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Thursday, December 17, 2015

What will wet season rain do to the sheep market?

By Angus Brown  |  Source: MLA's NLRS, ABS, ABARES

Key points

  • The flock has shrunk again in recent years, with Queensland sheep numbers falling by 45%.
  • An average wet season in Queensland would see a strong swing towards flock rebuilding.
  • Mutton prices could go back to a 100-150¢ discount to the ESTLI, which adds up to 200¢ upside for NSW and Queensland mutton prices.

2015-12-17 QLD Sheep FIG 1

2015-12-17 QLD Sheep FIG 2

2015-12-17 QLD Sheep FIG 3

We recently received a request to look at the where sheep might come from to restock Queensland if and when it finally rains. While Queensland is now a small player in the Australian sheep market, the dramatic drawdown of the flock over the last three years means any push to get sheep numbers back to 2009 levels will see tightening supply in lamb markets, and strong demand in breeder markets.

It’s no secret that the Australian sheep flock has been on the decline over the last 30 years (figure 1), but since 2010 the flock has largely steadied in the 68-74 million head range.  MLA expects the sheep flock to finish 2015 at 69.8 million head, which is 3.9% below 2014 and just 700,000 head above the 100-year low set in 2010.

While MLA doesn’t give a state by state breakdown of the sheep flock, the Australian Bureau of Statistics (ABS) publish state numbers each year, and the last five years make for interesting analysis.

From the end of 2009 to the end of 2014, the ABS estimates that the national flock has been largely steady, but this masked some interesting changes in individual states. 

Strong lamb prices have seen major sheep states of NSW, Victoria and South Australia record increases of 4, 2 and 10% respectively over the five year period.  However, this has been offset by fall in WA (8%) and Queensland, where the sheep flock has shrunk by 45%, or 1.95 million head.

The pace of the Queensland flock decline accelerated with the drought since 2013. Figure 2 shows that Queensland has become our smallest sheep producing state for the first time on record, with the Tasmanian flock increasing on the back of a switch to prime lamb production.

If Queensland receives somewhere near normal wet season rains, we can expect a restocking effort to get underway. However, numbers have to nearly double to get back to 2009 levels. This would take at least five years of rebuilding, and importing of sheep from NSW and South Australia.

What does this mean?

MLA is only forecasting the flock to increase by 200,000 head in 2016. However, we might expect a good season to see the flock grow by 1-2 million head nationally, and maybe 500,000 head in Queensland.  The precedent from recent times was set in 2011, when the national flock grew by 5 million head, but this took an exceptional season all up the east coast.

With much of any potential flock rebuild to be focussed on northern sheep areas, we can expect prices of mutton and breeding stock NSW and Queensland to move to a premium to southern states. The 2011 and 2012 years give a good guide to where mutton prices might sit relative to lamb values.  Figure 3 shows NSW mutton at a 100-150¢ discount to the ESTLI, which is where we can expect to see it again under a flock rebuild. 

This adds to 50-100¢ upside for mutton if the ESTLI remains steady, and up to 200¢ if the ESTLI rallies to 600¢ in the first half of 2016.

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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