By Angus Brown | Source: NLRS, RBA
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.
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.
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