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Thursday, October 27, 2016

Can retail beef prices help show the way for lamb?

By Matt Dalgleish  |  Source: MLA, NLRS, ACA

Key points

  • Retail lamb price movements demonstrate a reasonably strong correlation to retail beef price movements, with beef prices appearing to lead the way.
  • Unsurprisingly, trends in sale yard lamb prices as indicated by ESTLI movements also have a significant impact upon retail lamb price movements
  • Analysis suggests a lift in retail lamb prices above $15 per kg, and potential over $16, into next year.

2016-10-27 Lamb Fig 1

2016-10-27 Lamb Fig 2

2016-10-27 Lamb Fig 3

2016-10-27 Lamb Fig 4

The strong cattle market at the saleyard this season has flowed through into record prices for retail beef, hitting $19.15¢/kg in the last two quarters. Beef, considered the premium red meat protein, tends to lead the price movement at the retail level for its closest red meat neighbour - lamb. This analysis takes a look at the relationship between retail beef and lamb prices and lamb price movements at the saleyard level to determine the potential impact upon the shopper over the next few quarters.

Figure 1 highlights the price movement for retail beef and lamb, overlaid with the percentage spread of beef over lamb since 2000. Clearly, the recovery in the cattle prices at the saleyard since late 2014 has flowed through into higher beef prices in the supermarket pushing the spread of beef over lamb from 16% in September 2014 to 25% for the June 2016 quarter. The increase in beef prices at the retail level potentially supportive of higher retail lamb prices as consumers switch meats.

Taking a look at the quarterly saleyard price movements for lamb, using the Eastern States Trade Lamb Indicator (ESTLI), in comparison to retail lamb prices movements we can see similar trend developing between the two price series – figure 2. The ESTLI movement appears to lead the retail lamb prices by a quarter, which makes intuitive sense price movements at the saleyard would take a few months to flow through into the retail sector. Interestingly, analysis of the percentage spread of retail lamb to the ESTLI since 2000 averages 65% and doesn’t often move beyond a 55-75% range. The current spread of 57% suggest that the spread is more likely to widen than narrow in the coming months, indicative of either a higher retail lamb price and/or a lower ESTLI.

A fairly strong lagged correlation exists between retail beef and retail lamb prices, with beef price movements appearing to lead the way for lamb at a retail level. Figure 3 shows the relationship with a correlation coefficient of 0.82 (this coefficient can range from 0 to 1, with 0 showing no relationship and 1 being perfectly correlated). 

What does this mean?

The recent move in retail beef above $19 per kg suggests a move higher in retail lamb could be on the cards towards 1580-1650¢/kg level by the end of this year or early into the new year (yellow markers).

In addition, the relationship between ESTLI quarterly percentage price movements (smoothed over the year) and retail lamb quarterly percentage price changes can be shown in figure 4. Clearly the ESTLI movements appear to lead the retail price movements. Recent trends indicate that the smoothed ESTLI pattern has turned up suggestive of increasing price gains into the coming season, which is supported by expected tighter supply into 2017 and would add support to a move up in retail lamb prices in the coming few quarters.

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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