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Wednesday, March 11, 2015

Is 580¢ enough for lambs for April?

By Angus Brown  |  Source: MLA's NLRS

Key points

  • A major lamb buyer has recently offered forward contracts at 580¢/kg cwt, but is it a good price?
  • Historically, lamb prices track sideways to lower in March and April on steady supply, with some years of rising values.
  • Lamb prices have the potential to rise around 10% if supply weakens, but if slaughter rates remain strong forward contracts look like reasonable value.


2015-03-10 Is 580¢ For April Enough FIG 1

2015-03-10 Is 580¢ For April Enough FIG 2

2015-03-10 Is 580¢ For April Enough FIG 3

2015-03-10 Is 580¢ For April Enough FIG 4

Lamb prices have tracked sideways over the last few weeks. However, while at strong levels, they are not where we might have expected them to be a month or six weeks ago. One major lamb buyer has come out with forward contracts for April at 580¢/kg cwt, which raises the question “Is this enough?”

The contracts in question allow for 50% of the lambs contracted to be priced at the prevailing spot rate, while 50% will be at 580¢/kg cwt. This obviously makes the contracts more attractive for those looking for upside, but it’s an interesting stab at where prices will be in a month’s time.

Figure 1 shows that lamb prices in Victoria are currently running below the 580¢ mark in both over the hooks and saleyard markets. However, they are not behind by much with the average trade lamb over the hooks rate sitting at 568¢, and the saleyard trade lamb price at 545¢.

In NSW, where the forward prices are also available, the NSW OTH trade lamb price is 50¢ behind the forward price, and saleyard trade lambs 58¢ lower than the forward price (figure 2).  This obviously makes the forward contracts much more attractive in NSW than in Victoria.

Historically, price rises in March and April are relatively rare.  Using the Eastern States Trade Lamb Indicator (ESTLI) as a proxy for lamb prices, we did see the market rally 50¢ in April 14. However, we have to go back to 2008/09 to find the last March/April rally before that, when the ESTLI gained 10% (figure 3). 

Apart from these two years, lamb prices tend to drift sideways in March and April, on average losing 4% from the start of March to the end of April. However, this has usually followed a strong rise in January and February, which hasn’t eventuated this year.

It’s no secret as to why lamb prices have stagnated, with continued strong supply depressing values. So the question is really whether supply is going to weaken enough to see prices rally.  In both 2014 and 2009, the years when markets rose strongly in March and April, lamb slaughter fell heavily after the Labour Day holiday in Victoria, and never really recovered, to see values appreciate further into the end of the year.

What does this mean?

In a ‘normal’ year, when lamb prices have risen in January and February, and supply was weaker in those months, April forward prices offered at a premium to early March values would be good selling.  Whether we are in a normal year or not remains to be seen. However, as we have identified earlier, very strong slaughter rates to date suggest supply will have to weaken at some stage. 

A 10% price rise like that seen in 2008 and 2014 would put the ESTLI at 583¢/kg cwt. Combined with the current Victorian premium over the ESTLI, it would make 580¢ look around 30¢ too cheap. However, if the NSW discount still applies, 580¢ will be about right.  

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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