Category: Sheep

Lamb supply continues to contract and with it, prices are on the rise, mostly.  There were a couple of negative spots, especially in the restocker department, but we did see an indicator break through the extraordinary 1000¢ level.

New South Wales was where the action was at. The NSW Heavy Lamb Indicator was the first to break through the $10 mark.  NSW Heavy Lambs gained 28¢ this week to hit 1005¢/kg cwt (Figure 1).  Last year the peak in prices saw NSW Heavy Lambs leading the charge as well, no doubt dry times makes them hard to produce and in short supply.

It is especially hard to carry heavy lambs through when prices have been at record levels for more than a month.

Mutton also broke through resistance this week.  NSW (Figure 2) and Victorian Mutton Indicators both moved through 600¢, posting 624 and 620¢/kg cwt respectively. This time last year Mutton prices were falling, but the lack of stock left and the better season are now driving prices to new highs.

There were losers this week despite the records.  Restocker lambs eased back to the 800-820¢ range. Old season lamb demand is waning as the risk of cutting teeth increases, while no one seems to be selling restocker suckers in the saleyards.

On Auctionsplus restocker suckers are making more than $10. There was one lot of first cross ewe lambs which made $20/kg cwt. They were very light, but $150/hd for a 20kg lwt lamb is extraordinary.

Things are good in the West, but not as good as the east. The WATLI gained 31¢ to 853¢/kg cwt (Figure 3) and is not far off the record high set in June. WA Mutton did hit a record however, rising 34¢ to 518¢/kg cwt.

Next week?:

The coming month will be intriguing for lamb and sheep markets. A lot will depend on how quickly new season lamb producers can get weight into lambs and get them to market. There can’t be many old season lambs left.

The lamb rally continued this week, as supplies continued to tighten.  The Eastern States Trade Lamb Indicator (ESTLI) set a new record, just hitting 900¢.  Mutton markets might have hit their peak, however, having come off in recent weeks.

After a brief dip there a few weeks back, which could have been in anticipation of a short week, the ESTLI price rally has made its way to 900¢/kg cwt.  The ESTLI was up 15¢ this week, and interestingly, just 12¢ higher than four weeks ago.  Current levels look like they are providing some resistance.

Tightening supplies are no doubt sending prices higher.  Over the last two years there have been periods where lamb supplies have been tight, and sheep have been tight.  It has been almost exactly two months since ovine slaughter has hit this level in a full week (figure 2).

Last week total sheep and lamb slaughter was 15% lower than last year, and 7.6% below the five year average.  It didn’t get this low at all during the price peaks last year, and it is still only June.

Figure 3 shows the National Mutton Indicator seems to have found its peak.  Sheep supply is tight, but is around the five year average, and it looks like processors are finished bidding up prices to try and draw out supply.

Mutton prices generally trend down in July, but it will be hard for that to happen again this year, as surely supply will remain tight for a while yet.

What does it mean/next week?:

For sheep and lamb prices to fall, either demand will have to weaken, or supply improve.  Traditionally lamb and sheep supply will fall for another couple of weeks, before starting to recover.  Last year the lamb supply didn’t come until August, so we may have a while to wait before we see prices ease.

The percentage price spread premium between the Eastern States Trade Lamb Indicator (ESTLI) and the National Mutton Indicator (NMI) has been narrowing in recent months. It is not unusual to see this occur during the middle of the season. However, the Mecardo team were wondering how much of an impact the price differential has on Australia’s export volumes of lamb and mutton. Is there any substitution effect at play as the relative price of the two sheep meat exports varies?

The percentage price spread premium between the ESTLI and NMI has been broadly following its normal seasonal pattern of narrowing throughout the first half of the year, drifting from a high of 43% in January to a low of 28% over April (Figure 1).

As the seasonal pattern demonstrates, it is not uncommon to see the spread premium at its narrowest during winter and it can dip towards the 20-25% spread region. Conversely, peaks toward 50-55% are achievable at the start and end of the season.

We have noted that occasionally month to month export flows to countries like China, that takes both lamb and mutton from Australia, show some signs of substitution. Export trade figures from April to May show that for China lamb volumes increased 10.6% while mutton exports declined 31%.

Indeed, across all trade destinations for the April to May period the total volume of lamb exports increased by 1,999 tonnes swt while mutton exports declined by 2,291 tonnes swt. It begged the question – Is there a relationship between the price differential between lamb and mutton and relative trade volumes?

Analysis of the 12-month rolling average of the percentage spread premium and the export ratio between lamb and mutton volumes shows there is a link. Since 2004, when the percentage spread premium exceeded 50%, lamb export volumes could not get beyond 50% more than mutton export volumes. Similarly, when the percentage spread premium dipped below 30% lamb export volumes expanded to close to double mutton export volumes (Figure 2).

What does it mean?

Monthly correlation analysis between the percentage spread premium and export ratio shows a moderately strong inverse relationship between the two data series, with an R2 of 0.5555 (Figure 3). When the price spread is high, signalling relatively expensive lamb, the trade flows favour mutton and in relative terms, lamb exports weaken. Conversely, when the spread is lower (relatively cheaper lamb) the trade flows favour lamb and lamb export volumes are relatively higher.

Given the low flock numbers presently and historically high prices encouraging increased production/flock rebuilding as soon as climatic conditions allow, there is a reasonable chance that we will see price spreads between the ESTLI and NMI remain toward the lower end of the normal range in the coming seasons. This will be particularly evident when the flock rebuild is able to get underway in earnest and it provides a promising outlook for lamb exporters and producers with lambs that meet the export specifications as the trade flows will favour lamb.

Key points:

• The percentage price spread premium between the ESTLI and NMI has narrowed from January to June, broadly following the normal seasonal trend.
• Historic trends show that when the percentage price spread premium dips below 30% trade flows favour lamb and when the spread extends above 50% they favour mutton.
• Correlation analysis on a monthly basis confirms a moderately strong relationship between price spreads and trade flows.