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Thursday, October 23, 2014

Sell trade, buy light and hold mutton – spread insights for lamb markets

By Augusto Semmelroth  |  Source: MLA's NLRS, ACU

Key points

  • Tracking the spread between different lamb categories to the ESTLI help us to assess potential trade opportunities.
  • Trade and heavy lambs are priced at very similar levels across the east coast while light lambs are comparably cheap in SA.
  • Mutton markets look undervalued in comparison to the ESTLI in southern markets. A rainfall break could see prices recovering rapidly by December.
  • Despite being fairly priced against the ESTLI, light and restocker lambs look like a good buy to be turned off in early 2015.  

2014-10-23 Lamb Spread Article FIG 1

2014-10-23 Lamb Spread Article FIG 2

2014-10-23 Lamb Spread Article FIG 3

Most lamb categories yarded on the east coast tend to follow the Eastern States Trade Lamb Indicator (ESTLI) relatively closely. Yet, the price of specific lamb types fluctuates against the benchmark because of the fairly widespread distribution of lamb production and variable seasonal conditions at the regional level.. This article takes a closer look at the current prices differentials to the ESTLI to assess potential buy/sell opportunities.

Figure 1 shows the current and spread range of various lamb categories to the ESTLI across eastern states markets for last week. As general rule, the price of trade lambs in NSW, VIC and SA fluctuates within a very narrow range to the ESTLI this time of the year, while in Tasmania prices tend to move more widely. As you move away from trade lambs, the range for which prices deviate from the ESTLI also increases reflecting particular differences in supply, quality and, to an extent, demand patterns.

At this stage, the spread between the ESTLI and NSW/VIC lambs look around average levels for this time of the year. For light lambs, this means a 36¢ and 23¢ discount to the ESTLI for NSW and VIC, respectively. Trade and heavy lambs are pretty much at parity with the benchmark, which is around the average spread level for mid to late October. This means, they are neither cheap nor expensive in relative terms.

As opposed to NSW and Victoria, SA light lambs are looking comparatively undervalued in relation to the ESTLI. As of last Friday, light lambs were quoted at 415¢/kg cwt, or a 47¢ discount to the benchmark. This is well below the average discount of 19¢ and outside the 70% range seen over the last 10 years for the third week of October. Trade and heavy lambs in SA look adequately priced against the ESTLI.

Despite the strong slaughter levels since July, Tasmanian lamb prices have managed to remain at a solid premium to the ESTLI. Last week, light, trade and heavy lambs were still quoted at a 30-40¢ premium to the benchmark and at the top of the 70% range. Tasmanian markets should remain at a premium to the ESTLI for another month or so before supply really kicks in to bring prices back to eastern states levels.

Moving away from lamb markets, figure 2 shows the spread between the state mutton indicators and the ESTLI. Aside from NSW, mutton prices are substantially discounted to the benchmark.   

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What does this mean?

Tracking the spread of individual lamb categories to the ESTLI is a powerful tool to assess buying and selling opportunities at specific points in time.

For producers with trade and heavy lambs ready to sell in NSW, VIC and SA, prices are still quite firm. Unless you are able to hold them for another 6-8 weeks to avoid peak of supply (particularly in the south), there seem to be little merit in waiting to sell them.

On the flipside, light lambs look like a good buy despite being fairly priced against the ESTLI. In most parts of the east coast, light or restocker lambs can still be purchased for $80/head or less (roughly 500¢/kg cwt). For those with suitable carrying capacity, feeding them until trade or heavy lamb specs to be sold in January/February looks sound as the price prospects for early 2015 are quite positive.

Mutton markets in the south are clearly under-priced in comparison to lambs as a result of the poor spring rainfall to date. This means that they should have the greatest upside potential when it rains, and are possibly a good hold until December. 

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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