Category: Sheep

The lamb market is throwing up some interesting data at the moment.  Meat and Livestock Australia’s (MLA) weekly slaughter data is telling us lamb slaughter is at a record for this time of year, yet prices remain historically strong.

Figure 1 shows that slaughter for the week ending the 15^th of September has reached levels we normally see towards the end of October.  The 383,184 head slaughtered on the East Coast last week was the second highest level for the year, 10% higher than last year and the second highest on record for this week.

We can also see in figure 1 that weekly lambs slaughter this year is following the 2014 trend very closely.  While the slaughter trends for 2014 and 2017 are a close match, prices are doing a much better job of holding up this year.

In 2014 rising lamb supplies saw prices fall heavily in August, and stay there until December.  Apart from prices easing from extreme highs in June, we still haven’t really seen prices deteriorate in response to stronger supply.

This week the Eastern States Trade Lamb Indicator (ESTLI) gained 1¢ to sit at 598¢/kg cwt.  The story was different in the West where the WA Trade Lamb Indicator (WATLI) fell over 10% this week to 537¢/kg cwt, a 7 month low (figure 3).

Lamb supply in WA wasn’t particularly strong this week, but mutton was, with over 20,000 head yarded.  WA mutton values fell 65¢, over 20%, to 270¢/kg cwt.

 The week ahead

In the last few years the 400,000 head mark has been the trigger point for heavy falls in prices.  Lamb slaughter appears to be headed that way, but could just as easily track sideways for a month or so.  Does this this mean prices will also track sideways?  It’s hard to say, but demand appears to be very resilient.

Price movements in WA are a warning as to what could happen if lamb supply picks up enough to put pressure on kill space.

 

Another Winter is over and the first day of Spring heralds a drop in WA Mutton prices as supply reacts to the recent buoyant markets over there. The WA Trade lamb indicator (WATLI) off too, closing the gap between itself and its Eastern cousin this week to see only 3¢ difference between them.

Figure 1 highlights the reaction of Western mutton producers this week to the robust prices for sheep and lamb prices being experienced recently, as covered by our earlier analysis piece this week. Indeed, the 63% jump in WA mutton throughput pressuring sheep prices lower to see them shed 7% to close at 409¢/kg cwt, now sitting only 4¢ above East coast mutton prices.

East coast lamb slaughter beginning to decline with figures for the week ending 25^th August 4% lower than the previous week, with just over 357,000 head processed. Although, slaughter figures still sitting fairly high compared to previous seasons with the current week tracking 7% above the five-year average for this time of the year – figure 2. Read more about what the higher slaughter levels now may mean for lamb prices as we head further into Spring here.

The high supply not having a great impact on most national categories of lamb this week, with only Merino lamb posting a decline – down 2.3% to 557¢/kg cwt. National Mutton down a similar magnitude, off 1.9% to close at 407¢/kg. All other national lamb indicators posting gains between 1.5% to 5% and this robustness was mirrored in the Eastern States Trade Lamb Indicator (ESTLI) with a gain of 2.4% noted to close at 633¢/kg cwt, just 3¢ shy of the WATLI – figure 3.

The week ahead

Light rainfall forecast for the West and better falls noted for SA and Victoria should keep prices reasonably stable for the week ahead. In addition, with no clear signs yet of the impending spring flush and the stronger than normal supply we have seen for lamb in the last few weeks, means that less may present themselves throughout Spring. This suggests that prices may be kept fairly well supported on any dips.

Every quarter the Australian Bureau of Statistics survey retail meat prices as part of the construction of the Consumer Price Index.  Meat and Livestock Australia (MLA) have a formula for converting the numbers from the indices into average retail prices.  Given the levels of saleyard lamb prices in the June quarter, it should come as no surprise to see that at a retail level, lamb has never been more expensive.

The sharp rise in saleyard and over the hooks lamb prices in the first half of 2017 took a while to translate into strong retail lamb prices, but it did eventually push them to a record.  The average retail lamb price increased 51.77¢, or 3.6%, to move to 1501.37¢/kg rwt.

The retail lamb price in the June quarter sat 4.2% above the same time last year.  This was dwarfed by the increase in saleyard lamb prices.  During the June quarter in 2017, the Eastern States Trade Lamb Indicator (ESTLI) averaged 106¢/kg cwt higher than 2016.  This equated to a 19% rise, so we can see that obviously the rise in saleyard values has not been fully passed on to retail values.

However, things were not as bad as they have been in the June quarter for retailers.  For the two years from July 2013 to June 2015 retail lamb prices averaged a premium to the ESTLI of 792¢/kg (figure 2).  In the June quarter this year the premium was 839¢.

During the very strong price period in early 2011 retail lamb prices didn’t quite break the $15 mark, pulling up at 1498.47¢ in the June quarter.  During this period there were reports that the high retail prices were impacting lamb consumption at domestic and export level, and we subsequently saw a sharp fall in lamb prices.

Things are a bit different this time.  Obviously in real terms lamb remains cheaper than it was in 2011, and compared to its main red meat competitor it is not yet in the expensive range.  Figure 3 shows retail beef prices remained strong in the June quarter, and despite the rise in lamb values, beef it still at a 22% premium.  In 2011 the beef premium shrunk to just 4%, and this put considerable pressure on lamb demand.

Key points:

• Retail lamb prices reached a new record high in nominal terms in the June quarter.
• The retail lamb price premium to saleyard prices fell, but it has been lower in the past.
• Beef still commands a strong premium to lamb at retail level, so pressure on price from consumer level is unlikely.

What does this mean?

At this stage it looks unlikely that we’ll see a push back from consumer level to record high retail lamb prices, given that it is still competitive relative to beef, and the margin to saleyard values is still well above levels we’ve seen in the past.

There remains some concern in the expensive red meat prices relative to static cheap chicken prices, and this is being borne out in consumption levels.

The issue will come when lamb supply recovers, and this extra meat has to find a market.  If export market can’t take it we might see lamb prices ease at retail and then saleyard level in order to claw back some market share from the white meats.

Just when we were expecting the lamb market to continue its late winter and spring slide into the mid-500s, demand seems to have found some life.  This week the lamb market rallied back to 5 week high despite increasing slaughter rates.

Markets can sometimes defy even the most rusted on seasonal trend.  A couple of anomalies caught our eye this week.  Figure 1 shows the massive jump in lamb slaughter over the last two weeks, to the point where for the week ending the 18^th August, we hit its highest level since the third week of 2017.  In fact lamb slaughter last week was the third highest for the year.

The 5.4% increase in east coast lamb slaughter was driven by a 10% increase in Victoria, with the 372,731 head the highest August weekly slaughter on record, by a margin of 3%.

Despite the increasing supply, lamb prices managed to post a counter seasonal rally.  The Eastern States Trade Lamb Indicator (ESTLI) gained 24¢, or 4% to 618¢/kg cwt (figure 2).  The rise was on the back of increases in all states, 29¢ in NSW, 36¢ in SA and 8¢ in Victoria.

The higher ESTLI took it to within a few cents of the forward contracts released back in May and June.  Up until now the forwards had been well in front, but stronger demand might see the markets in front next week.

WA continues to lead the market, with the Trade Lamb Indicator gaining 6¢ to 666¢/kg cwt this week.  WA Mutton values eased, but remain the most expensive in the country at 440¢/kg cwt.

The week ahead

There has been some talk around about slow lamb growth rates impacting on the supply of finished lambs early in the selling season.  While this could explain continued strong prices, the high slaughter rates suggest supply is ok, and demand may be pushing prices higher.

We often say higher than normal slaughter early in the year bodes well for prices later on, and this is even more so when prices remain so strong.

Average trade lamb prices continue to track around the 600¢ mark on the east coast, and higher in the west. Lamb and sheep slaughter has rallied and is sitting well above last year’s mark, but demand appear to be keeping pace with supply.

In the week ending last Friday lamb and sheep slaughter tipped over 450,000 head, and reached its highest level since March (figure 1). Ovine slaughter sat 20% above the same week in 2016, and was largely driven by much higher lamb slaughter in SA and Victoria. In NSW there was an extraordinary 65% year on year rise in sheep slaughter.

The good news is the stronger supply this year isn’t sending prices lower. Figure 2 shows the Eastern States Trade Lamb Indicator (ESTLI) and the National Mutton Indicator (NMI). The ESTLI is at almost exactly the same level as last year, despite lamb supply being stronger, while the NMI is 8.6% above this time last year.

In WA the market continues to outpace its east coast counterpart, sitting at 660¢/kg cwt this week (figure 3). In SA trade lambs are at 524¢, which for a 20kg lamb equates to a difference of $27/head. It doesn’t happen often, but it’s almost worth trucking lambs to the west.

Figure 3 also shows that the precipice is coming for WA lambs, as they there is a very reliable price decline at this time of year. How far WA lamb prices fall is the hard part, it’s hard to see them going back to 500¢, but that is where they came from in January.

The week ahead

Lamb and mutton price should decline further in most markets over the coming month. They are, however, showing stubborn resistance to lower level, even in the face of stronger supply. This is good news, but the tipping point is coming, with the only question being how low they will go. My moneys on a 525-550¢ range in September.

Some big moves again in East coast lamb and sheep yardings this week, heavily influenced by NSW flows, but for the most part prices around the country finished firmer. The headline, Eastern States Trade Lamb Indicator rising 1.3% to break back above 600¢ – although stronger gains were noted across other categories of lamb across the country.

Figure 1 highlights the sharp rebound in lamb throughput at East coast saleyards this week, with a gain of 74% to see just shy of 165,000 head of lamb exchanged. The rebound driven by a surge in lamb throughput in NSW which posted a whopping 108% increase in numbers on the week. It is reasonable to argue that the size of the NSW gain is a bit distorted as the previous week’s numbers were much lower than normal, however the 138,000 head of NSW lamb throughput this week is still 37% above the five-year average for this time of the year.

A similar, but opposite story for sheep yardings along the Eastern seaboard. Figure 2 demonstrates the 33% decline in sheep throughput on the week to see 41,000 head at the sale yard, to see it pretty much in line with longer term average levels. NSW again the driving force behind the lower sheep numbers with a 67% decline noted here this week, although the 33,000-odd head reported still 30% above the five-year average in NSW for this time of the season.

The volatile supply figures did little to dampen most lamb and sheep prices though, with national categories showing Restocker Lambs the only category to post a decline on the week – down 5.3% to $75 per head, dragged down by an 18% drop in WA Restockers. National Merino’s, this week’s winner with an 8.5% rise to 564¢/kg cwt – boosted by strong gains to Merino Lambs in Victoria and SA, up 20% and 16%, respectively. National mutton stronger this week too, up 5.4% to 431¢/kg cwt, as a rebound in Victorian and NSW mutton prices assist the national indicator.

The week ahead

A softer $A, now below 79US¢, flowing through to higher export demand a good sign for the weeks ahead as live export wether prices post a 10.8% gain on the week to close at $140 per head. In other weather news, forecast rainfall for the week ahead shows some good falls to lamb rearing regions of the nation, with NSW the only state to miss out on falls above 5mm. Despite the dry patches in NSW the rainfall to the rest of the country should continue to be broadly supportive of prices in the short term.

In recent weeks we’ve covered what a dry winter and spring will do to lamb and cattle markets, but what about mutton?  While mutton price are still ok, continued dry weather will continue could see prices fall, but there remains conjecture about how far and for how long.

While mutton markets have participated in the decline in ovine markets since mid-June, unlike lamb markets, mutton values have managed to remain strong relative to last year’s levels.  Figure 1 shows the National Mutton Indicator (NMI), which last week fell to a six month low of 395¢/kg cwt.

The NMI is, however, still sitting at a 5.6% premium to the same week last year, and a very healthy 18% premium to the five year average.  Additionally, the NMI is still stronger than almost any other time between 2012 and 2017.  Mutton prices are not that cheap, despite having lost over 100¢ in the last six weeks.

Figure 1 shows that on average the NMI falls 28% from the start of August to the low, which is usually set at the end of October.  A 28% fall from the current value would put the NMI at 285¢/kg cwt, the lowest level since early 2016.  A mutton prices with a two in front is not unusual for the spring, it has been there in four of the last five years.

In 2016 the mutton market eased a little, but found solid support at 350¢ as the good season and flock rebuild supported prices.  From 2012-2015 the NMI averaged 230¢/kg cwt in October, so it’s the exception for mutton to be valued at better than 300¢ in the spring.

Continued dry weather is also likely to impact the NMI spread to the Eastern States Trade Lamb Indicator (ESTLI).  Figure 2 shows that the NMI is still at a relatively strong spread to the ESTLI, sitting at a 31% discount.  Despite being down from a 22% discount, the NMI is likely to ease further, with a 40% discount closer to the norm.

Key points:

• Mutton prices remain relatively strong compared to historical levels and the ESTLI.
• On average mutton prices fall 28% from the end of August to late October.
• A dry spring could see mutton prices as low as 250¢, making current prices very attractive.

What does this mean?

Obviously there is no guarantee that Australian sheep areas will have a dry spring.  The BOM have been in pretty good form this year, and their latest forecast doesn’t paint a rosy picture (figure 3).  Simply based on historical mutton prices during strong supply, we would put the NMI in the 200-250¢/kg cwt range.

If we take our forecast for the ESTLI in a dry spring, of 450-500¢, and apply an average 40% discount for mutton, it gives an NMI of 270-320¢/kg cwt.  The worst the NMI discount has been in spring in the last five years is 50% discount, which would put it at 225-275¢/kg cwt.

If prices are headed to this level, it makes a solid argument to sell surplus sheep into the current market rather than hold to the spring.