By Augusto Semmelroth | Source: ABS, MLA, ABARES
ABARES released their quarterly commodity outlook last week and pegged lamb slaughter levels for 2015/16 to fall 4% year-on-year to 22 million head. This is pretty much in-line with Meat and Livestock Australia’s (MLA) estimates and bodes well for prices going forward assuming demand remains steady to stronger coupled with a more favourable exchange rate environment.
Estimating the size of the lamb crop and yearly slaughter levels has been pretty challenging in recent years withMLA and ABARES underestimatingsupply by a fair margin. Most of the discrepancy between forecasts and actual numbers seems to have derived from higher than expected lamb marking rates. As both entities adjust to this correction, we expect them to turn out more accurate forecasts going forward.
This year MLA & ABARES seem to have arrived at a consensus that lamb supply will be lower in 2015/16, albeit only marginally from 2014/15. According to ABARES estimates, lamb slaughter will fall to 22 million head in 2015/16 on the back of lower sheep numbers and increased ewe lamb retention. MLA seems to be sharing the same view with turnoff numbers pegged at 22.25 and 21.5 million head for 2015 and 2016, respectively.
To facilitate the comparison between both estimates, we adjusted MLA’s numbers to a financial year (Jul-Jun) based on average seasonal supply trends. The result is a forecast of 21.8 million head for 2015/16, which is only 200,000 head below ABARES official estimates (figure 1). If these forecasts are correct, lamb supply will be around the same levels as experienced in 2013/14.
Looking beyond the yearly tally, it’s important to assess the seasonality of supply and how this may impact prices throughout the end of the season. On average, supply peaks in November with close to 9.5% of total numbers slaughtered (figure 2). From December until April, monthly turnoff falls to around 8% of yearly total before the usual spike in May to 9%.
Although that’s the typical supply trend, lamb slaughter can sometimes deviate from this pattern. In 2014/15, poor seasonal conditions in spring resulted in many producers bringing sales forward leading to a surge in supply in September and October.
As a result, a supply void unfolded in December and January to see prices rallying before Christmas. As the season progressed into the first half of 2015, numbers started to appear strongly in February/March/April again to see prices track sideways before moving another leg higher in May once supply pressure eased.
Despite the relatively poor accuracy of long-term supply forecasts put out by ABARES and MLA in recent years, we believe the current projections for 2015/16 will be closer to reality this time. With that in mind, we are likely to see lamb slaughter levels fall somewhere around 4-5% below 2014/15 levels based on their numbers.
This bodes very well for lamb markets for the rest of the season, particularly as export demand is anticipated to remain strong and domestic consumers may started to baulk at high beef prices and favour lamb meat. While we haven’t been able to see this trend in the domestic market gather momentum, it’s something to keep an eye on.
As opposed to 2014/15, we expect the distribution of slaughter to be more in-line with the normal seasonal trend. This means, turnoff will be likely to peak in November before a major contraction in supply between December and April (figure 3). As such, lamb markets are also expected to follow their usual seasonal trend with prices likely to find a bottom in November and then trend higher until March.
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