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Wednesday, April 22, 2015

More lambs now, less later – but what about price?

By Angus Brown  |  Source: MLA

Key points

  • MLA has revised lamb slaughter forecasts higher for 2015, but kept them low for 2016 and 2017.
  • If MLA’s 2015 lamb slaughter forecast is correct, the remainder of the year will see slaughter 9% lower than a year earlier.
  • If slaughter forecasts are correct we are likely to see lamb prices between 500-600¢ for the remainder of the year, and stronger prices in 2016.


2015--04-21 MLA Lamb Projections FIG 1

2015--04-21 MLA Lamb Projections FIG 2

2015--04-21 MLA Lamb Projections FIG32

Meat & Livestock Australian (MLA) released its quarterly projection update this week. Not surprisingly, it made a heavy upward revision to lamb slaughter for 2015, but is maintaining low projections for 2016 and 2017. What does this do to Mecardo’s expectations around lamb prices?

Given the very strong lamb slaughter for the first quarter of 2015, it was necessary for MLA revise its slaughter forecast higher. This quarter’s projections release increased slaughter by a further 1.6 million head on January’s estimate, giving a forecast of 21.4 million head (figure 1).

The new forecast will see 2015 lamb slaughter 3.8% lower than 2014, but still the third highest level on record.  Interestingly, MLA has gleaned from its surveys that the trend of slaughter over 21 million head is going to abate. Estimates are still a heavy fall of 6.5% in 2016 with slaughter forecast at 20 million head, and this continuing in 2017.

Despite the increase in the 2015 slaughter forecast, the large numbers already killed and the overall 3.8% fall on 2014 suggests that the remainder of 2015 will see lamb slaughter rates lower than the equivalent in 2014.  Figure 2 shows the projected monthly slaughter rates for the rest of 2015 based on the 21.4 million head forecast, the 5.4 million slaughtered to date, and the five year seasonal trend to split the remaining 16 million head across the coming nine months.

Implicitly, MLA is forecasting slaughter for the rest of 2015 to be 9% below the same time last year, which suggests prices should be higher than last year.  Taking the lamb slaughter levels shown in figure 2, and applying the demand curve we’ve been sitting on for the last two years (read our recent article Short term upside in lamb markets, but what’s after that?), gives the price forecasts shown in figure 3. 

Obviously this model isn’t perfect, as the level of demand for Australian lambs is impacted by rainfall and lambs supply from New Zealand (among other things). However, it gives a relatively clear indication of how prices might track if MLA’s forecasts are correct.

If we expand the model out to 2016 we get an average price of 574¢/kg cwt for the year, which would see some very strong values during tight supply periods.

What does this mean?

Lamb slaughter has been very strong for a long time. As such, it’s hard to know if MLA’s forecasts will come to fruition, or if there has been a structural shift towards lamb production that isn’t showing up in surveys, but is at slaughter levels.  History suggests MLA will be proven right at some stage, as the flock returns to a rebuilding mode like it did in 2010 and 2011.

If it’s difficult to forecast supply, it’s impossible to forecast price. However, we re-iterate again that demand for lamb remains strong. Moreover, any weakening in supply will be met with stronger prices. This is good news for old and new season lamb prices, which should track at least at last year’s levels and possibly higher.

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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