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Tuesday, May 23, 2017

Mutton above $6 during Winter – is that possible?

By Matt Dalgleish  |  Source: MLA, NLRS, ACA

Key points

  • The percentage price gain pattern for the ESTLI has been trending above average for the 2017 season, even spending some time above the upper end of the normal seasonal range.
  • In contrast, the percentage price gain pattern for National Mutton has been tracking much closer to the long-term average pattern for much of this season.
  • Based off the earlier ESTLI winter peak forecast and seasonal spread patterns between the ESTLI and NMI a mutton price above 6$ during Winter isn’t out of the question.

2017-05-23 Lamb Fig 1

2017-05-23 Lamb Fig 2

2017-05-23 Lamb Fig 3

During a recent off the cuff remark to a rural journalist I said that a peak for National Mutton Indicator (NMI) this Winter could be around the 550¢/kg cwt level. However, a look at seasonality patterns between the Eastern States Trade Lamb Indicator (ESTLI) and the NMI suggests I may have underestimated the humble sheep.

Figure 1 shows the percentage gain in the ESTLI for the season so far, spending much of the year in the upper band of the normal range and above the ten-year average seasonal pattern. The Mecardo ESTLI forecast for 2017, originally released in December 2016, called for a Winter peak of 755¢ and assuming the percentage gain pattern for the ESTLI remains in the top part of the normal range it remains feasible that we could see a gain of around 35% recorded, which would put the forecast peak within reach.

Despite the record mutton prices on offer this season, a look at the seasonal percentage gain/loss pattern shows the 2017 trend has been mirroring the ten-year average pattern reasonably closely, not too dissimilar to how the 2016 pattern played out. Indeed, assuming the trend continues along the ten-year average path into Winter and taking into account the longer-term average percentage gain of around 45-50% come July would place the NMI within the 550-570¢/kg cwt (380¢ January 2017 price plus 45-50%).

Figure 3 highlights the percentage spread pattern between the ESTLI and NMI over the season and reinforces just how solid mutton prices have been this year compared to lamb. Indeed, the spread has been trekking along the lower end of the normal range for much of the season, very much akin to the patterns displayed during the last favourable climatic periods during 2010-11. As shown by the long-term average trend the ESTLI to NMI spread usually tends to reach a trough late Winter and, if the 2010/11 patterns are any indication, it may reach a narrowing in the spread toward the 10-20% level come July/August.

What does this mean?

Anyone that can quickly do the math will realise these numbers don’t all add up. If by late Winter the ESTLI is around 750¢ and the NMI is between 550-570¢, this puts the percentage ESTLI to NMI spread nearer to 30-35% not 10-20%. So, something has to give. Either the ESTLI doesn’t reach as high as 750¢, the percentage spread between the ESTLI and NMI deviates away from the 2010/11 pattern back to more longer-term average levels, or the NMI gets dragged higher by expensive lamb prices to see mutton reach above 6$.

My feeling, given the supply constraints expected, is that the mutton price will test higher. Some quick calculations based off an ESTLI between 730-750¢ and a percentage spread of ESTLI to NMI of around 20% would put the mutton price peaking at about 610-620¢/kg cwt. A mutton price peak between 610-620¢ in July/August would see the percentage price gain pattern around the same levels it peaked at last season in the 60-65% vicinity, which is a feasible scenario – figure 2.

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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