By Angus Brown | Source: MLA's NLRS
With young cattle prices rallying on recent rain, and little response from the lamb market, the premium held by lamb markets has fallen back to its lowest level in two years. Historically, the spread between lamb and cattle prices has had a very wide range. However, strong cattle prices should support lamb prices.
Figure 1 shows the Eastern States Trade Lamb Indicator (ESTLI) and the Eastern Young Cattle Indicator (EYCI) over the past fifteen years. The ESTLI is much more volatile than the EYCI, likely because of larger supply swings in lamb markets. Cattle supply is spread more evenly than lambs, both globally and in Australian markets. This leads to less volatility in prices.
This time last year, the ESTLI was at its peak close to 600¢/kg cwt. At this time, the premium to the EYCI was at a historical high of 250¢/kg cwt as heavy supply kept cattle prices in the doldrums.
Figure 2 shows that the 250¢ mark has been hit once before, during the extreme lamb prices of March 2011. During that time, the EYCI was also at a record level of 420¢/kg cwt, but tight lamb supply saw lambs outperform cattle.
From March 2011 to December 2012, lamb prices fell more than 50% as supply improved rapidly in response to the strong prices and good seasons. During the time, the ESTLI briefly fell below cattle prices for the first time in five years.
Strengthening demand for lamb since then saw prices recover, while cattle prices were depressed by poor seasons and heavy supply.
Between 2004 and 2007, the ESTLI traded at a discount to the EYCI. This was driven largely by the BSE outbreaks, which saw cattle prices supported while lamb prices tracked along at similar levels to pre-2004.
Apart from the 2004-2007 period, lamb prices have largely traded at a 50-200¢ premium to cattle prices. It will be interesting to see if lambs can maintain these premiums in the face of what should be strong cattle prices, and continued strong lamb supply. The price trends from 2012 are unlikely to be repeated, as we are yet to see the seasonal conditions that can see supply rally that strongly.
Rising cattle prices will support lamb prices as the two meats compete for consumer dollars, and rising beef values will see demand shift to lamb. So while the ESTLI might move below the EYCI at times over the coming year, it can be expected to maintain a premium in general, but probably at the lower end of the historical range.
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