By Augusto Semmelroth | Source: MLA's NLRS
Under normal circumstances, saleyard and over-the-hook (OTH) lamb markets are expected to move in tandem with restricted price variances between them. That’s expected in a “perfect market” scenario according to economic text books but, in practice, some fluctuation does occur. Does anything stand out when the overall market is in an “up or down trend”?
Figure 1 shows the Victorian OTH heavy trade lamb price and its corresponding saleyard indicator. Overall, both markets follow the same directional trends, which is to be expected. However, after a closer look at those prices, we can identify times where saleyard and OTH prices deviate. Or at least expose some leading or lagging behaviour.
Over the last three seasons, saleyard prices started the spring downturn ahead of OTH markets. That makes sense as saleyards are a good starting point for processors to gauge supply dynamics and quickly readjust prices on the spot. After that assessment is done, they would revise OTH rates, hence the scope for a lag period.
In theory, that adjustment should be fairly quick so that saleyard and OTH prices converge again. However, this does not seem to happen as expected during the spring supply flush and price downturn. To put this observation into perspective, figure 2 shows the seasonal price spread between the Victorian trade lamb indicator and OTH trade lamb.
In both 2014 and this year, dry conditions in Victoria saw the saleyard/OTH spread plunge in spring. Last year, trade lambs moved to a 100¢/kg cwt discount to OTH rates while this year discounts bottomed at 60¢ in mid-September and hit -50¢/kg cwt again two weeks ago. This might have to do with the poorer quality of lambs yarded in those weeks, but still reinforces the idea that the downside can be more accentuated at the saleyards during supply peaks.
Going back to figure 1, we can also see that saleyard markets tend to take a lead once prices start to recover and processors may take some time to readjust OTH rates accordingly. That’s exactly what happened last year in Victoria and NSW in November/December, with saleyards outperforming OTH markets by up to 40¢/kg cwt.
Figure 3 shows the spread between the NSW trade lamb indicator and OTH trade lamb. With the exception of the last few weeks, trade lambs have attracted a 20-40¢/kg cwt premium at the yards compared to OTH rates.
This simple analysis looking at the relationship between OTH and saleyard markets does not aim to suggest which marketing method is better. That said, it provides us with some insights about the potential price discrepancies between markets and when they are likely to occur.
With that in mind, it appears OTH rates lag saleyard prices on both the downside and upside. As such, during the most intense sell off in spring, producers may be better off selling direct to works if they have lambs in the right specs. However, when the market turns, the opposite is true with saleyards tending to deliver slightly better prices.
As a final remark, producers should constantly monitor both markets to make more informed marketing decisions. Given the spread can move to +50¢ or -50¢/kg cwt ($10 on a 20kg trade lamb) during spring and summer, it’s well worth keeping track of market developments so as to fetch the best possible sale price.
Want to see more ?
Go to Sheep data
Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report.
Mecardo will send you its latest market analysis outlook delivered to your Inbox as it's published. You will also receive one month Premium access for free.
You tell us what information you want to hear about, so you'll only be alerted to information that is relevant to you.Learn more about Mecardo Sign Up Now!