By Matt Dalgleish | Source: MLA, NLRS, ACU
Our sheep market comment last week made a mention of the current weak mutton prices in Western Australia and it prompted readers to ask for us to probe a little deeper into this anomaly given that mutton prices for the eastern states had been reasonably supported so far this year, despite solid supply figures.
As figure 1 demonstrates the historical seasonal discount of mutton to the Eastern States Trade Lamb Indicator (ESTLI) can range between 150-250¢ for this time of year, depending on the region (The green column represents 70% of the historic seasonal price range). Mutton prices for NSW and Victoria are at the bottom of the seasonal historic range. Tasmania and SA prices are below the band while WA mutton is very much below the band.
Further investigation shows that WA mutton price discounts to ESTLI are not an uncommon scenario and prices have been at similar discounts on a percentage basis during July/August 2013 as highlighted in figure 2. The shaded green area on this graph measures 70% of the possible statistical variation in mutton discount, given the recent price history. Indeed, this figure shows that while the current mutton percentage discount to ESTLI may appear extreme it is still within the normal seasonal range.
Looking at figure 3 we can see during the July/August 2013 period there was a noticeable spike in supply of mutton in WA, much higher than the five-year average that is a likely cause for the dip in mutton prices that were experienced over the same period. Similarly, recent yarding figures for WA mutton at the end of 2015 indicate a similar increase in December 2015 numbers of 5,813 head above the five-year average. In addition, the stranded Wellard live export ship saw 7,500 sheep offloaded into a WA feedlot early into 2016, potentially adding further mutton to the elevated supply levels.
It is not secret that the two main drivers of sheep prices are supply factors and the competitiveness of the A$ which helps fuel exporter demand. Given the recent supply flush of sheep experienced in WA recently it should not be too surprising to see mutton prices in the west sitting at a reasonable discount to the ESTLI. We expect this discount to narrow back towards longer term averages as supply begins to tighten and the depreciating A$, currently under 69¢ US, lends support to sheep prices across all categories.
A combination of expected lower yarding figures into the first quarter of 2016 for WA sheep and the increased competitiveness of sheep exports, due to a lower A$ is expected to see WA mutton prices return to more normal discounts to the ESTLI in the coming month. Similarly, national mutton prices are anticipated to remain supported and are expected to head towards 325-335¢ by Feb/Mar 2016.
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