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Tuesday, February 20, 2018

A West spread story.

By Julia Cataldo & Matt Dalgleish  |  Source: MLA, NLRS, ACA

Key points

  • Merino lamb spreads to the ESTLI are performing better than expected for this time of the year, with Western Australia exceeding the Eastern States.
  • The WA Merino spread to ESTLI is sitting at a 5.5% premium, well above the 30%-5% discount that is normal for this time of the year.
  • There is a low supply of WA Merino lamb yarding compared to that of the 5-year average, and is considerably lower compared to that of the previous year.

2018-02-20 Sheep Fig 1

2018-02-20 Sheep Fig 2

2018-02-20 Sheep Fig 3

Sale yard prices last week, as reported by Meat and Livestock Australia’s NLRS, show Merino lamb spreads to the Eastern States Trade Lamb Indicator (ESTLI) are performing better than expected for this time in the season – especially in Western Australia. Given the record wool prices being achieved at the moment, it probably comes as no surprise that Merino lamb across the country are doing so well, but why is WA Merino lamb particularly strong?

Figure 1 shows the price spread premium/discount for a variety of lamb and sheep categories around the nation in relation to the Eastern States Trade Lamb Indicator (ESTLI). Also shown is a comparison to normal spread behaviour for this time in the season (green column). In particular, the spread of Merino lambs in WA are performing better than what is considered normal for this time of the season, and is exceeding the performance of the Eastern States.

The current spread is a premium of 5.5% to the ESTLI, which is significantly greater compared to the midpoint average 17% discount spread, and that of the normal range sitting at a discount spread between 30%-5% to the ESTLI.

The historic spread movement in figure 2 reflects the data in figure 1. It shows that the spread for this year so far, is trending well above the 10-year average, and is exceeding the results of last year’s spread for the same time in the season. There was a dip in the spread towards the middle of February, dropping it just below the midpoint average of 17% discount to ESTLI, however the spread recovered quickly, bringing it back up to 5.5% premium before the end of the month.

Figure 3 shows the WA Merino lamb yarding for the year to date, with 2017 figures and the five-year average for comparison. We can see that supply has been relatively low when compared to 2017, and is trending towards the lower range of the five-year average, with the exception of a spike in supply occurring around the middle of February which coincided with the reduced premium spread seen in figure 2.

This elevated WA Merino spread appears to be a result of the decreased supply of Merino lambs in WA, and due to the fact that WA is a fairly isolated market, the spread is more volatile to supply changes compared to those of the Eastern States.

* Julia Cataldo is a third year Bachelor of Agriculture student at Melbourne University on a work placement at Mecardo

What does this mean?

As a result of the Western Australia market being smaller and more isolated than the Eastern States, the premium/discount spread is relatively volatile to supply and market changes (Figure 2 & 3). The Eastern States are more adaptable to these changes, as they are part of a larger market. An example of this was earlier this year in Murray Bridge, when Thomas Foods International, who is responsible for 10-12% of the nation’s lamb processing, was damaged by a fire, yet the market was able to avoid significant price disruption, as the slaughter capacity was able to be met by other processing plants in nearby states.

If a similar scenario were to happen in WA, then a likely result would be a negative impact on price. By keeping an eye on supply for WA markets is a useful indicator of potential price/spread behaviour, given the lack of correlation with the eastern states and the isolated nature of WA markets.

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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