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Thursday, December 15, 2016

More upside than down for mutton

By Angus Brown  |  Source: NLRS, MLA

Key points

  • MLA’s Sheep Industry projections are forecasting mutton slaughter to remain low for the next five years.
  • If sheep slaughter remains close to current levels, mutton prices should remain in the 300-400¢ range.
  • Sheep slaughter is unlikely to stay in such a tight range, but there is some upside for sheep values.

2016-12-15 Sheep Fig 1

2016-12-15 Sheep Fig 2

2016-12-15 Sheep Fig 3

In Tuesday’s sheep article we saw the impact Meat and Livestock Australia’s (MLA’s) lamb slaughter forecasts will have on lamb prices, if they come to fruition. MLA’s sheep supply projections are not all that exciting, with slaughter forecasts bunched around this year’s level, and as such mutton prices are expected to stay strong for some time.

Figure 1 shows the various demand curves for Australian sheep.  In recent years the sheep demand curve has flattened out.  That is, changes in sheep supply have been having less impact on price.  The slope of the demand curve is similar to that of 2012-13, but demand is obviously a lot stronger, with prices higher at the same level of supply. 

MLA’s forecast of supply for this year and the coming four years is shown in figure 2.  MLA expect 2016 and 2017 to mark the low point for sheep supply, with slaughter coming in at 7 million head.  Only gradual increases in sheep slaughter rates are expected out to 2020, when it will hit 8 million head.  As such the forecast is for sheep slaughter to remain below 2015 levels for the foreseeable future.

Rather than a rapid flock rebuild, which saw the flock gain 3 million head from 2010 to 2013, MLA are expecting a slaughter to remain above those years, and as such precipitate a slower rebuild, although they do expect to add 3 million head in four years.

At current demand levels, and projected slaughter, there will be little change in the average national mutton indicator over the coming five years.  The average mutton price should stay around the 350¢/kg cwt level. 

The National Mutton Indicator generally ranges around 50¢ either side of its yearly average, as shown in figure 3.  This means the NMI will have a high of 400¢, and a low of 300¢ for the foreseeable future.  The fact mutton prices haven’t fallen to their usual spring lows, suggests we might see a peak higher than 400¢ over the coming year.

What does this mean?

Figure 2 shows that sheep slaughter rarely stays within 5% of the previous year’s level, and it’s unlikely to start now, despite MLA’s projections.  As outlined in the Tuesday’s lamb article there is probably more impetus for sheep slaughter to fall than to rise, with strong wool and lamb prices, and better seasonal conditions likely to see sheep supply tighten further.

Obviously this would point towards higher mutton prices, and possibly are return to the highs of 2010-11.  On the downside, it would take a dry year to see a lift in mutton slaughter, and a subsequent decline in prices, but there appears to be more upside than downside.

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