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Wednesday, March 16, 2016

Rising oil and iron ore not great for lamb

By Angus Brown  |  Source: MLA, RBA

Key points

  • The stronger AUD has offset falls in lamb prices in US dollar terms, with lamb still relatively cheap in export markets
  • The Aussie dollar has also strengthened relative to the NZ dollar, making NZ lamb cheaper.
  • There is still scope for Australian lamb prices to rise, but the rising AUD will add some resistance.

2016-03-16 Nz Free Kick Fig 1

2016-03-16 Nz Free Kick Fig 2

2016-03-16 Nz Free Kick Fig 3

 

There has been plenty of comment surrounding the recent rise in the Aussie dollar, and unfortunately for local lamb growers, it hasn’t been due to a falling US dollar, but rather strength in the Aussie. Our main sheepmeat competitor, NZ hasn’t been afflicted by the same currency rally, which might see some pressure come on lamb demand.

The Aussie dollar has rallied sharply in the last 10 days, gaining 5.5% since the middle of last week, and 8.5% since the middle of January to sit at 74.3US¢.  At least the AUD has come off the weekend high of 75.5¢, which was an 8 month high.

The Eastern States Trade Lamb Indicator (ESTLI) has been falling in recent weeks under heavy supply, and as such the price in USD has remained relatively steady (figure 1).  Australian lamb is still cheap in export markets relative to last year, and especially the five year average, which is good news for lamb producer looking for a price rise.

Lamb markets are not as subject to exchange rates as cattle, with a smaller proportion of lamb exported, and few competitors in international markets.  Our main competitor in lamb markets, New Zealand, is likely to benefit from the recent rally in the AUD, as New Zealand’s currency hasn’t rallied in the same fashion.

Figure 2 shows the AUD/NZD exchange rate, which show the appreciation of the AUD over the past fortnight, gaining 4% since the start of the month.  The AUD is now close to a two year high relative to the NZ currency which hasn’t rallied as its market is basically driven by milk prices.

A stronger AUD/NZD exchange rate means NZ lamb will become cheaper relative to Australian lamb, and figure 3 shows just how much cheaper NZ lamb is in Aussie dollar terms.

New Zealand lamb prices generally fall in late summer and autumn as supply ramps up, and in our terms NZ lamb is now at its cheapest level in 2.5 years at 427¢/kg cwt.  

What does this mean?

The good news for lamb producers is that the ESTLI has been at a 160¢ premium to NZ lambs as recently as last June, which means there is around 68¢ upside from the current premium of 93¢.  The bad news is that this would still only take the ESTLI back to 575¢/kg cwt, and that this only happened under very tight supplies in the winter.

In the short term the stronger AUD, and cheaper NZ lambs in our terms, is likely to limit any rally in the ESTLI if, and when, supply finally tightens and gives the market some upside.

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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