By Augusto Semmelroth | Source: ABS, ABARES, MLA, ACU
Despite the ongoing strong turnoff levels, mutton markets have performed remarkably well this spring with prices tracking 25-60% above the corresponding period in 2013. After bottoming at 280¢ in late October, the NSW mutton indicator has posted a 19% recovery to reach 334¢/kg cwt last week. With slaughter numbers expected to contract up 20-40% below year-ago levels in the first half of 2015, what is in store for mutton markets?
Figure 1 shows the official east coast sheep slaughter figures until October and an estimate for November based onMLA weekly slaughter stats. Although sheep turnoff this spring was only 5% higher than in 2013, numbers remained roughly 30% above the 5-year average and more than 72% higher than in 2011.
There are a few drivers behind the stubbornly high sheep slaughter levels seen this year. The most obvious one has been the persistent drought conditions in key sheep areas on the east coast. Secondly, the subdued confidence in the wool market coupled with stagnant wool prices has enticed producers to shift to other activities, destock or in extreme cases leave the industry. Lastly, firm mutton prices have added extra fuel to this trend by making the selloff a less burdensome process.
After an impressive price rally in the autumn, the NSW mutton indicator (used as a proxy for eastern states markets) has been able to consolidate most of those gains and see prices moving within a relatively narrow range of 280-390¢/kg cwt (figure 2). During the same period in 2013, prices ranged virtually 100¢ lower between 180¢ and 300¢/kg cwt. This provides strong evidence that demand for sheepmeat is much firmer this year.
Another way to reinforce the view that mutton demand is very robust this year is to compare mutton prices with lambs. Since July, the NSW mutton indicator has tracked 25-38% below the Eastern States Trade Lamb Indicator (ESTLI). In the second half of 2013, discounts ranged from 37% to 55% in spring while the 10-year average discounts are in the order of 40-50% for that period.
In years of flock rebuild such as 2011, mutton markets tend to outperform lambs to see discounts shrinking below 30% once the autumn breaks (figure 3). Given the intense and long lasting sheep turnoff seen over the last two years coupled with the very positive prospects for lamb markets in 2015, the incentives to rebuild the flock will be very strong once seasonal conditions improve.
Mutton markets have performed exceptionally well this year, particularly under the strong supply levels. While the easing A$ has given some support for prices in recent months, the key driving force behind the firm mutton prices has undoubtedly been the robust export demand for red meat. The good news is that this demand trend is unlikely to change in the near future.
After two and a half years of intense breeding stock liquidation, sheep turnoff could fall up to 20-40% below year-ago levels from early 2015 onwards provided rainfall conditions return to average levels. This, of course, will see mutton markets post a strong recovery in the first half of 2015.
Although mutton markets seem relatively well priced in comparison to lambs at the moment, we expect discounts to the ESTLI to contract even further in early 2015 when turnoff comes to a halt. In terms of upside potential for early autumn, a conservative target is 380-400¢/kg cwt with the possibility of prices surpassing 450¢/kg cwt in winter if seasonal conditions allow.
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