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Thursday, July 02, 2015

How long can the record ESTLI last?

By Angus Brown  |  Source: MLA's NLRS

Key points

  • Lamb prices have reached a four-year high, but historically significant further price rallies in July are rare.
  • If lamb supply remains tight, there may be a further 25-50¢ upside in lamb markets before prices start to fall.
  • Lamb markets are likely to ease once new season lamb supply starts to flow.
  • The rate will depend on the season but 450¢ looks to be a good support level.


2015-07-02 ESTLI Forecast FIG 1

2015-07-02 ESTLI Forecast FIG 2

2015-07-02 ESTLI Forecast FIG 3

It’s about four months later than we expected, but the Eastern States Trade Lamb Indicator has finally broken through the 600¢ barrier. This is a four-year high as we see more of a traditional winter supply dearth. So how long can it last?

The last eight weeks have seen east coast lamb slaughter track 6% lower than the same time last year, as the strong supply of April and May hits home with tighter supply now (figure 1).  Slaughter has still, however, been around 7% stronger than the five year average.

The tighter supply saw lamb prices edge higher for much of May and June, before taking the jump through 600¢ over the last week. Last night (Wednesday), the ESTLI closed at 602¢/kg cwt (figure 2).  While the ESTLI is at its highest level since April 2011, it is only 20¢ above this time last year and 4¢ above the 2014 peak. So the current prices are not really out of the ordinary.

Generally, lamb supply tracks sideways through July and August, at levels close to the seasonal lows, and this generally sees lamb prices also track sideways. 

There are not many examples in the recent past of lamb markets seeing strong July rallies.  In 2013, the ESTLI gained 30¢ (6%) in the second week of July, but subsequently started its late winter decline.  In 2010, the ESTLI rallied 8% in August (figure 3) as supply was very tight, while in 2011 prices largely tracked sideways right through to the end of the year as seasonal conditions were exceptional.  As we all know, exceptional seasonal conditions in spring are not expected this year.

On the downside, last July is probably the best example of prices tanking in July and August, although they bottomed out at what were historically strong levels.  We are unlikely to see a price decline of similar proportions this year as the season has not been as conducive to the early finishing of lambs.

What does this mean?

There are forward contracts out for August for new season lambs at 600¢ and old season lambs at 580¢, which are broadly in line with the seasonal price trend.  While it’s hard to see lamb prices falling too hard through to August as finished lamb supply should remain tight, strong rallies are hard to find in recent history. The upside limit is likely to be in the order of 25-50¢. Moreover, if we do see this sort of rally, it won’t hang around long.

Prices after August are almost guaranteed to fall, unless we have an exceptional spring. How far depends on the season, but spring rainfall couldn’t be much worse than 2014, and supply can’t be much stronger. For this reason, we think 450-500¢ might again be the market low for 2015.

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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