Tag: Commodity

Key Points

• Sheep slaughter is expected to get tight, both in absolute terms and relative to lamb.
• MLA’s forecast is for sheep slaughter to move back towards the levels of 2016-17.
• There is less downside for sheep prices than lamb values as we move towards the spring.

As we come out of the winter lull evidence is starting to point towards a recovery in lamb supplies, and a continuing dearth in sheep. We have seen this before, but maybe not to the extent that is expected, though we can still look for clues as to how prices might react.

Lamb supplies are bottoming out, and on the way up, and sheep supplies are heading lower as the flock rebuilds. The difference in supply trajectories as we move into spring will see mutton supplies heading back towards the lows of 2016-17, and possibly even lower.

Figure 1 shows how lamb and sheep slaughter has behaved over the long term, with a 12 month moving average over the top to smooth out the chart.  Since 2000, we have seen a divergence of lamb and sheep slaughter. The move towards meat and dual purpose sheep seeing more lambs being produced, along with more Merino wethers being slaughtered as lambs, has increased lamb supplies and decreased sheep.

We can see that in the last year, lamb slaughter has trended down more quickly than sheep.  However, we expect the rolling average to turn upwards for lambs and continue down for sheep.  With lamb and sheep supplies both falling, relative supplies have remained steady since late 2018.

Figure 2 shows sheep slaughter as a proportion of lamb slaughter which highlights that in relative terms, we only just saw a move in tightening sheep supplies in April.  The average sheep slaughter as a proportion of lamb has been tracking at 43% for the last two years.  Meat & Livestock Australia’s (MLA) industry projections suggest that sheep slaughter will be 35% in 2020 and 33% in 2021.

In 2016 and 2017 sheep slaughter was 30% and 33% of lamb slaughter, so while sheep supply is set to be lower than those years, lamb slaughter will be lower as well.

The last two times sheep slaughter was below 35% of lamb slaughter, mutton prices narrowed their discount to lamb prices. Figure 3 shows the National Mutton Indicator (NMI) spread to the Eastern States Trade Lamb Indicator (ESTLI).

From 2010 to 2012, when sheep slaughter was at its tightest, the NMI ranged between a 20 and 30% discount to the ESTLI.  In 2016 and 2017, mutton values were not as strong relative to the ESTLI, but they did sit in the 20-30% range for the first half of 2017.

What does this mean?

For most of the last year the NMI sat between a 30-40% discount to the ESTLI.  With sheep slaughter falling relative to lamb slaughter, we can expect the NMI discount to shrink over the coming months, as it is likely to return to the 20-30% discount level.

Moving toward spring, the mutton discount is likely to shrink due to falling lamb prices rather than rising mutton prices.  If mutton remains around 650¢, the ESTLI will be 800-850¢.  Looking from the other angle, if the ESTLI falls back to 750¢, mutton will be 550-620¢.  There is less downside for mutton than lamb over the coming year.

The stark reality of the wool market woes is reported in this week’s AWEX report; the EMI in Au$ terms is 605 cents or 35% lower than the same period last year. As far as supply is concerned, over the past three months there have been 70,000 bales fewer sold than the corresponding period last year. The figures for bales sold year-on-year are also telling, with 250,000 or 16.7% fewer bales having been sold to date, representing not only a fall in supply but also the higher withdrawal and pass-in rates by growers.

The Eastern Market Indicator (EMI) again disappointed falling by 29¢ this week to close at 1,110¢. The Australian dollar firmed to US$0.695 which influenced the EMI in USD terms to fall by a more modest 12¢ to 771¢. Fremantle came back to selling with the Western Market Indicator playing catch-up falling 71 cents from the previous sale to settle at 1,176¢.

Turnover was up with the inclusion of Fremantle to $31.75 million this week, with the average bale value of $1,280 slightly lower than last week, taking the season to date value to $1,972 million.

After growers withdrew 6.8% of the offering, 28,029 bales came forward this week, and with a pass-in rate of 11.5%, 24,804 bales were sold. This was almost 10,000 bales up on last week.

Mecardo reported this week that unsurprisingly wool stocks in wool stores have grown as the fall in demand flows back to the auction room causing a dramatically reduced clearance. In Andrew Woods article this week he noted “The indications are that this state of affairs will persist into the coming spring. In the longer run the stocks will slow the subsequent (price) recovery but not to the extent of the 1990s as production is now low whereas in the early 1990s it was at record levels.”

The Crossbred sector was also impacted by the weaker market with falls of 20 to 40 cents across the microns.

Cardings have been holding reasonably well, but this week the weight of negative sentiment saw the cardings indicator in Sydney retreat 44 cents, Melbourne minus 50 cents and Freo pulling back 19 cents.

The week ahead

Next week all centres sell on Wednesday & Thursday with 31,072 bales on offer. This is almost an identical offering as this week; however, the question for the wool market is one of demand and this for now is weak.

With not all processors operating fully and sheep supply tight, sheep slaughter dropped to the lowest level of the season last week. It’s been a while since we last had sheep slaughter this low, In fact, the last time was back in 2011. Luckily prices are more robust now, but the reduced buying interest saw modest falls for mutton.

Just 37,998 sheep were processed in the week ending the 19^th of June (Figure 1). While it was 53% under the five year average for this time of year, we know it’s far from an average season.  What does make the better comparison is the 2011 season, where the same week saw just a 3% difference in sheep slaughter levels.

There was enough room for lambs to be processed though. Lamb slaughter held steady at recent levels with most yards reporting a slight lift in lamb supply, particularly heavier lambs.

Victoria, Tasmania and parts of Western Australia all received a good drenching in the week passed, and all saw mutton values dive. The result was a fall of nearly 50¢ for the National Mutton Indicator to 626¢/kg cwt (Figure 2).

There were mixed reports for lamb categories between yards this week, but most moved slightly lower. The Eastern States Trade Lamb Indicator (ESLTI) lost 7¢ on the last week of the 2019/20 sale season to finish at 870¢/kg cwt, just 3% below last years level.

Heavy lambs had a noteable fall of 12¢ to 827¢/kg cwt on the east coast, tested by another week of uncertainty around retail and export demand. A 31¢ decline was recorded for Restocker lambs. Merino lambs were the only category to see a gain on the week, up 14 cents to 804¢/kg cwt.

Next week:

Earlier in the week we looked at how lamb and sheep supply is likely to play as we move closer to spring, and how prices might react (view here). Lamb supplies tend to stay relatively steady at this time of year but rebuilding efforts will keep sheep in paddocks and provide some support to both mutton and lamb prices.

• The latest sheep and lamb industry projections show a slight tightening in annual sheep and lamb supplies.
• Second half lamb slaughter could be marginally higher than 2019.
• Forecasts suggest we are in for two years of tight sheep supplies.

As we move through the depths of winter and tight ovine supply, attention is turning to the spring and summer. With winter lambs hitting the ground now, and many of the new season supply coming in the next two months, we take a look at what we might see in terms of lamb and sheep supply for the rest of the year.

Meat & Livestock Australia’s (MLA) industry projections put some figures around total sheep and lamb supply for 2020, and it obviously takes into account what has been slaughtered already.  As such we deduct slaughter to date to give us a rough idea of what MLA think is to come for the rest of the year.

April lamb slaughter came in well below last year’s levels. Coming in at 1.58 million head, April lamb slaughter was 16% below last year, but it has been lower recently, in 2017.

Based on MLA’s weekly slaughter statistics, it looks like May lamb slaughter will be higher than April, but much lower than last year. Lamb slaughter in the first 2 weeks of June has also been lower, and it looks like we might be headed for the tightest slaughter month since at least 2005.

If we take what has been processed to date, and deduct from the latest forecast of 20.6 million head, the supply in the second half of the year looks like figure 1.  If it comes to fruition, lamb supply from July to December will actually be 3% stronger than in 2019.

Figure 1 also shows how the 2021 forecast will pan out with average seasonality.  With a return to more normal seasons, we should see similar slaughter to this year in the first quarter, and stronger levels for the remainder of the year.

There is no such increase on the horizon for sheep supplies.  The second half of 2020 is expected to see slaughter rates 35% lower than in 2019.  Sheep supply is expected to increase in the spring, but it will still be well off the strong levels seen last year.

The forecast for 2021 sheep slaughter is the same as in 2020, at 6.5 million head. Figure 2 shows that normal seasonality will see 2021 slaughter track at similar levels to this year.

What does this mean?

We have noted before that we are currently seeing the low for lamb supply, with year on year increases expected from here. It will be up to demand to drive lamb prices in the spring. Supply will be historically low, but it is hard to see demand matching the levels of last year, and therefore it’s hard to see prices matching either.

Tight sheep supply might save lamb prices. The sheep supply dearth will leave some more space for lamb, if export demand is there to soak them up.

Lower supply wasn’t enough to put a halt to the softening lamb prices this week, with what appears to be wavering demand. Small sheep numbers on the east coast however, did help to lift mutton prices.

So far in June, east coast lamb slaughter has trended 12% below the five year average, and 4% below the tight supply year of 2011. The “tight supply getting tighter” situation continued last week with lamb slaughter down 6% on the week prior (Figure 1).

East coast sheep slaughter was steady for the week ending the 12^th of June.  59,902 head were processed which was within the lower end of the 70% range for this time of the season.

Both lamb and sheep yardings were lower again, for a combined throughput of 161,175 head at east coast saleyards (Figure 2). This was 17% below the five year average level for this time in the season. The big drop came from NSW which saw 30% fewer lamb yardings last week compared to week earlier numbers.

Weaker lamb yardings was met with weaker prices. The Eastern States Trade Lamb Indicator lost 24¢ to come back under the magic 900¢ threshold, ending at 882¢/kg cwt. Trade lambs fared better in Western Australia, up 13 cents to 817¢/kg cwt.

Sheep continued to receive support, resulting in a 2% rise in the National Mutton Indicator on the week to close at 672¢/kg cwt.

Next week:

Declining supplies and softening prices is not a good sign for demand. We won’t sound the alarm yet, but the test will come in July when lamb supply starts to ramp up.