By Angus Brown | Source: NLRS, DAFF
The Australian mutton market is export dominated, with 95% of last year’s mutton supply exported. When compared to lamb, of which 53% was exported in 2015, export markets have a much larger bearing on mutton prices than lamb. With mutton prices currently languishing, despite tight supply, we delve into export numbers to see if we can find the reason weaker supply isn’t correlating with stronger prices.
Figure 1 shows that mutton exports in 2015, and in January 2016, have been much lower than the previous year. Since July Australian mutton exports have been 19.4% lower than the previous year, which should not be surprising, as sheep supply has tightened with better weather and the beginnings of a flock rebuild.
The national mutton indicator spent July to September at an average 9% premium to the year before, which is to be expected, with lower supply and steady demand seeing higher prices (figure 2). Things started to get concerning from October to November, when weaker supply saw prices at the same levels as the previous year. In December and January the national mutton indicator has tracked at a 26% discount to year before levels, despite weaker supply.
Much weaker supply, combined with much weaker prices generally means demand for mutton must be considerably weaker than last year.
Determining which markets demand might be weakening in requires us to look at the proportion of exports to each market, as total exports are simply an indicator of supply.
Middle Eastern and Asian markets are the main importers of Australian mutton, accounting for around 75% of exports. Middle Eastern markets generally take a steady amount of mutton from year to year, while in Asia, and in particular Chinese, imports vary widely.
Figure 3 shows the proportion of mutton exported to China, and the average monthly National Mutton Indicator. The two series tend to move in opposite directions, having a correlation of -45% since the start of 2012. This suggests that when mutton becomes cheap, the Chinese buy more, and when it gets expensive they buy less.
In January 2016 the relationship has broken down, with prices averaging 277¢/kg cwt, yet China only took 10% of mutton exports. Previously a price around this level has equated to China taking closer to 20% of exports.
The Middle Eastern market stepped up and imported more mutton in January, with exports to that market hitting their highest level since March 2015, and 16% higher than January 15. It seems processors shifted more product to the Middle East at lower prices, as the Chinese weren’t interested.
Why the weaker Chinese demand? Domestic Sheepmeat supplies are reportedly strong in China, while economic issues are potentially impacting demand for red meat in general, which would see consumption of lamb and mutton fall.
It is definitely a concern that mutton exports to China were at their lowest January level since 2012, despite prices being at close to two year lows. However, there is potential for higher values if Chinese demand bounces back.
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