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Thursday, May 28, 2015

More short-term upside for lambs despite less favourable BOM outlook

By Augusto Semmelroth  |  Source: ABS, MLA

Key points

  • Lamb supply defied seasonal trend in autumn, peaking in March/April rather than May.
  • Eastern states lamb slaughter levels to fall below 2014 levels over the next 2 months.
  • Aggregated AU/NZ supply glut finally waning and expected to reach a low point in June/July to support firmer prices.
  • Despite the less favourable seasonal outlook for June/July, we still expect upside potential for the ESTLI up to 630-650¢ by June and 650-670¢/kg cwt July under average seasonal conditions.

2015-05-28 ESTLI Article FIG1

2015-05-28 ESTLI Article FIG2

2015-05-28 ESTLI Article FIG3

Lamb slaughter levels defied the usual autumn supply trend, peaking in March/April rather than in May this year. This was a major headwind for lambs previously as export markets struggled to cope with record supplies from both Australia and New Zealand. As numbers finally start to dwindle, lambs are at last regaining some ground. In addition, more upside is expected for June/July.

Figure 1 shows the weekly eastern states lamb slaughter levels collated by Meat and Livestock Australia (MLA). As a general rule, lamb supply softens in March/April before rebounding in May. This year, the exact opposite occurred as numbers surged in March and early April (roughly 15% above 2014 levels) before declining substantially over the last 5-6 weeks. From a peak of 404,326 head in Mid-April, weekly slaughter has moved back below 350,000 head.

Despite the less optimistic 3-month rainfall outlook released by BOM this morning, a further contraction in “old lamb” numbers over the next couple of months will be inevitable. As for the new lamb supplies, they are also likely to start appearing later than in 2014. Most of the key producing regions received 50-100mm less rain between February and April this year. This will certainly impact weight gains and timing to market. 

With that in mind, we believe lamb slaughter levels could potentially fall another 15-20% month-on-month in June to see numbers move slightly below 2014 levels and to around the 5-year average for the month. For July, slaughter rates should start to pick up again, but not as swiftly as in 2014 (figure 2). This means that the pool of lambs available for slaughter during the June/July period is expected to be much smaller this time.

The tightening eastern states supplies, coupled with the restricted availability coming from New Zealand during the winter months, will finally give lamb markets the chance to better reflect the solid demand fundamentals. The gradual shift from “over to adequate” supplies will support firmer lamb prices in the months ahead.

The Eastern States Trade Lamb Indicator (ESTLI) has already responded well to the dwindling lamb numbers gaining 60¢, or 11%, over the last six weeks to 582¢/kg cwt this Wednesday. In the coming months, we expect the ESTLI will see very restricted downside risk below 560-570¢/kg cwt. Upside potential for June and July is expected to be around 630-650¢ and 650-670¢/kg cwt, respectively (figure 3). From August onwards, prices should start retreating below support levels. 

What does this mean?

After a two consecutive highly favourable 3-month rainfall outlook releases, the BOM has finally published a less encouraging one today forecasting only a 35-45% change of above average rainfall for June and an even chance (50%) for July.

Although a scenario of above average rainfall for June/July would support a strong fall in supply, lamb numbers will still wane during the period under average to slightly below average rainfall. Assuming average seasonal conditions, we still believe upside potential for the ESTLI could be up to 10% by June and 15% by July.

As mentioned before, as the global traded lamb supply (AU/NZ) moves from an oversupply status in March/April into its low point in the coming months, lamb markets should better reflect the still positive demand fundamentals. In addition, the recent fall of the A$, now at US77¢, will also improve export competitiveness and support firmer prices in the next two months.

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