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Tuesday, February 17, 2015

Lamb slaughter projections too low, or serious supply deficit looming

By Angus Brown  |  Source: ABS, MLA's NLRS

Key points

  • MLA’s lamb slaughter projections translates into a very tight lamb supply forecast for the coming five months.
  • The supply dearth has not hit yet, and if MLA is right it will be severe when it does come.
  • Despite the correction in prices last week, there remains plenty of upside potential for lamb prices, even if MLA’s slaughter forecast is out by 2 million head.


2015-02-17 Lamb Slaughter Too Low FIG 1

2015-02-17 Lamb Slaughter Too Low FIG 2

Meat and Livestock Australia (MLA) recently released its sheep and lamb projections for 2015 and beyond, with some interesting lamb slaughter projections suggesting an 11.6% fall in slaughter from 2014. We’ve had a look at the medium and longer term implications of lower slaughter already. However, what does it mean for the remainder of this selling season, and potential price movements?

If we take MLA’s national lamb slaughter forecast for 2015 of 19.8 million head and multiply it by 49% (five year average proportion killed from January-June) it gives us 9.7 million head for slaughter from January to June.  This will be a 15% reduction in lamb slaughter relative to the July-December period just gone. 

According to MLA’s weekly slaughter figures, January slaughter was similar to last year, which leaves just 7.8 million head for slaughter from February to June, or 1.57 million head per month.  This sounds like a lot of lambs, until we look at figure 1 which shows how the slaughter projection relates to last year and the five year average. 

Over the last 10 years, we’ve never seen lamb slaughter for January-June fall 15% on the July-December values. The closest we came was in 2009-10 and 2010-11, with 9% falls in each year. Moreover, the trend was similar with lambs hitting the market earlier than normal, and subsiding in the new year simply because of lack of supply.

The impact on price of the decline in supply in 2010-11 is clearly illustrated in figure 2, with prices rallying strongly from January through to March, before easing as late lambs came to market.  The difference in price trend to this year so far is easily explained by figure 1.  In early 2011 the real supply dearth hit in January and February before later lambs came along from March to June. 

This year so far, supply has remained strong, encouraged by prices higher than last year, and possibly a move toward lotfeeding lambs.  If MLA is right, there is going to be a real supply squeeze at some stage. However, even if it is out by 2 million head (10%), lamb supply over the coming five months still needs to be lower than last year.  

What does this mean?

The correction in prices last week (figure 2), which seems to be continuing into this week, has some worried that the market got overheated and might lose some ground. 

Fundamentally, the market still looks to have plenty of upside potential after the current supply spurt moves through the system. The market is likely to have another crack at $6/kg cwt by the middle of March, and get a further leg up from there. 

Obviously, a lot depends on how growers spread the remaining lambs out through the next five months. However, as long as slaughter keeps running at a similar level to last year, it simply takes lambs away from the April-June slaughter timeframe.

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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