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Tuesday, February 23, 2016

Trading lambs, the good, the bad and the ok

By Angus Brown  |  Source: NLRS

Key points

  • Restocker lambs prices are currently strong relative to the ESTLI.
  • Lamb trading margins are currently good if feed is cheap, but those feeding grain are likely to be expecting a price rise.
  • There is a good chance of prices rallying over the coming month, and making lamb trading profitable.

2016-02-23 Lamb Good Bad Ok Fig1

2016-02-23 Lamb Good Bad Ok Fig2

2016-02-23 Lamb Good Bad Ok Fig3

The last few years have seen a structural change in lamb markets whereby restocker and feeder lamb prices have shifted higher relative to trade lambs values. This is no different in the current market, with lighter store lambs being actively sought after. Here we take a look at the potential margins in a lamb trade, and it turns out there is no ugly, just good, bad and ok.

Figure 1 shows how restocker lamb prices have shifted higher relative to trade lambs.  From 2001-2009 restocker lambs in NSW ran at about a 50¢ discount to the Eastern States Trade Lamb Indicator (ESTLI), which has shifted to average or around parity since 2010.  Currently the NSW restocker indicator is sitting at a 38¢ premium to the ESTLI, which suggests those buying store lambs are confident the market will remain strong.

Restocker lambs last week sold for an average of $79/head according to the NLRS, but this was dragged down by WA, where restockers paid only $57.  The east coast average was closer to $82/head, and as such we can use this as a starting point in calculating margins.

On the sell side, lamb prices rarely fall at this time of year, with figure 2 showing the expected range of the ESTLI based on historical seasonality.  There is downside in the market, but historically the ESTLI hasn’t fallen more than 5% from the end of February value, which gives a bottom of 500¢/kg cwt. 

On the upside there is significant potential if supply tightens.  We expect the price to return to 550¢ over the coming 4-6 weeks, while 600¢/kg cwt is not the best case scenario, as it could go higher, but is a reasonable expectation.

Figure 3 shows a margin calculation based on buying a 33kg lamb for $82 and putting 12kgs on and selling at three different price scenarios.  The gross margin looks good in all cases, but as with any livestock trade, it’s the cost of feed which will drive profitability.  Feeding lambs a full ration to gain 12kgs is estimated to cost $22/head, but this can vary widely, but this gives an idea of possible lamb trading margins.

What does this mean?

The lamb feeding industry has matured in recent years, with more participants pushing the price of restockers higher, and squeezing margins.  Obviously those with surplus green feed are also helping prop up restocker lamb values in the current market, as the margins available with cheap feed are good.

A solid price rise will see good or very good margins for lambs purchased in the current market, while feeders are likely to lose some money if strong supplies come forward pushing the market lower.

It would seem that many restockers and feeders are expecting a price rise in the finished market, given the solid prices currently being seen for store lambs

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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