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Thursday, November 05, 2015

Weaker lamb exports in October – a supply and demand tale

By Augusto Semmelroth  |  Source: DAFF, MLA

Key points

  • Lamb exports tracking well below 2014 levels this spring despite seasonal lift in volumes in October.
  • Season-to-date shipments remain 10% below 2014 levels and have been impacted by lower supplies and a major slowdown in Chinese demand.
  • The Middle East and the US remain the best performing export markets while upcoming countries such as Papua New Guinea are helping to fill the Chinese void.
  • The softening A$ has helped support export competitiveness and sustain historically strong lamb prices this spring. 

2015-11-05 Lamb Exports FIG 1

2015-11-05 Lamb Exports FIG 2

2015-11-05 Lamb Exports FIG 3

Despite the steady increase in lamb exports since July, shipments continue to track well below the corresponding period last year. Between July and October close to 75,300 tonnes swt of lamb meat made their way overseas compared to 83,900 tonnes swt in 2014, a 10% contraction in volumes. The slowdown in lamb turnoff this spring explains part of this - but not all.

While the first half of 2015 was marked by record lamb exports, surpassing those of 2014, the second half of this year has seen lamb meat shipments trail well behind the corresponding period in 2014. This was no different in October. Despite the 14% month-on-month volume increase, the total tally remains 14% lower year-on-year at 21,621 tonnes swt.

Once thing is clear: lamb slaughter levels have been trending well below 2014 levels since July. Figure 1 shows Meat and Livestock Australia (MLA) weekly slaughter rates for this 2015, 2014 and the five-year average. While lamb turnoff remains 7.5% above the average since July, numbers are still falling 5% short of the values seen in 2014.

Yet, from a supply standpoint, it’s difficult to justify a 5% reduction in lamb slaughter would lead to a 10% contraction in exports season-to-date (July to October). In other words, it’s seems clear that overall export demand is softer this year and more lamb meat has been absorbed by the domestic market. In theory, the softer export demand trend seems pertinent but it would be inaccurate to attribute a one-size-fits-all demand pattern to all overseas markets.

Although exports to all key markets have tracked below 2014 levels since July, some are clearly doing better than others. If we were to put together a list classifying markets progressively from over- to underperformers, it would look like this. The Middle East is firmly in top position with season-to-date exports only 1.5% below 2014 levels, followed by the US with volumes down 4.8%, then Europe with an 18.4% decline and Asia being the obvious laggard with a whopping 29.7% fall in shipments.

The main reason for the slowdown exports to Asia comes from the challenging trade conditions with China since May on the back of increased domestic production and high inventory levels. Figure 3 helps to put into perspective the rapid deterioration in trade conditions with China by showing the year-on-year change in lamb exports to the country. Since May, shipments have been tracking 35-45% below year-ago levels.

What does this mean?

The slower pace of lamb turnoff is clearly impacting exports this spring, but the short-term slowdown in Chinese demand is also to blame. China has established itself as a major importer of lamb meat from Australia and New Zealand in the last five years so the softer demand has been a major headwind for lamb markets this year.

That said, this has opened up opportunities to intensify trade with other key customers, in particular the Middle East and the US. This is also helping to diversify the pool of overseas markets and the appearance of upcoming markets such as Papua New Guinea, which imported almost 2,000 tonnes swt of lamb in October.

Before we wrap up, it’s important that we acknowledge the pivotal role of a lower A$ in buffering the negative impact of a slowdown in Chinese demand. To a large extent, the softer A$ helped us to maintain our competitive advantage in key overseas markets. It has been crucial in sustaining historically strong lamb prices this spring.

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