By Matt Dalgleish | Source: MLA, ACA
The market commentary from last week mentioned the recent resilience of mutton prices despite increasing slaughter levels. This analysis focuses on the seasonal percentage price gain patterns for sheep, lamb and the spread between the two price series in order to give an indication of what to expect as we head toward spring.
Figure 1 highlights the pattern of percentage price gains for the National Mutton Indicator (NMI) so far this season, overlaid with the 2015 pattern, the ten-year average percentage price gain pattern and the 70% range - which indicates where the pattern has fluctuated for 70% of the time since 2001.
Clearly, since early July the pattern for mutton has held onto the percentage price gains achieved so far this season remarkably well. Indeed, as the ten-year pattern demonstrates the normal trend for mutton price gains is to track lower during August toward 20-25%. However, the NMI close last week at 384¢/kg cwt places the percentage price gain since the start of 2016 at 56%, sitting at the top of the 70% range for this time of the year.
Figure 2 displays a similar seasonal percentage price gain chart for the Eastern States Trade Lamb Indicator (ESTLI). Added to this chart is the dry and wet year percentage price gain averages that were the focus of some previous analysis. In April Mecardo published a piece that identified that the 2016 season was tracking very close to the dry-year average pattern, which has held up reasonably well for the year thus far. Our market commentary in late July suggested that since the rains had arrived we may see a switch and suggested that the 2016 pattern may start to follow more closely to the wet-year average pattern. Certainly, up until the selloff that occurred last week in the ESTLI to see it close at 588¢/kg cwt it looked as though lamb prices may have held up a little longer above 600¢, alas the move lower came a few weeks earlier than anticipated.
Turning our attention to the seasonal pattern for the percentage spread between the ESTLI and NMI we can see that the recent resilience in mutton prices, in the face of a falling ESTLI, has seen the spread narrow from 41.2% to 34.7% during the last month – figure 3. Historically, according to the ten-year average pattern, the spread should be in the mid 40% area at this time of year and continue widening to reach a spring peak just below 50%.
Given the normal movement in the percentage spread between the ESTLI and NMI, as identified by the long term average pattern (figure 3), is for a widening of the spread it is hard to see mutton prices remaining resilient for long while the ESTLI continues to trend lower.
Indeed, even if the ESTLI were to find a short term base at current levels the seasonal percentage price gain pattern for mutton this year still indicates that the NMI should be lower at this time of year.
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