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Thursday, July 09, 2015

Mutton slaughter waning, but so is demand

By Angus Brown  |  Source: MLA's NLRS, ABS

Key points

  • Mutton slaughter well down on last year with May and June slaughter falling below the five year average.
  • Mutton prices stronger because of tighter supply from January to April, but have failed to rise with recent supply declines.
  • Weaker demand from our biggest export market in China appears to be limiting mutton upside.


2015-07-09 Mutton Projection FIG1

2015-07-09 Mutton Projection FIG2

2015-07-09 Mutton Projection FIG3

With sheep slaughter waning and growers trending towards a flock rebuild, we would expect mutton prices to rally in a hurry. While mutton prices are stronger, they are relatively weak compared to lambs and cattle. So, is there potential for further upside?

Better rainfall, combined with two years of strong sheep slaughter, has seen the number of sheep killed so far in 2015 fall 22% below last year, while May and June saw slaughter estimates track 7% below the five year average (figure 1).  While sheep slaughter has been weak, it has remained well above the very low levels of 2011 when good seasons saw sheep slaughter fall to record lows.

Mutton prices have risen marginally in recent times (figure 2), but have ‘only’ gained 14% this year despite slaughter falling by more than half from the February peak.  The five-year average January to July price rise is 30%, on a weaker slaughter decline.

If we look at the mutton price relative to the Eastern States Trade Lamb Indicator (ESTLI), the NSW mutton indicator is currently sitting at a 34% discount. This is basically the same as last year and very close to the five year average (figure 3).  The mutton discount has, however, spent much of 2015 so far at strong levels similar to those of 2010-11, and well above average and last year’s levels.

Tighter supply and strong prices, both in relative and absolute terms, fit well together for the first four months of 2015.  The current market, however, presents somewhat of a conundrum, with lower supply and similar prices suggesting demand is weaker.

There have been reports of weaker mutton and lamb demand being caused by better than expected sheepmeat production in China, meaning it has to import less.  China is our biggest sheepmeat export market and the data confirms weaker demand. Mutton exports to China for the year to date are down 36% on last year.  For May and June, mutton exports to China have been down 55%.  

What does this mean?

Wool producers are used to being told that China is the reason for price movements. It appears that this explanation has expanded, at least for the time being, to take in mutton prices as well.  How long weaker demand out of China for mutton lasts is anyone’s guess, but exports generally ramp up in the second half of the year as supply improves, and Chinese domestic supply wanes.

A reasonable spring should see mutton prices remain relatively strong on tight supply. However, the concern would be an increase in supply due to a dry spring coinciding with weaker Chinese demand. This could see mutton values fall back under 300¢/kg cwt.

A return of strong Chinese demand, combined with a flock rebuilding effort, would be likely to see mutton values gain a further 10-15%.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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