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Thursday, December 18, 2014

The perfect storm is brewing for lamb markets

By Angus Brown  |  Source: NLRS, RBA

Key points

  • The ‘perfect storm’ in lamb markets involves tight supply, lower Australian dollar and sheep restocking demand due to good rain.
  • If lamb importers pay similar rates to last autumn, at the lower exchange rate prices could reach 670c, and 800c if prices in US term reach 2011 levels.
  • Australia still consumes 40-50% of lamb produced domestically, which may keep a lid on prices at around the 700c mark.

 

2014-12-18 Sheep Fig 1

2014-12-18 Sheep Fig 2

2014-12-09 EYCI Of 450c - Our Tip  FIG 3

We use the term ‘Perfect Storm’ in a positive way, with a falling Australian dollar, potentially very tight supply, and renewed restocker demand possibly all coming together in the new year to push lamb prices to new all time highs. The only thing that might put a lid on prices under the perfect storm scenario is the domestic consumer.

We have covered the potential for very tight supply in numerous previous articles, and nothing has changed as we move into the end of the year.  High slaughter rates since July is likely to mean lamb supply will be lower than last year over the coming six months, and possibly considerably lower.

The Aussie dollar has fallen from 93US¢ in August to 82US¢ today, and is 7¢ lower than this time last year.  When the last ‘perfect storm’ hit, in autumn 2011 the Aussie dollar was at parity or higher, so it wasn’t quite a perfect storm, but prices hit 650¢ regardless

Figure 1 shows the Eastern States Trade Lamb Indicator (ESTLI), and the ESTLI in USD terms.  Despite the recent rally in lamb prices, in US$ terms the ESTLI has only reached 425¢/kg cwt, which is the middle of the range of the past 3 years and below the levels of 2010 and 2011.

If we take the peak ESTLI in US$ terms from last autumn of 550¢, and apply the current exchange rate, we get an ESTLI of 670¢/kg cwt.  Basically under a supply scenario similar to last year, lamb importers can possibly push the ESTLI to record levels.

If we get a tight supply situation similar to autumn 2011 when the ESTLI in US term reached 670¢, at the current exchange rate this gives a local price of 807¢/kg cwt.  Lamb importers would be paying the same price as in autumn 2011, but local growers would get 150¢ more than at that time. 

Obviously prices heading towards these levels would be enough to see restocking plans put on hold in a dry season, so for prices to reach these levels tight supply and strong demand for restocking sheep would be required to see price head towards and through $7.  In short, widespread autumn rain in NSW, Victoria and SA in the autumn would complete perfect storm. 

What does this mean?

We understand that forecasting lamb prices to reach 800¢/kg cwt seem farcical (figure 2), and it’s likely the fact that the domestic consumers account for  40-50% of lamb produced in Australia (and we know they started to baulk and move to other proteins when lamb prices last got to 650¢), will keep a lid on lamb prices at around 700¢. 

However there are recent precedents for this sort of price rise, as readers of our cattle pages will know, US cattle prices, and our export beef prices to the US (figure 3) have rallied 50-60% over the last two years, and lamb operates in the same red meat market, so you never know.

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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