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Thursday, June 18, 2015

Mutton cheap but merino lambs expensive

By Angus Brown  |  Source: MLA's NLRS

Key points

  • Trade lamb prices climbing gradually, but SA lambs left behind by Victoria.
  • Merino lambs have moved faster than trade lambs, while mutton prices have lagged despite tighter supply.
  • Merino lambs currently better selling than adult sheep; this should correct over the coming months.

2015-06-18 Lamb Spreads FIG 1

2015-06-18 Lamb Spreads FIG 2

Lamb markets have gradually trended upward for the last month or so, but not all sheep and lamb prices have been equal. Merino lambs are at a stronger than normal spread to the Eastern States Trade Lamb Indicator (ESTLI), while mutton is at a larger than normal discount.

The ESTLI is obviously driven by trade lamb prices in NSW and Victoria. It’s interesting to see Victorian trade lambs trading at a larger than normal premium of 20¢ this week, which suggests supply is relatively tight in the south.  SA trade lambs usually trades close to Victoria, but are currently at a 50¢ discount.  Either Victorian prices will fall, or SA prices will rise: either way, this gap should close.

Merino lambs in NSW, and particularly Victoria (figure 1), are priced very well relative to the ESTLI, sitting well above average levels.  Perhaps it’s the rallying wool prices that have fewer Merino lambs coming to market, and stronger demand from restockers.

However, we would think that if it was stronger wool prices driving Merino lamb prices higher, this would translate into stronger mutton prices, with a large proportion of ‘mutton’ sold being Merino sheep.  Mutton indicators are very weak, with all state indicators sitting at more than a 180¢/kg cwt discount to the ESTLI.  In WA, mutton prices are at a more than 300¢ discount the ESTLI.

While mutton supply is down on last year, it remains stronger than the five year average. It appears that demand has weakened somewhat, leading to the large discounts we see in the current market.  Stronger wool prices, along with improved seasonal conditions, should see markets recover, at least back to average levels. These are 50¢ away in Victoria and NSW (figure 2), and 100¢ away in WA.

What does this mean?

Adult sheep look like a good buy in the current market: they are cheap relative to both trade lambs and merino lambs, and are prices at a similar level to cows, which also have a lot of upside.  The current market still has the hallmarks of oversupply of breeding stock, and a lack of demand from restockers because of ordinary seasonal conditions.  Recent rain, combined with strong wool prices, could see the mutton market turn around quickly as we move through winter.

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