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Tuesday, February 12, 2019

If this is not the low it is pretty close

By Angus Brown  |  Source: MLA, ABS

Key points

  • MLA are forecasting the Australian Sheep flock to hit a new low this year, down 3.6%.
  • Sheep slaughter is forecast to fall sharply, and hit a low in 2020.
  • Much tighter sheep supply is very positive for mutton values when seasonal conditions improve.


2019-02-12 Lamb 1

2019-02-12 Lamb 2

2019-02-12 Lamb 3

Last week Meat and Livestock Australia (MLA) released their sheep industry projections, and we noted that lamb supply is likely to take a hit this year. It should come as no surprise that sheep supply is also expected to fall, and if we talk proportionally, they are going to take a bigger hit. Prices have some serious upside from current levels.

The flock is expected to hit a new low by the end of June 2019.  MLA’s forecast for a flock of 65.23 represents a 3.6% fall on 2018, and is a similar level below the previous 100 year low of 67.5 million head set in 2016. 

There has been a change in how the Australian Bureau of Statistics (ABS) and MLA measure the flock, with very small flocks no longer included.  Regardless, the drought has had a massive impact on the flock.

With a record low flock, surely a record low sheep slaughter?  Apparently not.  With the fast start to the year, and continuing dry weather, MLA are not projecting 2019 to be the low for sheep slaughter as they are for lambs.  Sheep slaughter this year is expected to be down 16% on 2018, with a further 10% fall in 2020 to 7.2 million head. 

We can see in figure 1 that despite the low flock, MLA are seeing the slaughter low of 7.2 million head is still 46% above the low mark set in 2011 and 3% above the 2016 low mark.  The flock did manage to grow 7% in 2016-17, which suggests the flock is more fertile than in 2011, and a good season might see sheep slaughter around the 7 million head mark.

If we take the projection for 2019 slaughter, of 8 million head, subtract estimated January slaughter and divide the rest by historical seasonality we get monthly slaughter as shown in figure 2.  February to April slaughter should be down on last year, but not by much.  If we are to reach the 8 million head target, sheep slaughter will have to well back on last year from May to December.   

What does this mean?

Figure 3 shows the National Mutton Indicator year on year.  It is due to start rising, and it is highly likely it will get over 500¢ in winter.  We can see that even with strong sheep supply in winter 2018, mutton values averaged over 500¢.  It won’t surprise us to see mutton in excess of 550¢ with a reasonable season.

Over the medium and longer term, things look equally rosy for mutton markets.  MLA don’t expect sheep slaughter to get back above 8 million head until 2022.  With a 9.5 million head slaughtered in 2018 mutton prices averaged 443¢/kg cwt.  If we’re not seeing the low for mutton prices now, we’re not far off it. Upside is in excess of 200¢ from last week’s 364¢/kg cwt.

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