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Tuesday, October 14, 2014

Eating into supply – East coast lamb slaughter continues to hit records

By Angus Brown  |  Source: ABS, MLA's NLRS

Key points

  • Very high east coast lamb slaughter is driving national lamb slaughter to record levels.
  • Lamb and sheep slaughter in WA in August well down on last year.
  • Sheep slaughter in August down slightly on last year, as flock rebuilding begins.
  • High slaughter rates should mean tighter supply down the track and stronger prices, as evidenced by forward contracts.

2014-10-13 Eating Into Supply Lamb FIG 1

2014-10-13 Eating Into Supply Lamb FIG 2

2014-10-13 Eating Into Supply Lamb FIG 3

The Australian Bureau of Statistics (ABS) released its monthly slaughter statistics for August last week. While sheep slaughter eased below last year’s levels, lamb slaughter continued to set records, outpacing August 2013 by 3% to post a new record for the month. This was despite WA lamb slaughter being down 30% on last year.

Improved seasonal conditions this year seems to have set WA on a flock rebuild, with lamb slaughter in July and August both well down on 2013 (figure 1) and around the five-year average despite prices which have been historically strong for that time of year.

With WA slaughter well down, it means east coast slaughter has driven the record slaughter levels. In August, lamb slaughter in Victoria, NSW and SA was up 11% on 2013 at 1,754,000 head. This easily set a new record, surpassing the previous mark set in 2012 by 10% (figure 2). 

National sheep slaughter was down 6% on 2013, thanks to a 2% fall on the east coast and a 16% fall in WA as both a shrinking flock and rebuilding efforts impact on sheep supply. 

MLA’s weekly east coast slaughter data suggests lamb slaughter will remain similar or higher than August, and around 10% above last year. This means that we are headed for another record east coast lamb slaughter for the calendar year, the third in a row.  To achieve this, there only needs to be 1.54 million head of lambs slaughtered per month in October, November and December.  Last year, this period averaged 1.7 million head, while the five year average is right on the target.

Given the strong slaughter rates early in the new lamb production year, it’s little wonder processors are starting to worry about supply later in the year.  Thomas Foods International offered forward contracts last week at 520¢/kg cwt for late December and January, and 500-510¢/cwt for February. 

Figure 3 shows the forward contract levels along with the Eastern States Trade Lamb Indicator (ESTLI). The late December and January prices look like good value in ‘normal’ years, when the ESTLI gains 8-9% between October and January.  The January forward price is 13% above the current ESTLI.

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What does this mean?

Very strong slaughter rates on the east coast suggest summer and autumn supply is likely to be tight, which should lead to stronger prices in the New Year.  Whether prices manage to breach the mark set by forward contracts remains to be seen. However, don’t be surprised to see a rally of similar order to the one seen last year, although it may come earlier.

In the west, it looks like lamb supply may have reverted to the five-year average levels, which is good news for prices as they should continue to keep up with east coast values while the market is not oversupplied. 

Sheep prices should also maintain pretty good levels, as recent dry weather has failed to see supply increase markedly. As such, it is likely to track below last year’s levels from hereon in, supporting prices.

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