By Augusto Semmelroth | Source: MLA's NLRS, ABS, ABARES
Last week we looked at the key stats from Meat and Livestock Australia’s (MLA) industry sheepmeat projections for 2016 to 2019. Today, we delve further into the most relevant themes and their impact on pricing for the projections period. In our view, MLA’s estimates of supply and demand are largely bullish for lamb and sheep prices, particularly in 2016 and 2017.
One of the key messages coming out of MLA’s report this time was the ongoing change in composition of the flock. There is expected to be a move towards crossbreds and meat sheep breeds, with the associated productivity gains for the industry. Although MLA had already recognised the positive impact of increased lambing rates on lamb numbers, it was only in this report it fully accounted for this shifting dynamic on its supply numbers.
We already showed this figure last week, but it’s worth revisiting given its potential impact on prices in the coming years (figure 1). For 2016 and 2017, MLA maintained its view that lamb turnoff numbers will remain marginally smaller than in the last two years at 21.5 and 22 million head, respectively. Yet, a significant upward revision in 2018 and 2019 numbers to 23 and 24 million head, respectively, was made on the back of the aforementioned flock productivity gains.
So what will that mean for prices in the years ahead? Figure 2 tries to shed some light on where prices may be headed, based on historical and prospective demand curves. Regular readers will be familiar with this analysis. For those who aren’t, it basically shows the impact of changes in supply on prices while highlighting the key shifts in demand patterns over the last 15 years.
Overall, major changes in demand have taken place every 4-6 years, resulting in firmer prices amid growing supply levels. Based on the prospective strength in export and domestic demand in the foreseeable future, and a favourable A$ environment, we expect the Eastern States Trade Lamb Indicator (ESTLI) to average 585¢/kg cwt in 2016 before easing to 555-60¢/kg cwt in 2017.
As we go further out into the projections period, it gets harder to gauge the potential price scenarios given the reduced accuracy of supply estimates and uncertainty around demand developments. However, unless the pace of export demand growth is sustained at current levels, prices could potentially retreat towards the 475-500¢/kg cwt range towards the end of the decade.
The sheep industry is in the midst of a gradual transition from a heavy merino based flock towards a more meat oriented and specialised flock: not dissimilar to New Zealand a few years ago. As a result, as pointed out by Andrew Woods in his article earlier this week (see link above), we should expect further increases in lamb offtake as a percentage of the flock.
That said, the flow-on effect on supply is only likely to be more significantly felt in 2018 and beyond. For the shorter term, the outlook for lamb prices in 2016 and 2017 remains very rosy with a myriad of positive factors expected to support firmer prices. The tighter Oceania lamb production, the favourable A$, the record beef prices at domestic retail (potential shift in consumer demand for lamb) and robust export demand will be key price drivers, at least over the next two years.
Our view is for an upside of 5-10% year-on-year increase in average prices for 2016 to around 585¢/kg cwt. This means we will most likely see prices moving above 600¢/kg cwt in the first half of the year. Moreover, we also expect prices to bottom at higher levels than in 2015 next spring.
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