By Matt Dalgleish | Source: ABS, MLA, DAWR, Mecardo
Live sheep exports remain in the headlines and some market commentators have suggested that banning the trade for sheep wouldn’t have a significant impact on local markets. While this may be true for the South Eastern states it is an entirely different story out in the West.
As outlined in our live export piece last week, the Western Australian sheep industry dominates the live export trade out of Australia, averaging nearly 84% of the total annual flows out of the country each season for the last five years. However, what is the market share of the live sheep trade in WA compared to their local lamb and sheep slaughter volumes?
Figure 1 outlines the proportion of annual volumes of WA slaughter for lamb and sheep compared to the annual level of live export sheep exiting WA ports since 2009 on a per head basis. Clearly, there has been a growth in lamb slaughter proportion over the period at the expense of the live sheep trade.
In 2009, lamb slaughter comprised around 30% of the volume, sheep slaughter was at around 25% and live export at 45%. In contrast, the 2017 figures show lamb slaughter at 45%, sheep slaughter remaining steady at 25% and live export reducing to 30% - although still a significant proportion of the WA offtake mix.
Analysis of price returns* data for Live Export Wethers, WA Trade Lamb and WA mutton shows that these markets display a similar pattern of movement over time. Indeed, the smoothed returns series for WA Trade Lamb to Live Export prices shows a strong level of price interdependence, both in terms of volatility and direction – Figure 2. This seems rational, export wethers in WA are predominantly 1 year old merino wethers with similar specifications to Trade Lambs. WA Mutton displays a slightly degree of variability, but the broad trend in returns is consistent with pattern set by both Live Export Wethers and WA Trade Lamb.
Quarterly price returns between Live Export Wethers and WA Trade Lamb show a moderately strong correlation, with an R2 of 0.5363, which signifies that the market price moves are interdependent -Figure 3. The added variability in WA Mutton price returns has the effect of reducing the correlation score between WA Mutton and Live Export Wethers on the quarterly price returns such that the R2 is slightly lower, at 0.4673 – Table 1.
* price returns refer to changes in price from one period to the next.
Annually the live sheep export trade comprises of around 30% of the WA sheep and lamb offtake, which is a significant proportion of the WA market. Given the price interdependence shown between WA Trade Lamb, WA Mutton and Live Export Wethers, the removal of the live export trade would likely lead to price pressures across local WA markets as the increased supply of stock no longer being exported live offshore would need to find a home.
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