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Tuesday, November 07, 2017

Lamb at 630¢ in January, worth an each way bet

By Angus Brown  |  Source: MLA, Trade

Key points

  • Lamb forward contracts have been released at levels which would be a record price for most of January.
  • Historically prices rise 12% from November to the end of January, but this seems unlikely.
  • While there is a reasonable chance lamb prices will be higher than forward contracts in January, the forward do offer very good value.

2017-11-07 Lamb Fig 1

2017-11-07 Lamb Fig 2

With three processors releasing lamb forward contracts last week we got our first indication of where the trade thinks the ‘fair’ price of both trade and extra heavy lambs will be come January. Based on historical price trends, the processor is dreaming if they think they’ll be that cheap, but when you’re in the top 10% of values the question is whether it is prudent to not lock in the profits.

Last week the first shots were fired in the bidding war for the southern spring lamb run.  The theory behind offering contracts seems to be an attempt to shore up some supply, and encourage producers tempted by very strong restocker values to hold lamb through to the New Year.  In the last three years we have seen a January demand spike which pushed slaughter close to or above those of the previous spring (figure 2), and processer will want to be sure they have at least some supply secured.

The forward contract offers for five weeks in January range from 580¢/kg cwt for an 18-32 kg grid, through to 630¢ for an 18-24 kg grid.  Historically, this is very good money.  The Eastern States Trade Lamb Indicator (ESTLI) has only been higher at this time of year in the last week of January last year (figure 1).

This means that producers who usually sell lambs in early January can now lock in the highest price they have ever received.  It should be pretty tempting, but as we saw last week, if lambs have to be fed grain to make it to January as trade lambs, lamb producers are better off selling as stores at current inflated values.

So what are the chances of lamb prices being higher than 630¢ in January?  On average November marks the annual low point for lamb prices, and there is usually only upside from here.  On average the ESTLI gains 12% from the low point to the end of January.  A 12% rise from here would put the ESTLI at 697¢/kg cwt at the end of January. 

We don’t think lambs will be quite that expensive at the end of January.  We do think lamb prices will rally from spring and summer lows, but not from the current level of 620¢, as there is likely to be some downside from here. 

What does this mean?

Often when lamb forward contracts are released they look relatively cheap.  This time processors are no doubt aware they need to offer very good value in their forwards to encourage holding lambs through to January, and they have.  There is however, a good chance lamb prices will be higher than forward contracts, based on improved demand, and the possibility of tight supply.

So what to do?  Like a bet on the Melbourne Cup, there are a lot of possible outcomes, so best to have a bit each way.  Some of the contract offer upside on 50% of the contracted stock if prices rise, which is even more reason to take some cover, especially if lambs are planned to be sold in January.  It will at least give some confidence if there is a supply induced price decline before Christmas.

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