By Angus Brown | Source: NAB, ANZ, MLA
A couple of major banks have recently released lamb market updates and while the analysis is of dubious quality, both banks are forecasting weaker lamb supply and stronger prices, although to a vastly different extent. Here we take a look the forecasts and the assumptions used to come to these forecasts.
The National Australia Bank released a price and production outlook stating that they expect 1% lower lamb slaughter in 2015-16, and an almost negligible 1.2% increase in the average ESTLI to 523.75¢/kg cwt. Extrapolating out the price forecast, based on what we have seen already, which is an average ESTLI of 582¢/kg, NAB are forecasting an ESTLI for the remainder of the year of 506¢ (figure 1).
The NAB price forecast would make 2015-16 the second highest priced year on record, but given what we have seen so far, and the bullish factors which are coming together, we think it might be a bit on the light side at this stage.
The ANZ bank were a bit more robust in their analysis, making the good point that the top five export destinations for Australia’s lamb settle either US dollar’s, or currencies linked to the US dollar. This basically means that the fall in the Australian dollar has resulted in lamb becoming cheaper in our main export markets.
ANZ are also suggesting a decline in lamb slaughter, based on lower breeding ewe numbers and poorer lamb marking percentages. ANZ made no specific forecasts on lamb slaughter, simply stating they expect supply to be weaker.
ANZ were also much less specific than NAB in their resulting price forecast, with the extent of the projections being that lamb prices could reach 650¢/kg cwt in the first quarter of 2016.
Figure 2 shows how the falling Australian dollar has made lamb prices cheaper than any other time in the last 18 months in export markets, and this is the main factor behind the contention from ANZ that the ESTLI could reach 650¢.
If the ESTLI reaches 450US¢/kg, where it was back in June, prices in our terms will be at 628¢/kg cwt. If supply contracts and the ESTLI hits 500¢ in US terms, which is the five year average for autumn, the current exchange rate would put it at 698¢/kg cwt.
Mecardo subscribers are likely to find market updates such as those released by banks a little underwhelming in their analysis, but they are often worth a read as economists sometimes have interesting takes on markets.
It is hard to see lamb prices being where the banks are predicting, especially if their other forecast of lower supply comes to fruition. The way we see it, either supply will be lower and prices much stronger, or supply will be steady, and prices a bit stronger.
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