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Another week, and more of the same for lamb prices. While lamb producers should be happy that they’re not trying to sell cattle at the moment, many are still thinking about the prices they didn’t lock in earlier in the year, as prices drift along the same path as last year.

Since January lamb prices have been up and down. They are still better than last year but are following a similar trend and easing from January levels. Forward pricing has generally been anticipating a price rise at some stage, but it is yet to eventuate.

As outlined in our article earlier this week, lamb supply has been surprisingly strong and sheep supply has easily outstripped last year’s levels. Supply is keeping a lid on prices but, as we know, strong demand means prices have never been this strong at this time of year (Figure 1).

The only reason to really be disappointed with prices is if lambs were bought and fed. Selling these in the current market is likely to have resulted in a loss. Homegrown lambs have never made better money in March.

There is a little cause for optimism on the price front, however. The Bureau of Meteorology (BOM) is forecasting around a 50% chance of most of Victoria and NSW receiving median rainfall. Another way of looking at this is shown in figure 2. It shows the chance of getting 25mm in April. It’s pretty good for a lot of sheep country, if we raise it to 50mm, there is a lot less blue and a lot more brown.

What does it mean/next week?:

We received more correspondence this week regarding flocks consisting of fewer ewes having lower scanning rates. Again, we saw this last year and it really came home to markets from July through to September. Unfortunately to take advantage of high prices, lambs either have to be very late or very early.

What we do know is that those with the ability to carry lambs through winter, or get them up to weight early, will see some handsome payoffs.

We’ve been working on upgrading our lamb price forecasting abilities at Mecardo and have recently developed an interactive modelling tool that allows us to forecast the annual average level for the Eastern States Trade Lamb Indicator (ESTLI) based on key supply and demand inputs.

In this analysis we take the model through a test run, playing out a handful of scenarios for the next few years to see the potential impact on lamb prices.

The forecast model uses predictor inputs such as the Australian dollar level, annual Australian lamb slaughter levels and demand metrics based on per capita gross domestic product (GDP) measures from some of our key export destinations to forecast an annual average ESTLI level.

Figure 1 shows how the model compares to the actual ESTLI since 1998, including a forecast based on financial market consensus for the A$ level over the next few years, the Meat and Livestock Australia annual lamb slaughter estimates from their 2019 Sheep Industry projections and the GDP forecasts from the International Monetary Fund (IMF).

It suggests that growing wealth from offshore consumers will keep demand strong for our lamb exports and underpin prices for the ESTLI to see it average around 840¢ in 2019, dipping to 806¢ in 2020 as lamb slaughter rates in Australia increase.

However, we can adjust the lamb slaughter levels in the model to play out a second scenario that would test what the impact of a dry 2019/2020 will have on the ESTLI if slaughter rates increase from 21.5 million head in 2019 to 22 million head and if the 2020 lamb slaughter lifts from 22.1 million head to 23 million head – figure 2. The result of the increased slaughter is to see the ESTLI forecast for 2019 drop from 840¢ to 795¢ and the 2020 forecast decline from 806¢ to 755¢.

We can also imagine a third scenario where the increased lamb slaughter levels coincide with a shock to world growth levels during the 2020 season that limits the demand for lamb exports from our key offshore destinations. This could be in the form of a Chinese credit crunch impacting upon the Asian region and/or increasing US interest rates flowing through to softer global GDP growth levels.

Scenario three forecasts the ESTLI dip in 2020 extending further on the back of the decrease in offshore demand to see it average 640¢ before recovering back above 700¢ as GDP growth recovers beyond 2021 – Figure 3.

What does it mean/next week?

Interestingly, the model predicts a continuation of historically good price levels for lamb into the next few years even after we account for unforeseen problems such as an extended dry period within Australia, resulting in higher than expected slaughter levels, and/or a short-term hiccup to world growth and red meat demand.

Indeed, the model doesn’t forecast an annual average ESTLI below 600¢ in the next four years under any of the three modelled scenarios.

Key points:

• Price modelling for the ESTLI based on current MLA slaughter projections and global demand growth for lamb consumption estimates annual average prices above 800¢ for the next few years.
• Assuming a drier climate and higher slaughter than currently forecast will place the estimates for the 2019 and 2020 season into the 800¢ to 750¢ range.
• The inclusion of a demand shock due to falling growth levels could see the ESTLI annual average drop towards 650¢.

Elevated sheep slaughter continued to drag on mutton prices this week across the East coast and, while sheep supply in NSW is running at levels similar to what we saw this time last season, it is interesting to note that Victoria has seen a significant lift in sheep slaughter rates since the start of 2019 compared to the first few months of 2018.

NSW sheep slaughter levels have been averaging close to 57,100 head per week since the start of the season, only marginally ahead of the 55,800 head recorded for the same timeframe during 2018. Although, compared to the five-year seasonal average NSW sheep slaughter has now had two consecutive seasons where weekly slaughter has been running nearly 30% above the five-year trend, representative of the dry conditions facing NSW producers – Figure 1.

In contrast, Victorian sheep slaughter levels began the 2018 season below the five-year average pattern, with slaughter levels not really taking off until the middle of the season. So far in 2019 it has been a robust start to sheep slaughter levels in Victoria with a weekly average of nearly 65,000 head processed. This is 31% higher than the volumes we saw slaughtered during the same timeframe last season and 26% over the five-year average trend – Figure 2.

The additional supply of mutton across the East coast weighing on prices with sheep prices 5% lower than where they were this time last year, after staging nearly a 7% decline on the week to close at 385¢.

Sheep prices not alone in the price drop this week with all NLRS reported categories experiencing a decline – Figure 3. Although, Restocker Lambs the are the only other category to be lower than this time last season – albeit marginally at 1¢ softer to close at 613¢.

The Eastern States Trade Lamb Indicator (ESTLI) performing best this week out of the NLRS reported lamb categories with only a 2.5% decline to finish at 639¢/kg cwt. Declines ranging between 3%-4% noted for other lamb types.

What does it mean/next week?:

With supply remaining elevated and not much rainfall forecast for sheep country in the coming week there isn’t a lot to inspire a price lift. Although it is worth noting that higher slaughter now will likely mean less available supply when we hit the depths of Winter so there will be plenty of time for price to play catchup then.