By Angus Brown | Source: MLA's NLRS, ABS
A question we are often asked is “Why are WA lamb prices discounted to the east coast?”. Mecardo takes a look at whether a discount is the norm, and what drives the difference in lamb prices between the east and west coast coasts.
Figure 1 shows the Western Australian Trade Lamb Indicator (WATLI) and the Eastern States Trade Lamb Indicator (ESTLI) over the last 10 years. It is true to say that, in general, lamb prices in the west are generally lower than in the east. However the two prices do largely move together with a correlation of 83%. Since 2003, the WATLI has averaged a 37¢/kg cwt discount to the ESTLI. The difference has ranged from 177¢ discount to a 175¢ premium, but has largely traded between a 100¢ discount and a 50¢ premium (figure 2).
While lamb from both the east and west ends up in export markets, the discount in western markets is likely due to the relatively small numbers of lambs slaughtered and smaller domestic consumption.
WA lamb slaughter for the 2012-13 fiscal year was 1.9 million head, compared to the east coast slaughter of 18.5 million head. This smaller slaughter means fewer buyers and less competition in markets, especially in times of oversupply as the capacity for processors to deal with extra supply is limited.
The smaller WA population, and therefore smaller domestic consumption, means that WA lamb producers’ and processors’ prices received are more exposed to a volatile export market, as opposed to a relatively steady domestic market.
When the relationship between the WATLI and ESTLI has gotten severely out of line, it has generally been due to abnormal seasonal conditions in the East or West. This has caused supply to be out of line with normal, resulting in the market being either over or undersupplied relative to demand. It’s interesting to note that it’s not just WA supply which drives the price spread to the east coast. Eastern prices can swing just as quickly and send the relationship out of kilter.
Knowing where the WA / Eastern States lamb price spread is in relation to historical levels is a powerful piece of information for lamb producers on both sides of the country. If, like the current market, the WA discount is at 43¢, it tells us that prices are relatively in line, and the spread could go either way. There is little incentive for WA growers to hold onto lamb, unless they expect a rise in prices in general.
If the price spread was similar to a month ago, when the WATLI was at a 135¢ discount, chances were that either eastern prices would fall, or western prices would rise. As such, a WA lamb producer could comfortably hold lambs in anticipation of a price improvement, while on the east coast selling was the best option.
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