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Thursday, January 29, 2015

Buy, sell or hold – what do the spreads tell us?

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

Key points

  • Looking at spread tables gives a good snapshot of where prices are sitting relative to the ESTLI and other sheep and lamb categories.
  • The spread table from last week throws up some interesting opportunities and pricing signals in a number of markets.
  • Using spread tables doesn’t tell us what to trade.
  • However, it gives a signal to categories that might warrant more investigation.

At Mecardo we often compare the prices of different livestock categories to determine if there is value in buying stock, or whether a certain category is overpriced, which gives a sell signal. This type of analysis is especially useful for livestock traders looking to buy and sell in the same market, identifying under-priced categories, and therefore potentially offering a better return and less risk.

All sheep and lamb prices are related, both across states and categories. In Australia, the Eastern States Trade Lamb Indicator (ESTLI) is the broadest price indication.  As such, we generally compare other prices to the ESTLI to get a snapshot of where they sit relative to both other sheep and lamb types. We also use this information to compare to the historical range.

Figure 1 shows the spread of a number of different sheep and lamb categories to the ESTLI as of last week, and also the historical range for that week.  Using the historical range for the week (instead of the year) filters out seasonality, which is a big factor in spreads between states and also categories.

We can see from figure 1 that many sheep and lamb indicators are at around an average spread to the ESTLI, especially for Mutton in NSW, Victoria and South Australia. Mutton in Tasmania is at a smaller discount to usual, indicating that it is good selling.

Merino lambs in NSW and Victoria are also overpriced relative to their historic range, despite being around 50¢/kg cwt under the ESTLI.  In contrast, Merino lambs in South Australia are cheaper, and the spread to the ESTLI is sitting at the bottom of the range. As such, this looks like a buying opportunity.

Trade and Heavy Lambs look cheap in Tasmania, suggesting producers could hold for a couple of weeks looking for the market to rise back to average. Doing this could add a significant 30-40¢/kg cwt to the price.

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What does this mean?

Simply looking at last week’s spread table doesn’t tell us what to buy or sell. However, it does give us a very good, brief snapshot at what categories might warrant further research and investigation.  For example, there could be good reasons why Merino lambs in SA are at an abnormal discount to the ESTLI. Looking at the table, though, it looks like they should catch up with lambs in other states and, as such, are worth looking into for a buyer.

Each month, Mecardo will publish these spreads for sheep and lambs (as well as cattle), to provide indications of where the value might be held in these markets, and what categories might be worth looking into.

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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