in the overall decline in WA sheep numbers across this period.

At present prices for sheep, wool and grain, sheep can match or exceed crop margins in the wool belt and western parts of the cereal sheep zone. Cropping is still favoured in the eastern parts of the cereal-sheep zone.

While the relative future margins between sheep and crop are unknown, Australia’s dominant position in world sheep meat and wool exports, our proximity to growing Asian markets and the low sheep numbers both here and in New Zealand are positives for the sheep enterprise in the medium term.

With the financial incentive to expand the sheep enterprise now in place at least in the wool belt, the survey of top sheep producers showed that a majority (53%) planned for a modest increase (5% over five years) in the scale of their individual enterprises. Their focus was on improving production from current resources rather than a large expansion of pasture area. They were interested in new technology but more likely to invest in yards, laneways and basic infrastructure until profits were demonstrated from the use of electronic identification and other emerging technologies.

Greater focus on the sheep enterprise

The improved margins compared to cropping are likely to encourage more attention to the sheep enterprise and a focus on the key drivers of profitability.  In some cases, where pasture area expands at the expense of crop, sheep production will increase disproportionately as sheep move onto better quality land which has historically been more heavily cropped.

There is still much that can be achieved by improvements in on-farm management of the average sheep enterprise with a focus on ewe management, pasture production, reducing losses, and lambs weaned per ha grazed. These opportunities exist across all regions however the impact of improved management on overall sheep numbers will be greatest in the wool belt where average flocks are larger.

Even top producers see potential for improved profitability and productivity in their own sheep enterprises through better management.

If current relativities in sheep and crop margins persist, there will be more farms where the sheep enterprise generates an equal or better margin than the crop enterprise. The benefits of a mixed farming operation have long been recognised, however too often the lower productivity and profitability of the sheep enterprise has restricted the area left out of crop.

With margins between the two much closer, there are opportunities to profitably expand the pasture area, run more sheep and as a result reap more synergistic rotational benefits such as weed control, nitrogen fixation and disease control. While such change could be transformative, producers surveyed and Planfarm clients both indicate only modest plans to expand their sheep enterprises in future.

What opportunities are there for sheep producers to expand their operation?

An increase in sheep numbers could be achieved by two means:

  • a change in land use away from cropping and back to sheep production
  • a change in productivity and profitability of individual sheep enterprises with or without any change in crop area.

In the wool belt, enterprise margins are such that there may be opportunities for growth in specialist sheep producers. With sheep being their major enterprise these producers are more likely to be at the forefront of driving efficiencies and profitability by adoption of new management techniques, genetics and investment in technology. There will not be a large number, but their impact on productivity could be significant.

Producers in the cereal-sheep zone see the sheep enterprise as complimentary to the crop enterprise but cropping is the priority. Practically this means sheep often graze land unsuitable for crop, and there is a big emphasis on running the sheep as 'easily' as possible. While there may be opportunities to expand sheep enterprises in this area, it is more likely producers will focus on running sheep simpler, easier and cheaper rather than necessarily maximising stocking rate.

Comparisons of key performance indicators between producers in the CSZ and the wool belt identified a ‘production gap’ that may be reflective of the low-rainfall focus on cropping. When compared to high rainfall producers, farmers in the low rainfall regions were much more efficient at turning rainfall into grain than turning rainfall into sheep products. This may indicate that low rainfall sheep producers have opportunities to expand their sheep enterprises.

Sheep Production KPIs for L4 and M4 as % of H4
Figure 3: Sheep Production KPIs for L4 and M4 as a percentage of H4 region (=100)

   

Grain yield for various crops in the L4 & M4 as a percentage of  H4 region
Figure 4: Grain yield for various crops in the L4 and M4 as a percentage of H4 region (=100)

There is a desire among the top producers interviewed for more transparency and competition in marketing, and 76% value highly the advice from their agents. Those producers who build relationships with buyers and processors will be better informed and more profitable as a result.

Conclusions

  • Current relativities in sheep and crop margins mean that for a farm, the sheep enterprise can generate an equal or better margin than the crop enterprise. This may represent an opportunity for producers to profitably expand the pasture area to run more sheep and gain the rotational benefits of weed control, nitrogen fixation and disease control.
  • The improved margins compared to cropping are likely to encourage more attention to the sheep enterprise and a focus on the key drivers of profitability.
  • Due to the larger average flock size in the wool belt, percentage improvements due to better management will result in greater overall sheep numbers. Enterprise margins in the wool belt may represent opportunities for growth by specialist sheep producers.
  • In the CSZ, comparison of key performance indicators (KPIs) with high rainfall producers, allowing for rainfall, suggest low rainfall producers may have opportunities to expand their sheep enterprises. The priority for cropping in this zone will likely see a maintained focus on running sheep as ‘easily’ as possible, rather than maximising stocking rate.
  • Producers who build relationships with buyers and processors will be better informed.

Contact information

Mandy Curnow
+61 (0)8 9892 8422