By Matt Dalgleish | Source: MLA, ACA
The Eastern States Trade Lamb Indicator (ESTLI) has been demonstrating lacklustre percentage gains since mid-February when compared to the normal seasonal pattern. This can be attributed to the effect of dry conditions causing supply of lambs to persist, particularly in NSW, delaying the seasonal lift in prices as supply tightens. This article focuses on the pattern of price gains during dry years and what this means for the current season.
Figure 1 highlights the weekly percentage gains in the ESTLI since the January opening price of 517¢/kg cwt and it demonstrates how poorly the season has performed so far after a promising start to the year when compared to the long term seasonal average pattern. The light green band represents the “normal” variation in the series and shows where the ESTLI has fluctuated for 70% of the time since 2006.
An analysis of percentage gains for each year since 2001 identified seven years where the pattern of gains over the first four months of the year was very similar to the current season, with the 2006 year being a particularly close match. Figure 2 outlines the seven similar years, each of which correspond to seasons whereby the south-eastern states experienced unusually dry conditions.
Rather than trying to track the pattern of each individual year the main focus of figure 2 should be on the broad similarity in patterns during a dry year. The impact of persistent dry across the majority of the lamb and sheep regions during these years was to delay or sometimes totally circumvent the normal seasonal tightening in supply and the corresponding price increase.
Figure 3 re-calculates the image from figure 1 but uses data only from years considered to be unusually dry. Interestingly, the pattern set by the 2016 season is remarkably similar to the dry year average pattern, particularly when compared to the ten-year average pattern overlaid from figure 1. In addition, as highlighted by sharp increase during May to July in the dry year average, if/when the seasonal tightening of supply occurs during a dry year it can correspond to reasonably fast weekly percentage gains in the ESTLI. Furthermore, the widening of the “normal” range (green band) during the winter peak in a dry year points to higher potential volatility in the ESTLI movements when compared to fluctuations during the first half of the year.
Despite a modest first quarter for the ESTLI the dry year seasonality suggests that there is still a good chance of seeing the indicator peak higher than in 2015. Seasonality based forecasts for the ESTLI winter peak released in late March indicated a level of 590¢/kg for a weak season, 610¢/kg for an average season and 635¢/kg for a strong season.
Click here to access the seasonality analysis from March.
Seasonality analysis using data only from dry years suggests that the winter peak during an average year could be a little higher at 620¢/kg cwt but for this to eventuate supply would need to start to tighten in the next week or two. It would be prudent to keep a close eye on east coast lamb supply in the coming month as a prolonged period of high supply could see the ESTLI stagnate with percentage weekly gains drifting along the bottom of the “normal” seasonal range.
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