Key points:
- Australian lamb exports volumes to China are at 49% above the seasonal five-year average and is being shadowed by a decrease in mutton exports
- Growing middle class wealth and increasing in interest for premium products in China is a potential cause for the shift in demand from mutton to lamb
- A narrowing price gap between sheep meats may also be a contributing factor
The release of Department of Agriculture and Water Resources (DAWR) trade data this month shows a continued surge in demand for Australian lamb from Chinese buyers. Indeed, the first quarter trade volumes show a distinct shift in preference for Australian lamb over Australian mutton.
Figure 1 shows the lamb export volumes for 2017 sitting at 49% above the seasonal five year average levels for this quarter. Volumes increased again for March to 4,477 tonnes swt, just shy of the record high in June 2016. This is deviating from the usual March drop that occurs towards the seasonal trough.
The story for sheep exports to China tells a completely different tale in Figure 2. The total volume exported over the first quarter of 2017 was nearly half of that two years ago, begging the question, is China’s appetite for sheep meat changing or are relative price differentials between lamb and sheep encouraging the shift?
To delve a little deeper into the question, in Figure 3 we have lined up the change in mutton and lamb export volumes from 2015 to 2017 for the season so far. Interestingly, we can see that where mutton volume has dropped off very closely aligns with increases in lamb consignments. Particularly in the months of January and March, there is a near exact shift in volumes from the one sheep meat to the other.
Chinese consumers have always had a strong affinity to lamb, however, it’s likely that the demand will only continue to rise with the changing demographic. The growing middle/upper income class and open food culture of the younger population is prompting a shift in taste towards ‘premium’ import meats. Where historically cheap proteins for the hot pot were in high demand, the ‘foodie factor’ is taking over, with consumers in China willing to pay a premium for quality and a sense of superiority on their fork.
What does this mean?
Our current sheep meat export prices may also be playing a part in the changing trade trends within China. Over the last season, the basis of the spread between mutton and lamb has narrowed significantly. In 2015, we had the price of mutton at around 50% of lamb but now we’re seeing the mutton price close in.
The NMI is even fighting against the typical seasonal drop, so far holding steady and still close to record highs of 2011. It could be that the reducing price differential between mutton and lamb is also encouraging the shift in consumption choice towards the premium meat as Chinese consumers are more willing to buy for quality.
Figure 1. shows the rising trend over the last few weeks in East coast lamb throughput with a further 21,000 head added to yarding numbers this week to reach just short of 204,000 head. Since the recent dip in mid-March, lamb throughput has risen 35.4% in response to the firmer prices on offer at the saleyard.
In US$ terms, lamb prices have reached a seasonal peak at 513US¢/kg cwt, this is only the second week it has been above 500US¢ this year – Figure 3. Despite the record local prices for Aussie lamb being received by producers at the moment lamb prices in US terms have been a lot higher. During the 2010/11 season our lamb in US terms reached toward 675US¢/kg cwt so at current levels it is still 24% off its all-time highs.
The EMI closed down 43 cents in A$ terms at 1449¢ and also softer in US$ terms at 1101¢, down 50¢. In Fremantle, the later selling time and strong finish to the week resulted in an indicator less effected with a 29¢ decline in A$. terms for the week – Fig 1.
The reversal on Thursday saw the EMI gain 2 cents, however the WMI finished plus 19 cents for the day with reports of a strong finish to the market. Gains were across the Merino combing section, 18 MPG plus 16 and 21 plus 19 cents in Melbourne.
It seems that the falls on Wednesday encouraged exporters to book business and when they returned on Thursday to a reduced offering we saw the resultant rally. This caused the pass-in rate to fall compared to Wednesday, in Fremantle for example the first day a total of 29% was passed-in, however the next day this rate fell to 11.4%. Also impacting was the withdrawal of 20% in reaction to the price falls of the previous day.
Wool producers are not in any hurry to sell wool if the market retraces like this week, and conversely, they have been keen to sell wool as the market rallied.
In nautical terms, dead calm is the absence of wind or waves. It feels that way at the moment in the grain trade. The market has largely drifting with little in the way of wind or waves to give momentum in any direction. Will the USDA & IGC report provide some wind behind our sails?
Yesterday the International Grain Council (IGC) released their global crop forecasts, and although not particularly positive for prices, does provide some hope for the future. The report indicates that in 2017/18 global wheat production would fall from 745mmt to 735mmt, with end stocks to be around 484mmt versus 513 this year. It has to be tempered that this would still remain the 2nd highest stocks in history. However, it does start to show a depletion in global stocks.
Anecdotal reports of revived restocker activity within the young cattle market suggest that recent rainfall may have given a boost to prices along the Eastern seaboard. But does the underlying data for the Eastern Young Cattle Indicator (EYCI) show this to be the case and if so, is it evenly spread across the Eastern states? Is just a simple glance at the broad restocker activity all that is needed to give a robust picture of the market or is it central to beef analysis to delve a bit deeper into the figures? 
Using the underlying EYCI data we are also able to filter and analyse specific components of the broader EYCI market to determine if the robust restocker demand this season is stemming from a particular region. Separating EYCI restocker purchases into northern and southern saleyard groups, with Dubbo saleyard marking the mid-way point between North and South, we can assess how evenly distributed the restocker activity is along the East coast.
Taking a look at the price spread patterns for Southern and Northern sale yards we can see that there are some stark differences between restocker activity in each region. Figure 3 shows that Southern restockers have been happy to pay a premium spread above the EYCI trending along the top of the normal seasonal range and peaking last week at 8%, equivalent to 687¢/kg cwt. In contrast, Northern restockers are paying a premium spread in the lower end of the normal range and below the seasonal average level for this time of year at 2%, equivalent to 649¢/kg cwt – figure 4.
The above average volumes of cattle being purchased by restockers in both the North and South certainly shows the intention to rebuild the herd is evident across the Eastern seaboard. Although, considering the magnitude of destocking experienced in the North during the large turnoff during the 2013-2014 seasons the current volume of cattle going to restockers in Northern saleyards isn’t much dissimilar to levels seen last season.
Lamb prices continued to charge higher this week, despite stronger yardings. The higher prices are showing no signs of dampening demand, with some categories hitting new highs, while others eased off this week.
It was NSW which drove the ESTLI higher this week, as the 25¢ rise saw a new record price of 659¢/kg cwt. Light lambs in NSW saw a 42¢ rise to be the highest indicator in the land, at 673¢/kg cwt. By contrast, light lambs in SA fell 58¢ to sit at a paltry 539¢/kg cwt. For a 17kg cwt lamb that is a $23/head difference.
The rain from Cyclone Debbie shouldn’t impact the lamb market too much, but it won’t hurt. Lamb supply out of northern NSW is likely to be disrupted, so we can expect some solid support for lamb markets. Some forward contracts for trade lambs have been floating about this week at 670¢ for May.
Figure 1 highlights the rainfall pattern across the nation this week with the impact of cyclone Debbie clearly evident. Rainfall further south also present and helping to lift restocker spirits in the southern regions as outlined in the 
The national cattle indicators mostly higher this week with 2-4% gains recorded for all categories except heavy steers. The national heavy steer indicator dropping 3.4% on the week to close at 294¢/kg lwt. The Eastern Young Cattle Indicator (EYCI) mirroring the broader market up 4.4% on the week to close at 649.75¢/kg cwt. Young cattle prices continuing to find support from restocker buying and the added benefit of higher beef export prices, with the 90CL frozen cow up slightly – figure 3.
The EMI closed down 44 cents in A$ terms at 1502¢ and also softer in US$ terms at 1151¢, down 33¢. In the West, the indicator was off slightly more with a 46¢ decline in A$. terms. – figure 1.
On a slightly different tack, the 18 – 21 MPG Basis (or 18 MPG premiums over 21 MPG) has lifted from 242 cents in January to 740 cents this week; a lift of 498 cents this year. The improving fine wool basis is a clear signal that the fine wool doldrums of the past 7 – 8 years are behind us. Previously the fine wool rallies have been short & sharp, we will need to watch closely over the next 12 months to be alert to any future retracements.
With the market at record levels (still!!), it is a good time to look at the forward price relative to your expected shearing and also in relation to your financial budget. Reducing risk and locking in profit generally makes sense, but in this environment, it is even more compelling.
Reports around the sale this week however, are that this is only a “hick-up” to the market, not a serious concern. Stocks are still reported as “very tight” along all sections of the wool pipeline. We tend to agree that the market is not under great pressure, and with growers prepared to pass-in large volumes the market should find support.
The futures market has subsided (figure 1) in the past week, as areas of dry concern receive forecasts of substantial rain in the US, and minimal bad news coming out of Europe. The reality is that the trade is concerned about USDA stock reports due next week. This asks the question, what if exports have not been high enough to deplete stocks?
However at a local level, we have seen basis increase across all port zones (figure 3) at an average increase week on week of $3.50/mt. This is using the public bid, and there are further opportunities out there for non-public sales.
We will get an insight into inventory levels with next week’s USDA quarterly stock report.