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Tuesday, December 12, 2017

Is the China demand myth becoming reality?

By Angus Brown  |  Source: MLA, ABS, DAFF, ACA

Key points

  • Lamb and mutton demand has moved to new higher levels this year, and especially this spring.
  • Exports to China have grown significantly, driving the stronger demand in sheep and lamb markets.
  • There is no guarantee Chinese demand is here to stay, but strong slaughter rates are removing lambs from the system.

2017-12-12 Sheep Fig 1

2017-12-12 Sheep Fig 2

2017-12-12 Sheep Fig 3

2017-12-12 Sheep Fig 4

We have been hearing for years that growth in the Chinese middle class is going to impact demand for Australian farm commodities. In the last three months we have been discussing the higher lamb and mutton prices this year, in the face of similar supply. Export data from the last three months gives some insight into where the demand is coming from, and how the increase in Chinese demand might be becoming a reality.

What is going on with lamb and sheep prices?  We’ve been hearing this quite a bit lately. If we didn’t have slaughter data we might think that supply is tight. We do however, know that lamb and sheep slaughter has been as strong as it was last year. Basic economic theory tells us that if price is higher, and supply is the same, demand must be stronger. 

Figure 1 and 2 show price versus supply for lambs and sheep on an annual basis. With year to date data we can estimate the final figures for 2017, showing prices moving higher, despite similar or larger supply. 

Average slaughter for the last 3 months, along with price are shown on the lamb chart. While slaughter is much higher than the annual average, prices have remained steady. For mutton we have converted slaughter for the last 3 months to an annual figure. While the average price for September to November has been slightly lower than the annual average to date, supply has been much stronger.

Figures 3 and 4 show where the stronger demand is coming from. Lamb exports to China have been 28% higher than last year for the last 3 months. The shift in mutton exports is more extraordinary. From September to November Australian mutton exports to China were up 227%, with China becoming easily our largest destination.

There is little information available as to what is driving the increased sheepmeat demand from China, or whether it is going to last. There is, however, little doubt that Chinese demand is forcing other export markets, and the domestic market, to pay what are normally mid-winter prices for sheep and lambs in the middle of the spring flush.

What does this mean?

Sheep growers will know that just because Chinese demand is strong now, it doesn’t mean it will continue.  The wool market has long been subject to fluctuating demand from China, and this tells us that the stronger lamb and mutton demand may not be here to stay, so it might be wise to take advantage of the good prices while they are available.

The good news is that the strong demand is removing plenty of sheep and lambs from the system, which will in turn see supply tighten in the New Year. As such, even if Chinese demand wanes, prices might hold.  And if Chinese demand remains strong, and we see weaker supply, the New Year could see new records.

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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