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Thursday, January 26, 2017

Mutton hitting the ceiling, but can it break through

By Angus Brown  |  Source: MLA, ACA

Key points

  • Mutton prices have rallied back to 6 year highs on the back of tights supply and solid demand.
  • The NMI has failed to match the ESTLI’s rally, and it has been up to 25% higher in US terms.
  • There is some upside for mutton markets if supply tightens further over the coming months, with 450¢ the initial target.

2017-01-26 Mutton Fig 1

2017-01-26 Mutton Fig 2

2017-01-26 Mutton Fig 3

All the talk in sheep and lamb markets in early 2017 has been about lamb prices. However, mutton values have also rallied, and have hit resistance which has been in place for six years. There are some pretty good indications that this resistance could be broken.

Figure 1 shows the rally in the National Mutton Indicator (NMI) has been small relative to the Eastern States Trade Lamb (ESTLI).  The ESTLI has gained 21% since before Christmas, while the NMI has risen just 12%.  We have previously surmised that the lamb price rise might have something to do with a demand spike due to Australia Day, and mutton is less likely to be impacted by this.

While the NMI has matched the ESTLI’s gained, it also didn’t match the falls seen in spring.  The NMI is now back close to its highest levels since 2011.

Despite the strong prices for mutton, there still appears to be strong demand.  Over 90% of our mutton is exported, with figure 2 showing that our largest market, the Middle East, have maintained their imports despite the higher prices over the last year.  The Middle East seems to outcompete Asian markets, which had larger imports when supply was more abundant, and prices cheaper.  Asian demand does remain stronger than pre-2013 levels however.

For those importing mutton, the market has been much more expensive in the past.  Figure 3 shows the NMI in US¢/kg cwt, and while the current price is as high as it’s been in 5 years, it remain 25% below the highs of early 2011.  This suggests that there might be some room for mutton prices to move higher in US terms if supply tightens further, from the already relatively tight levels.

What does this mean?

When mutton values were within 150¢ of lamb prices in December, upside looked a bit limited.  However, the rise in the ESTLI, if it is sustained, should give mutton values further impetus if supply tightens, which it usually does in autumn.  There is further impetus for tightening supply, with strong wool prices likely to encourage holding Merinos, and strong lambs prices limiting the supply of cast for age ewes.

This initial target for rising mutton prices is 450¢/kg cwt, with a new record of 500¢ not out of the question.

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