Month: May 2018

In the commentary last week, we noted that demand for lamb and sheep was keeping sale yard prices supported. Alas, it seems that supply has got the upper hand this week with East coast prices broadly softer. The Eastern States Trade Lamb Indicator (ESTLI) off 2.5% to 601¢/kg cwt and East Coast Mutton shaved off 1% to close at 469¢/kg cwt.

Table 1 outlines the price movements at the East coast sale yards, with Merino Lamb the only category to hold its ground this week. A booming wool price is helping to keep them in favour – perhaps. Restocker Lambs are feeling the weight of the extended dry Autumn, particularly in NSW, posting the greatest decline to see it off 3.1% to 550¢/kg cwt.

State based sale yard indicators for Restocker Lambs are clearly identifying NSW as the key culprit in dragging down the East coast indicator with NSW Restocker Lambs off 10.1% in mid-week sales to see them hit 542¢/kg cwt.

The seasonal pattern for East coast lamb slaughter is continuing to hold above 400,000 head – Figure 1.  Average lamb slaughter levels for the last month across the East coast are trending 12% above the five-year seasonal average and 14.5% higher than over the same period last season. The persistent elevated supply is getting the upper hand this week to act as a headwind on prices. A similar story for mutton, with East coast slaughter levels for the last month 7.1% higher than the seasonal average and 31.4% above the same time frame in 2017 – Figure 2.

What does it mean/next week?:

The most widespread rainfall for the last month or so is forecast to hit the south of the country in the upcoming week, with some decent falls noted for the West Australian coast. Victoria and Tasmania continue to receive some reasonable falls but NSW still yet to benefit in earnest, with most regions in NSW lucky to get 10mm.

It’s hard to see prices gain too much traction with supply remaining so elevated, and the rainfall forecast isn’t providing a great deal of confidence that supply can ease. This suggests sideways price action to continue this week with a slight downward bias evident.

Winter officially arrives next week, and with it, we expect lamb slaughter to decline from recent record highs. Traditionally lamb supply throughout the winter is sustained by the last of the old season lambs, and the arrival of new season spring lambs out of NSW in the second half of July.  With the dry continuing, we ask whether these lambs will finished on time, and whether they’ll be there at all.

Lamb supply has been exceptionally strong so far this year, and we know that it has been a factor of fewer lambs being killed at the end of last year and dry weather forcing some sales. We know that NSW becomes the major supplier as we move into winter. But as the dry in NSW continues, and grain prices rise, there is some doubt as to the number and condition of winter lambs.

Meat & Livestock Australia (MLA) have released the February MLA and AWI Wool and Sheepmeat Survey Report with little fanfare, and it gives us a few clues.

Firstly, the data in the Wool and Sheepmeat survey appears to be quite volatile. This is likely due to the number of sheep producers filling out the survey being around 10% of the total number of producers. It’s a good sample, but results can move around depending on who has time to do the survey.

The survey does show some interesting trends. Figure 1 shows the number of breeding ewes on hand for both Merino and ‘Other’. According to survey results, the Merino Ewe flock hit a seven year high in February, with just under 32 million head roaming Australia. This is a 19.7% increase on February last year, which seems a little over the top.

They do split the Merino flock into those joined back to Merinos, and those joined to ‘other’ rams. 22.1 million head (up 24% year on year) are to be joined to Merinos, and 9.8 million (up 10.4%) to be joined to other.

The ‘other’ ewe flock, which consists mainly of breeds used for lamb production, is down 9.4% on February 2017. The total number of ewes (Merinos and Other) on hand, as of February, to be joined to a breed other than Merino is down 1% on last year.

This tells us that there should be a lot more Merino lambs born this year, more first cross lambs, and less ‘other’ lambs.

The survey data on lambs born from November to February somewhat confirms the ewe data. November to February is the smallest lamb marking period, but it’s still worth looking at the data.  There were apparently 3% fewer lambs marked over summer (figure 2) compared to last year, but Merinos were up a massive 21% to 2.25 million head, and ‘other’ down even more, 27% lower at 1.04 million head. Around half the lambs marked from November to February were Merinos in NSW.

What does it mean/next week?

If we consider that there were apparently fewer ‘other’ lambs marked over summer, is suggests lamb supply at this time of year should be waning. Last week we concluded that a lot of NSW is likely to have been grainfed, so some of these lambs might have exited the system already.

More importantly, there are fewer ‘other’ ewes to producer the early new season spring lambs which appear in saleyards in July. These lambs would have been born in March and April on little feed, which doesn’t bode well for survival or growth rates. It suggests fewer and lighter lambs to fill the June, July and August supply void.

We recently had a query as to whether there was much seasonality in New Zealand lamb slaughter.  We have covered this before, but given New Zealand are our only major competitor in lamb export markets, it’s worth another look.

Australian lamb slaughter has some seasonality, with the five year average low month, July, coming in 18% lower than the peak in October.  In New Zealand they have real seasonality.  The lowest slaughter month of August is 75% lower than the peak in March.  That is, a quarter the number of lambs are slaughtered in August, than are slaughtered in March.

Figure 1 shows that January to March slaughter is usually very strong.  To put NZ into perspective, their January to March slaughter averages over 2.5 million head.  Australia’s highest slaughter month on record in 2.2 million head.

As well as illustrating annual seasonality, figure 1 gives us some idea as to why export demand for lamb has been strong this summer and autumn.  The falling NZ sheep flock and lamb crop has seen a heavy fall in lamb slaughter.  While January slaughter was similar to last year, February and March were down 19 and 14% respectively.

Lower lamb supply out of New Zealand simply means that prices are going to be higher there, which can see demand shift to Australia.  Heavy Australian slaughter has helped fill the hole left by New Zealand.

Lower slaughter has seen record lamb prices in New Zealand.  Figure 2 shows lamb prices for 17.5 kgs cwt lambs in NZ has been rising to record levels at a time of year when they normally hit their seasonal lows. Over the first five months of 2018 lamb prices have averaged 24% higher than 2017.

Sheep slaughter shows similar, but more pronounced seasonality in New Zealand.  Figure 3 shows monthly sheep slaughter.  The peak month of January is eight times larger than the lows of September.

What does it mean/next week?:

It seems whenever we look at New Zealand sheep and lamb its positive for our market.  In the short term we can expect export demand for Australian lamb to remain strong as New Zealand slaughter enters its seasonal decline.

Lower lamb slaughter this year might indicate the start of a flock rebuild, which in the medium term is negative for export demand.  Sheep slaughter has been stronger, which might will put a dampener of the flock rebuild, especially as there were supposedly fewer lambs born last year.

Regular readers will no doubt be aware that we like to base our analysis in basic economic theory.  Supply, demand, price, that sort of thing.  It also piques the interest when a market behaves in a way contrary to the normal rules, and we’ve seen a bit of that this week.

Rain in South East South Australia and Victoria has seen lamb and sheep markets rally this week on the east coast.  So we went looking for the ‘smoking gun’, which is usually declining supply.  But we couldn’t find it.

Admittedly we were frustrated by the week old yarding data, so we turned to slaughter.  Also a week old but usually less volatile.  Wheat we found was that rather than seeing a declining trend in lamb and sheep slaughter, we found lamb slaughter parked at an all-time high for May.  In fact, there have only been 3 weeks in history when lamb slaughter has been higher, all of them in 2006 (figure 1).

So it must be sheep which are in tight supply, opening up space for more lambs.  Where is that sheep with the smoking gun?  Nowhere to be found.  While sheep slaughter (figure 2) is within the historical range, it was 35% higher than 2016 and 2017 last week, and the week before.

It was demand.  Despite producing very large amounts of sheepmeat, demand continues to push prices higher especially for mutton (figure 3), which is nearing a 12 month high in Victoria and NSW.

The week ahead

There is no real rain on the 8 day forecast, so we might expect the flow of sheep and lambs out of NSW to continue.  At least they are getting good prices for them.  Well finished lamb supply is likely to wane, however, which might help push the ESTLI back toward the highs of last year.  If it does ever rain it’s going to be interesting.  It might be a case of the irresistible force (demand) meeting the immovable object (growers trying to maintain flocks).