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Thursday, January 30, 2014

WA lamb price outlook – What’s next?

By Augusto Semmelroth  |  Source: MLA, ABS, ACU

Key points

  • Lamb slaughter 62% higher year-on-year in spring 2013.
  • WATLI has rallied 139¢, or 41%, to 480¢/kg cwt in the week ending 17 January; now back at 453¢/kg cwt.
  • Trade lamb prices in WA are expected to rebound another 5-10% by April and 15-20% by July.  


2014-01-30 Lamb Article FIG 1

2014-01-30 Lamb Article FIG 2

2014-01-30 Lamb Article FIG 3

 

The Western Australian Trade Lamb Indicator (WATLI) has delivered a stellar performance since late November 2013. After rebounding 41% from October lows, the indicator retracted 5.5% last week to 453¢/kg cwt but is still 43% higher year-on-year. As with the east coast, prices are expected to continue moving higher in the next few months as supplies dwindle.

Figure 1 shows the year to November lamb slaughter rates for WA along with 2012 numbers and the 5-year average. According to ABS figures, lamb killings amounted to 2.24 million head between January and November 2013, a 48% increase on the corresponding period in 2012 and 11% above the 5-year average.

During spring, lamb throughput was also significantly higher than in 2012. In October and November only, more than 525,000 head were killed in WA, a 62% increase year-on-year. In spite of that, trade lamb prices were still 100¢, or 37%, above year-ago levels averaging 382¢/kg cwt in the last quarter of 2013. This suggests much firmer buyer demand.

From the lows of 341¢/kg cwt in mid-October, the WATLI has posted a very solid recovery, rallying 139¢, or 41%, to 480¢/kg cwt in the week ending on 17 January. Last week, the indicator pulled back to 453¢/kg cwt as a result of a supply flush in saleyards.

At its peak, the WATLI moved to a 79¢, or 20%, premium to the Eastern States Trade Lamb Indicator (ESTLI) (figure 2). Last week, this spread moved back to 31¢/kg cwt as the two indicators moved in opposite directions. However, the price differential remains well above the average discount of 20¢/kg cwt seen over the last five years at this time of the year.

As shown in figure 3, the WATLI tends to move sideways between January and April before showing a strong upside in autumn/winter on the back of tightening supplies. From January levels prices move 20% on average by July, with scope to jump up to 40% higher depending on how tight supply may get.

The WATLI is unlikely to repeat the performance of 2013 this year, at least in percentage terms, because prices have started the year from a much higher base (figure 1). However, a recovery in the order of 5-10% by April and 15-20% by July is still quite plausible. That would put the indicator within a 475-500¢/kg cwt range in April and 520-545¢/kg cwt in July. 

What does this mean?

As a general rule, trade lambs in WA tend to follow major price trends from eastern markets. While slightly more volatile, WA markets move within well-known boundaries in relation to their eastern counterparts, especially in years of average seasonal conditions. 

In the next two months, the WATLI is likely to move sideways, or perhaps slightly higher, as supply takes longer than in the east to start shrinking. As a result, the spread to the ESTLI should move back to average levels of -20¢ to -40¢/kg cwt as the eastern indicator takes the lead first.  

Watching closely to what happens in the east can give us some clear insights as to the potential price upside for WA prices. On that note, the ESTLI rallied 43¢, or 10%, to 452¢/kg cwt this week. That’s a very positive signal for WA markets in the months to come.  

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