Category: Sheep

Lamb prices opened the year at record highs, but on relatively small volumes.  As supplies ramped up with a full week of selling we saw indicators weaken, but they remain very strong, and at records for this time of year.

The first published Eastern States Trade Lamb Indicator came out on Monday at an extraordinary record of 698¢/kg cwt.  As the week progressed, prices cheapened, lamb indicators back in to line with the 2017 ending values.

It was this week last year than lamb prices moved, which means that the current ESTLI is now ‘only’ 10% above the same time last year.  It will be interesting to see where lamb prices head from here.  The TFI shutdown is likely to have some say in this week’s lower values, and it comes as a critical peak demand period.  They are hoping to open again at Murray Bridge towards the end of the month, but this will be too late for Australia day demand.

Figure 2 shows mutton values also rallied, but not as far as lamb, and they also fell, edging below the end of December prices.  As outlined in this week’s article on Chinese lamb exports, they continued to drive demand in December.  It looks like this might be continuing into 2018, and this is good news, especially when Murray Bridge is killing again.

Restockers continue to pay up for lambs, although late this week they got some cheaper lambs, which might turn out to be good value if supply tightens.  We saw last week how strong prices can get.

The week ahead

The question for the market is whether the lower prices of this week will see lamb supply weaken.  The supply of well finished woolly lambs is dwindling with feed supplies and older lambs will start to make the running, and many of these might not be ready yet.  We might see the market have a bit of a spike next week.

For the first week in January there was certainly some big news this week.  On Wednesday the biggest lamb market in the country at the moment opened even higher than the very strong close.  And on Wednesday night one of the country’s largest lamb processors had a fire.

At the Hamilton Lamb sale on Wednesday lamb prices gained a bit more ground, after having rallied strongly in December. This week’s rise was in the order of 20¢ for ‘young lambs’ (figure 1). More shorn lambs will start to hit the yards over the coming weeks, but young lambs are still the majority of this market.

This early sale might have producers deciding to sell whatever was left, but the fire at Thomas Foods International (TFI) on Wednesday has thrown a massive black swan into the works.

In an article in ‘The Land’ back in November TFI were quoted as killing 55,000 sheep and lamb at Murray Bridge per week. Figures 2 and 3 show weekly slaughter for SA, with the Murray Bridge plant accounting for 50-55% of SA capacity.

On a national scale the Murray Bridge plant kills 10-12% of sheep and lambs. To take this capacity out of the system overnight is guaranteed to have some impact on demand.

The good news is that there might just be enough capacity at other plants to take up TFI’s sheep and lambs. Figure 4 shows that the peak weekly sheep and lamb slaughter for the last 12 months was in December, at 530,000 head. If we assume this is full capacity, and deduct 55,000, this gives us a new number of 475,000 head, shown by the red line.

For the first half of the year at least, if supply runs in a similar fashion to last year, the market shouldn’t be constrained by slaughter capacity.

The week ahead

Uncertainty is not good for markets, and this might lead to a short term slump. We do know, however, that domestic and export lamb and mutton demand isn’t going to go away, the main risk is a processing bottleneck. The best example of this was the 2013-15 drought which saw more cattle on the market than could be killed, or carried, and very weak prices.

There is probably enough sheep and lamb slaughter capacity, along with carrying capacity on farm, to avoid a crash in sheep and lamb markets in the first half of the year at least. Over the coming weeks weaker prices may ensue at saleyards however as TFI make arrangements to handle the supplies they had booked up for January.

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.

Last week we looked at some long term trends in lamb and sheep trading enterprises. We identified that lamb trading margins were more reliable, but merino wether trading had the potential to offer very good margins, or on the rare occasion, losses. Price seasonality has a strong impact on trading margins so this week we delve deeper into the data looking for the best buy and sell months.

Our trade scenario is buying a 35kg lamb, holding for two months, and selling at 48kgs. No costs are accounted for, and as such the only variables are the store and trade lamb prices, and how these change over the two month term of the trade.

Figure 1 shows how the gross margins for the lamb trade have behaved over the last two years, and on average. The green shaded area shows the range of results two one standard deviation. The data points are for the sell months, so lamb purchases were made two months earlier.

It would come as no surprise that on average November is the worst month to complete a lamb trade. The average gross margin for lambs bought in September and sold in November is $23/head, with a narrow range of $18-28/head.

The strongest months for trades would also give few surprises. June and July both average around $40/head thanks to strong seasonal price rises from April and May into the winter months. The ranges are wider for winter trades from $28-53/head, however, showing the price movements have less consistency than the spring falls.

This year abnormal seasons, and as such abnormal price trends have seen somewhat of a reversal in gross margins on lamb trades. There wouldn’t be many growers out there who would turn down a lamb trade paying $39/head for lambs sold in November, and those who took the punt have been well rewarded.

We can run the same seasonal analysis for our six month mutton trade, where merino wethers are taken from 50-62kgs, cutting 2kgs of clean 19 micron wool. Figure 2 shows that on average the best results are for wethers shorn and sold from April to July, but there is plenty of variation.

Key points:

• Gross margins on trading lambs and merino wethers shows strong seasonality.
• The best margins are on lambs and sheep sold in the winter, but these are also the most expensive to produce.
• Lamb and merino wethers bought now historically deliver strong margins, if costs can be kept under control.

What does this mean?

Sheep producers are likely to look at these charts and realise that the best gross margins are made at times when it’s hardest to turn off good sheep or lambs. Prices rise during times of shorter supply, due to the fact that grass has been hard to grow. These charts can be used when buying or holding sheep or lambs to quickly and easily assess upside and downside in any proposed trade, before some more in depth analysis is done.

For those looking at buying sheep or lambs, historical seasonality tells us that it’s a pretty good time to do it. Even the lower end of the historical range should provide a profitable trade for lambs and sheep, as long as feed costs are not too high.

The last full week of sheep and lamb sales has seen 2017 finish as it began.  Streaking higher.  This week saw the Eastern States Trade Lamb Indicator (ESTLI) post a six month high, in spite of a record yarding.

There is an old saying in markets. “The best cure for high prices is high prices”. The theory goes that higher prices encourage increases in supply, which in turn sees prices fall. The adage doesn’t seem to apply to lamb markets at the moment.

The record December lamb prices have indeed drawn out more lambs. Figure 1 shows east coast MLA yardings in the week to Tuesday staying strong, at 275,231 head. While down on the record yardings of the previous week, supply remains very strong.

As we keep saying, the strong supply is not having the normal negative impact on lamb prices. This week the ESTLI gained 26¢ to 661¢/kg cwt (figure 2) a six month high. In fact, the ESTLI is now just 26¢ off the all-time high set back in April.

Figure 3 shows part of the reason we have seen rapid price rises at the yards. The rain in NSW has seen tightening direct to works supply, with slaughter lower in the last couple of weeks. Processors have needed to buy up the yards to fill their kills.

The week ahead

A phenomenal year of lamb and sheep prices is almost over. Figure 2 shows that it has been a rare event for the ESTLI to be below 600¢, and this in a year when supply is likely to finish at a similar level to 2016.  In 2016 prices spent just 3 months above 600¢.

The December price rise is not unprecedented, the market rallied at the end of 2014 and moved sideways in early January. This year, with lamb supply having been so strong in the spring, there is the chance that the usual strong January demand might be met with tight supply, and the ESTLI might have a tilt at 700¢.

In last weeks comment we mentioned that the rain could provide a short-term boost to lamb prices, and indeed it did. We surmised that the extra moisture could see a pullback in supply with processors fighting it out at the saleyard, although that didn’t appear to be the case, signalling this week’s movement was demand led.

Figure 1 shows the rainfall pattern for the week ending on the 7^th of December and despite some areas not receiving the magnitude of rain forecast there was still some ample falls to much of Victoria and NSW. Despite the rain there was no detrimental effect upon supply in these states with Victorian lamb throughput up 19% and NSW lamb yarding up 4% on the week.

The increased throughput having little impact on east coast lamb prices with the ESTLI climbing 3.5% to close yesterday at 635¢/kg cwt.  – figure 2. The WATLI stronger too, posting an 11% increase to 640¢ as lamb throughput there trekked sideways.

Mutton prices firming too on the week across the Eastern states in the face of higher saleyard volumes with the East coast mutton indicator up 3.5% to 487¢. West Australian mutton one of the few categories to see lower week on week throughput, falling 8.6%. The lower supply providing a boost to WA mutton prices – up 8% to 387¢.

The strength of recent lamb and sheep prices no mean feat when you consider how much above the seasonal average the combined east coast throughout levels have been tracking of late – figure 3. Indeed, at sitting just shy of 385,000 head the East coast lamb and sheep yarding is 19% above the five-year average for this time in the season.

The week ahead

Much lighter falls are forecast for this week across the nation with less than 10mm predicted for most of the sheep country. Its unlikely the magnitude of the recent price gains for the ESTLI will continue into next week, even with the seemingly robust demand.

Trade lamb prices in excess of 630¢ are going to continue to encourage producers with capacity to deliver stock to keep coming forward. But as we often say, more supply now can mean less available for later. What this may mean for supply and prices as we head into 2018 is an exciting prospect for producers.

Unseasonal rain will have an impact on sheep markets.  This week it had an impact even before it fell, with the Eastern States Trade Lamb Indicator rallying back to 613¢/kg cwt this week.  The unpredictable weather might see more surprises yet.

The supply, demand and price equation is still not adding up relative to last year.  Figure 1 shows that to the end of last week east coast lamb slaughter hit its 2017 high, just shy 400,000 head.  Lamb slaughter was 3% higher than the same week last year, yet the ESTLI remained 17% higher.  We keep talking about it, but lamb demand is very strong.

For sheep the equation is similar, but the lift in demand is more dramatic.  Last week 18% more sheep were slaughtered than this time last year, yet prices were 14% higher.  Total sheep and lamb slaughter for last week was 6%higher than this time last year, and just shy of a two year record (figure 3).

Interestingly however, total sheep and lamb slaughter is right on the five year average.  This tells us there is slaughter space available, it just needs to come back online, and at current prices, export demand needs to be strong enough.

In the west lamb prices maintained their strength.  At 578¢/kg cwt, the WATLI is 100¢ stronger than this time last year, and not far of the ESTLI.  Restocker lambs remain cheap however, at 508¢/kg cwt, compared to east coast at 680¢/kg cwt, and this is encouraging the shipping east.  Lambs from WA can be landed in eastern Victoria around $10 cheaper than the local price.

The week ahead

The forecast for the coming days is for plenty of rain.  This is the time of year when lamb yardings peak, and processors rely more heavily saleyard supplies than usual.  Disruption to saleyard supply due to rain will be hard to replace with direct consignments.  This means we could see a short term spike in lamb prices next week as processor battle it out for supply.

The Eastern States Trade Lamb Indicator (ESTLI) continues to hold its ground in the face of strong lamb throughout figures being recorded in South Australia and Victoria, closing yesterday just 1¢ softer at 610¢. East coast mutton was even more defiant in the face of above average saleyard numbers to see an 8¢ gain to 461¢/kg cwt.

The East coast lamb throughput posted a 22.5% increase on last week and is sitting 28.4% above the five-year average for this time in the season – figure 1. NSW lamb yardings trekked sideways on the week but remain 22% above the seasonal average level. Although the big boost to East coast yardings is coming from SA and Victoria.

Figure 2 highlights the surge in SA lamb throughput at 52,251 head; the highest weekly lamb yarding recorded since 2008 to see throughput levels soar 60% over the five-year average for this time in the season.

Victoria is adding to the East coast glut of lambs with over 120,000 head recorded at the saleyards this week. Victorian lamb throughput was also higher than the five-year average this week, sitting 23.5% above the seasonal level. The increased numbers are currently dragging down each states respective Trade Lamb saleyard indicator, with Victorian Trade Lambs posting a 3.4% decline (600¢/kg cwt) and SA off 6.1% (574¢/kg cwt), based off the MLA mid-week saleyard report.

Stronger than average East coast mutton throughput levels were recorded too. This was aided by higher NSW figures, to see an 8.6% increase in saleyard numbers and the trend continuing to trek along the upper band of the normal range – figure 3. NSW mutton yardings were up 15.7% on the week, pressuring NSW mutton at the saleyard to see them ease 4¢ to 400¢/kg. Softer Victorian and SA mutton throughput is providing some support to prices there with Victorian mutton up 20¢ to 420¢ and SA gaining 8¢ to 410¢/kg cwt.

The week ahead

Price support is likely to remain from continued rainfall forecast across much of Victoria and NSW next week, with much to these two states expecting between 25-50mm. Although, increased Victorian yardings are likely as the Spring flush continues, so that will act to help counterbalance the recent and forecast rains.

On balance, the ESTLI is likely to ease into the week ahead to test sub 600¢, but don’t expect a huge drop.

It could be the beginning of the spring flush, or it could be another blip in what has been an exceptional spring for prices. The rainfall this week might also have something to say about lamb prices in the east, but in the west they look like good buying.

There is an interesting east/west paradox going on in the lamb market. In the east restocker lambs are trading at a 50-90¢/kg cwt premium to trade lambs. In the west, trade lambs are priced at 542¢/kg cwt, and restocker lambs at 489¢.

If we work on a 16kg cwt restocker lamb, it makes east coast lambs $122/head with a $5 skin. In the west, the same lamb is worth $83. Historically this is a decent price, but it brings shipping sheep from west to east into play.

Despite yardings falling this week, prices have eased. The Eastern States Trade Lamb Indicator (ESTLI) lost 16¢ to 611¢/kg cwt in the week to Tuesday, but as shown in figure 1, remains well above last year’s levels.

Mutton markets defied the downward movement, with Victorian and NSW remaining solid at 466 and 450¢ respectively. Vic and NSW mutton values have rallied 25% in the last month with demand seemingly the driver (figure 2). Figure 2 also shows that in South Australia mutton is only 330¢, which makes them cheap, and worth shipping to Victoria.

The week ahead

Major lamb districts in Victoria and South Australia have seen exceptional rainfall in the last few days. The rain is likely to see lambs held back, especially if the market eases as Western Victoria and South-East SA are likely to be green until Christmas.

Slaughter figures will tell the tale of lamb supply, and give some pointers to what might happen in the New Year. But don’t be surprised if after this rain the spring flush of lambs is lighter than normal.