Year: 2018

ABARES forecasting more lambs but demand to drive.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) are good enough to have a crack at forecasting financial year lamb slaughter. This week we take a look into this, assume their December forecasts are right, and see what it means for second half lamb supply.

Regular readers will know that forecasting supply of any agricultural commodity is an imprecise art. With livestock, in particular sheep, it’s even harder. The starting number of sheep is always rubbery. Good seasons can see tightening supply and poor seasons heavy increases. Add to this variation in lambing percentages and on the same starting flock we have in the past seen variation of 10-15% in lamb supply.

Regardless of all this, ABARES have come out with what seems to be a reasonable number for 2017-18 lamb slaughter, pegging it at 23.03 million head (figure 1). The slaughter forecast is 3% higher than slaughter for 2016-17, and the five year average. The higher slaughter numbers are a result of growth in the flock, driven by lower lamb turnoff last year.

ABARES are forecasting the national sheep flock to finish 2017-18 at 72.6 million head. This is also 3% higher than June 2017, and will take the flock to a four year high, which, we would think, will drive lamb slaughter in coming years.

In the more immediate term, we can make some rough estimates of how lamb slaughter might play out for the next six months based on the ABARES forecast, and what has been slaughtered to date.

Figure 2 shows lamb slaughter for the year to date, based on Australian Bureau of Statistics (ABS) figures to October, and our estimates for November and December, based on MLA’s weekly numbers. Slaughter for the year to date has run around 3% higher than last year. This means that some of the forecast higher supply has already exited the market.

For the second half of the year we have deducted slaughter to date from ABARES forecast 23.03 million head. This leaves 11.22 million head, to which we have applied average seasonality to come up with monthly slaughter estimates.

Key points:

  • ABARES December Agricultural Commodities Report pegged 17-18 lamb slaughter 3% higher than last year.
  • To date lamb slaughter has been running 3% higher than last year, with remaining lambs to lift second half slaughter rates.
  • Strong demand for lamb has driven record spring prices so far, but strong supply will temper further rises.

What does this mean?

There are a couple of things to take from this analysis. Firstly, lambs slaughter for the coming six months is likely to be higher than last year. This should temper price rises to an extent. If demand was at the same level as last year, we’d expect lamb prices to be lower than last year.

However, the second thing we can see in figure 2 is that lamb supply is also likely to be much weaker than it was from October to December. We have been banging on about stronger demand driving prices higher during spring. If demand remains strong, prices are likely to better than last year even with stronger supply.

Lotfeeders feeling the squeeze.

December wasn’t a great month for cattle feeders. After a brief reprieve at the start of the month, rising input costs coincided with falling finished cattle prices to see another intense squeeze on margins. Tightening lotfeeder margins are not good news for those producing young cattle either, and for this, the first cattle article of 2018, we’ll see if we can find any respite in the coming months.

Figure 1 shows the main problem for cattle lotfeeders and the cattle market in general. After a small, and short-lived, bounce back to the 520¢ level in late November, the Queensland 100 day Grainfed Steer price has resumed its downward trend, finishing the 2017 at 507¢/kg cwt.

The Grainfed Cattle price is not only close to a 3 year low, it’s 7.5%, or 40¢ lower than this time last year.  For a 340kg lwt steer, the lower price means lotfeeders are receiving $136/hd less than this time last year.  The quarterly feedlot survey gives a pretty good idea as to why grainfed cattle prices are weaker. With still over 1 million head of cattle on feed at the end of September, supply is strong and consistent. There is little scope for lotfeeders to hold back supply in order to support prices.

On the input side, lotfeeders are seeing little in the way of positive news. The spike in fed cattle values in late November saw feeder values also jump. The shortfed feeder lifted 19¢ from October lows, to hit 302¢/kg lwt. It has since lost 6¢, but remains relatively strong.

Medium fed feeders have performed similarly, but have held their price at the top, finishing 2017 at 320¢/kg lwt. This, along with the falling grainfed prices, pushed margins for Riverina lotfeeders into negative territory in early December. A fall in feed grain prices due to some harvest pressure saw gross margins back at $20 per head (figure 2) late in December, but this is still a long way from turning a profit after overheads.

There might be a little positive news on the horizon for lotfeeders. On average Grainfed Steer prices rally 4% in January (figure 3) as Japanese demand ramps up. We haven’t really seen this in the last two years, as prices have eased from highs, but given we’re starting at a 3 year low, there is some scope for higher values.

Key points:

  • Lotfeeder margins finished 2017 at weak levels as Grainfed cattle prices were close to a 3 year low.
  • Feeder values held on to their early December levels, but will come under pressure.
  • There is some scope for a price rally in January, but grainfed cattle supplies will remain strong.

What does this mean?

Weak lotfeeder margins are not great news for the weaners which are about to be sold in Victoria.  Lotfeeders often place a floor in the market for heavier weaners, and this year their prices are likely to sway some way from last year’s values.

Low grainfed cattle prices are similarly depressing for grassfed cattle values. While there might be some sort of lift with tightening grassfed supplies in January, its likely prices will remain well below last year’s levels, unless we see a strong lift in export prices.