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Tuesday, January 17, 2017

Can cheap grain and expensive lamb make feeding work?

By Angus Brown  |  Source: MLA, ACA

Key points

  • Rising lamb prices and falling grain prices make lamb feeding a more viable proposition.
  • Lamb markets will have to maintain current levels to turn are reasonable profit on intensive lamb feeding.
  • There remain risk in putting lambs on grain with store prices still very attractive.

2017-1-17 SHEEP FIG 1

2017-1-17 SHEEP FIG 2

2017-1-17 SHEEP FIG 3

Finished lamb prices have kicked in the last week, and grain prices are in the doldrums. We have previously looked at grain-feeding lambs and it looked too expensive due to a high store lamb price, but it’s time for a revision.

There is no doubt that the cost of gain in a lamb lot feeding operation this year is a lot less than the price of lamb.  This issue recently has been the fact that store lamb prices have been very strong relative to finished lambs, thereby wiping out a lot of the margin.   

However, the last month has seen a very sharp rally in finished lamb prices, with trade and heavy lambs gaining over 100¢/kg to sit above 600¢/kg cwt.  East Coast restocker lamb indicators have also rallied but to a lesser extent. Figure 1 shows the spread between the price of a 16kg cwt (36kg lwt) restocker lamb and a 24kg (53kg lwt) Heavy lamb. 

The Heavy lamb premium has rallied from the doldrums of December, when it was at a paltry $22, to a healthier $34 last week.  The expensive store lambs which were bought in December don’t look so expensive now.

In terms of feed costs, we have heard prices for full lamb rations ranging from $230-340/t depending on product, but prices are generally $80-100 per head cheaper than last year.  The middle of this range gives a price of $24 to put 19kgs of weight on a lamb.  We are not including any other costs in this calculation, but it’s not hard to work out freight, veterinary and labour costs which need to be deducted from the net margin in figure 3.

Finally we need to put some sell prices on our worst, expected and best case scenarios.  As outlined in Friday’s weekly summary, we could be in a short term spike due to the ‘Kekovich Effect’, in which case prices could return to the levels of the forward contracts offered back in December of around 520¢. 

Alternatively, if we get summer rain in key parts of NSW we could see a repeat of 2011 when a supply dearth sent prices to 650¢.  Our expected level is somewhere in the middle, as we see prices easing from current highs, but remaining relatively strong (blue line on figure 2).   

What does this mean?

Figure 3 shows the results of trading or feeding lambs under our worst, expected and best case scenarios out to March.  After freight, labour and selling costs there is unlikely to be much of a margin in feeding lambs if the March price is at 570¢/kg cwt.  However, if we follow the 2011 trend there will be a great return in feeding lambs, equating to 20-22% return in 6-8 weeks.

What we do know is that lamb producers who are holding lambs, and have green feed in front of them are still pushing the store market higher, as there remains considerable risk in buying lambs and feeding them.

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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