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Wednesday, June 15, 2016

A five year high for the ESTLI, but is it good for spring?

By Angus Brown  |  Source: MLA

Key points

  • The ESTLI has hit a five year high this week on the back of tightening supply.
  • Lamb prices tend to see their price decline early after good autumn and early winter rains.
  • We are likely to see lamb prices fall earlier this year, and head back towards 500¢ but the decline may not be as rapid as 2015.

2016-06-15 Lamb Fig 1

2016-06-15 Lamb Fig 2

2016-06-15 Lamb Fig 3




When analysing a market it’s nice to get things right sometimes. Despite being about 2 months later than expected, our prediction of 600¢ for the Eastern States Trade Lamb Indicator (ESTLI) has finally come to fruition. Now that we are at, or somewhere near the peak, we can review our forecasts for the timing, and magnitude of the spring price decline.

It has been a while coming, but the ESTLI finally breached 600¢ on Friday, and hit a five year high of 609¢/kg cwt on Tuesday.  Figure 1 shows that rapid price rises are a relatively common occurrence in lamb markets, as lamb supply suddenly stalls, forcing processors to bid up to maintain kills. 

While it is of interest to most lamb producers to see current high prices, many will be much more interested in what prices will be like in spring.  Late winter and spring is when lamb supply can suddenly hit the market, which usually results in a complete reversal of autumn or winter price rise.  Figure 1 shows that the winter peak can last three months, like in 2015, or it can last one month, as we saw in 2013.

Thus far in 2016 the ESTLI price trend has followed the dry year seasonality eerily closely, and this would suggest we are in for a long winter peak, before price lose 25% from August to October.  If we assume 610¢ is the peak of the market, a 25% decline will put the spring low at 460¢/kg cwt.

With recent rain there is a case to be made for strong lamb growth rates, and an earlier than normal start to the spring flush.  A brief look back at June rainfall, and subsequent price movements shows a trend of wet June’s in NSW and Victoria correlating with July price declines.  In 2013 and 2014 we saw the ESTLI fall heavily in July, while after a dry June in 2010, 2012 and 2015 lamb prices held until August or September.

It is possible for season to push lamb supply around by 60 days.  An autumn lamb born in April will reach a sale weight of 45kgs by July in a good season.  In a poorer season, it could take until August to reach sale weight, which is where the later price fall can occur.

What does this mean?

The two extreme options for the winter/spring price fall are shown in figure 3 with the 2014 and 2015 price trends.  The common factor of these two years is the final price level after the fall, sitting in the 470-500¢ range.  In reality we are likely to see the timing of the late winter and spring price fall to be between 2014 and 2016, with the risk of lower prices becoming exponentially stronger the longer we move into July.

Don’t expect 600¢ to still be available in September this year, and it might be a case of the earlier lambs are turned off, the better the ¢/kg price.

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. 


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