By Angus Brown | Source: ABS, MLA's NLRS
The BOM is still forecasting a 70% chance of an El Nino developing this year, albeit a mild one. We think it’s timely to look at what previous El Ninos have meant for sheep and lamb markets, and how this might apply to prices for the coming 6 to 12 months. How concerned should we be?
With the national sheep flock being in such decline over the past 20 years, it’s difficult to get a handle on how supply might be affected by an El Nino event. Figure 1 shows national monthly sheep slaughter, with the last five El Ninos highlighted by the red circles. The most recent El Nino, in 2009-10, was a mild one, with little impact on sheep slaughter. The severe El Nino in 2006 saw a 12% increase in sheep slaughter, and similar impacts in 2002 and 1995.
The declining sheep flock has meant that each El Nino event since 1990 has seen sheep slaughter lower than the previous one, and the subsequent pull back in supply has been sharper.
Figure 2 shows that El Ninos have, historically, had little impact on lamb slaughter rates. This generally makes sense in that most growers have traditionally offloaded older sheep during dry times, and had a similar, or even smaller, number of lambs to sell.
Sheep supply rose significantly during 2013, and was a large proportion of the flock. As such, it is difficult to imagine that any El Nino occurring this year would be able to push sheep supply higher than in 2013. The story is similar for lambs: even if we do see an El Nino-induced drought, there is unlikely to be enough lambs on the ground to see a marked increase in supply.
Which brings us to prices. Changes in price in response to El Nino largely reflect changes in supply. In 2003 and 2006, the national mutton indicator fell 50-75% on the back of stronger supply and weaker demand. Lamb prices fell more briefly, in the order of 30% from July to November, which is not much more than the usual seasonal fall.
Read more on how demand is faring: Lamb markets see a major shift in demand in 2013/14
Because of the sheep and lamb liquidation we’ve seen over the past two years, it’s hard to see supplies reaching the extreme levels and pushing prices back to the doldrums of late 2012. This is especially true when we take into account the growing sheepmeat demand (read our recent article (link above) on sheepmeat demand).
An extreme drought event such as 2006 could push mutton prices back under 200c/kg cwt, and lamb under 400c/kg cwt. However, these values are far from disastrous, and as we have seen in recent months, will only signal an even stronger bounce when seasonal conditions return to normal.
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