By Angus Brown | Source: MLA's NLRS, BOM
Following our article on the impact of El Nino on trade lamb prices, we received a query on how El Nino has historically affected the price of restocker lambs. Our hypothesis would be to expect a severe El Nino to depress restocker lamb prices, both in absolute terms and relative to finished lamb prices. This turns out to be largely correct, but there may have also been a shift in lamb market dynamics due to lotfeeding.
We have all heard about the Bureau of Meteorology forecasting a strong chance of an El Nino occurring this spring. Whether or not you believe the forecast, it’s worth looking at the possible impact of an El Nino on restocker lamb markets. In theory, a dry spring should result in more lambs being sold in store condition. This oversupply of restocker lambs should lead to lower prices.
Figure 1 shows the Eastern States Trade Lamb Indicator (ESTLI) and the NSW restocker indicator over the last 15 years. In general, restocker lamb prices move in line with the ESTLI, which makes sense as restocker lambs are largely just a month or two away from being trade lambs. The red circles show the three El Nino events of the last 15 years: 2002, 2006 and 2009.
Even on the 15 year price chart, we can see that restocker lamb prices lagged the ESTLI during 2002 and 2006. This is further confirmed when we look at the spread between the ESTLI and the NSW restocker (figure 2).
Not surprisingly, the severe El Nino conditions in 2002 and 2006 saw the NSW restocker indicator at a larger than normal discount to the ESTLI. The 2009 El Nino, which actually saw rainfall around average, saw NSW restockers at around a normal spread to the ESTLI.
Figure 3 shows the difference in the NSW restocker spread to the ESTLI in more detail. In the spring of 2002, restockers paid 100-150¢ less than the trade lamb price for lambs. In 2006, they paid 50-100¢ less, while in 2009 good rainfall in spring saw restockers rise to a premium to the ESTLI of up to 50¢.
It is interesting to note that the dry spring of 2014, which obviously wasn’t El Nino but rainfall was lower than average, saw restockers still paying a premium to the ESTLI.
If we take the (limited) data on face value we’d say that in El Nino years the NSW restocker indicator trades at a 60¢ discount to the ESTLI in spring, compared to a 5¢ premium over a 10-year average. It’s more accurate to say that there is a 44% chance of a severe large rainfall deficit, which is the proportion of years we have seen a heavy fall in grain production (this correlates) closely with poor pasture conditions. A large rainfall deficit has historically led to a restocker discount of 80-150¢ to the ESTLI.
However, the rise of lamb lotfeeding may have shifted this historical lamb market dynamic. This has been seen in part over the last nine months. The dry spring in 2014 saw restocker lambs trading at around $80/hd. This was a discount of around $40/head to trade lamb prices, which was roughly equal to the cost of feeding restocker lambs through to finished lambs. In ¢/kg terms, restocker prices were actually at a premium to the ESTLI (figure 3) because of the relatively high finished lamb price. Unless there is a massive oversupply of restocker lambs, we suspect restocker lamb prices will continue to be governed by the cost of feed.
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