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Friday, September 12, 2014

What will a milder spring supply flush mean for lamb markets?

By Augusto Semmelroth  |  Source: ABS, DAFF, MLA

Key points

  • ABS lamb slaughter stats for July confirm expected early appearance of new season lambs; killings move ahead of corresponding period in 2013.
  • Supply expected to fall at least 5% below 2013 levels in spring/summer.
  • Downside risk for ESTLI this spring seems limited to 420-425¢/kg cwt, while a more substantial price recovery should only unfold after December.
  • As opposed to this year, the ESTLI should be able to move above the 600¢/kg cwt in autumn/winter next year and consolidate gains. 


2014-09-11 Lamb Projections FIG1

2014-09-11 Lamb Projections FIG2

2014-09-11 Lamb Projections FIG3

Following this week’s ‘High August slaughter eating into lamb supply’ article, we now take a closer look at prospective lamb slaughter levels for the rest of 2014. Further, we delve into some price outlooks for trade lambs on the east coast for the next six months. Assuming demand remains strong, and it should, lamb markets should continue to track around 10-15% above year-ago levels until early 2015.

As we mentioned earlier this week, new season lamb yardings have been running ahead of the corresponding period in 2013 since July. This trend has finally started to appear on the official ABS slaughter stats released this Wednesday. According to the Bureau, close to 1.84 million head were killed in July nationally, a 3.5% increase on July 2013 levels.

Using the National Livestock Reporting Service (NLRS) weekly slaughter stats for the east coast as a barometer, we estimate that national slaughter numbers increased roughly 4% month-on-month in August to 1.9 million head. This puts August 2013 figures roughly 11% higher year-on-year, and provides further evidence new season lamb supply has been brought forward this year.

This prompts the question of how many lambs are likely to be killed until the end of 2014 and how this will impact prices in spring/summer. According to Meat & Livestock Australia’s (MLA’s) mid-year projections, lamb slaughter for this year is estimated at 21.2 million head. Considering year-to-August numbers are around 14.5 million head already, slaughter levels would have to fall roughly 12% below year-ago levels for the Sep-Dec period for the 21.2 million head target to be achieved.  

Our view is that this scenario is unlikely. However, a contraction in lamb killing of around 5%, or slightly higher, below 2013 levels seems quite plausible for the remainder of the year. The range of estimates varying from a 5% drop (most likely) to 12% (necessary to reach MLA’s projections) is shown in figure 1.

Although we expect lamb turnoff to fall below the record levels seen in spring 2013, numbers will still increase from current levels as spring supply really kicks in. This will most likely put some pressure on lamb markets until December. On average, the Eastern States Trade Lamb Indicator (ESTLI) drops 10% and 13% from September levels by October and November, respectively, before starting to regain some ground (figure 2).

Last year, prices fell slightly less than the average from September onwards. The real turning point occurred later on in early 2014, with prices recovering up to 27% from September levels by March. 

What does this mean?

Lamb supplies have been running ahead of 2013 levels since July, but we expect that this trend will start to reverse in the months ahead, particularly if seasonal conditions improve. As mentioned before, this does not mean numbers will contract from current levels. More so, it suggests that the spring supply flush won’t be as intense as last year.

Lamb markets should still face some downward pressure in the next couple of months. Yet, there is seemingly limited downside risk for the ESTLI below 420-25¢/kg cwt (monthly average) (figure 3). As for upside, the most substantial recovery is only likely to unfold at the earliest by December, but certainly at the turn of the year.

This year, the ESTLI managed to reach the 600¢/kg cwt mark but struggled to consolidate gains above that. In 2014/15, the odds of that occurring sometime in autumn/winter will be definitely higher.

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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