By Augusto Semmelroth | Source: MLA, ABS, ACU
Two months have passed since we released our forecast for the Eastern States Trade Lamb Indicator (ESTLI). Over this period, the indicator has eased as projected but still found strong support at around 450¢/kg cwt despite the deterioration in seasonal conditions and high slaughter rates. Now it’s time for us to revise those numbers, assess slaughter trends and put forward our view for prices going forward.
Although the 2014/15 lamb crop is expected to be up to 5% lower than in 2013/14, slaughter numbers continue to track well above year-ago levels. The latest official stats released by ABS for September (ABS data is lagged by six weeks) showed total lamb slaughter surpassing the 2 million head mark. That puts September’s lamb turnoff 12% higher year-on-year and close to 20% above the 5-year average for the month.
Using the National Livestock Reporting Service (NLRS) weekly slaughter stats for the east coast as a gauge, we estimate that national slaughter numbers remained roughly 5-6% above-year ago levels in October and November. As such, we should see lamb killings close to 2.2 million in October and around 2.1 million head in November.
For December, we expect slaughter levels to continue easing from current levels. This trend can be already noticed in the recent NLRS weekly slaughter figures, which points to a decrease in numbers over the last month or so. Despite the positive rainfall outlook for this week for NSW and eastern Victoria, the western districts of Victoria and SA will miss out on those falls. That, coupled with improving prices, could to see sufficient numbers continue to flow to the yards.
If this scenario unfolds, and that is quite plausible, we will be set to kill around 11.5 million head in the first half of season 2014/15 leaving only 10 million head (or less) to be killed between January and June 2015. Over the corresponding period last year, 10.7 million head were slaughtered. This means that numbers could fall up to 7-8% below year-ago levels in the first half of 2015.
As far as prices are concerned, lamb markets have already bottomed in October and downside risk for the following months is virtually non-existent. As for upside potential going forward, figure 2 shows the historical price movements from October onwards, while figure 3 uses those values as reference to forecast a potential price range for the ESTLI.
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This bullish outlook for lamb markets in early 2015 may look a bit too optimistic, but there are a number of reasons to support this view.
On the supply front, it has become evident that lamb turnoff has been brought forward this year and, as mentioned above, this could lead to a reduction of up to 7-8% below year-ago levels in 2015. On the demand front, the record pace of exports suggests overseas demand for lamb meat is remarkably strong and is unlikely to wane in the near future, particularly as competing meats such as beef remain at record high levels. In addition, the lower A$ and potential for further depreciation will continue to support prices in 2015.
Depending on the extent and intensity of the rains expected for this week, we could actually see turnoff contract considerably before Christmas, particularly in NSW. Under that scenario, we could see an upside potential for the ESTLI of up to 515-535¢/kg cwt by December. Southern markets would probably be slightly below those levels.
That said, the best recovery prospects should come to fruition after January and particularly in autumn. In a scenario of average to above average autumn rainfall, trade lamb prices are likely to surpass 650¢/kg cwt. It’s also hard to see lamb prices below 550¢/kg cwt next autumn unless we get very dry conditions by then.
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