By Angus Brown | Source: MLA's NLRS, ABS
Regular readers will be aware of our regular reporting on the unusual strength of lamb prices in August. Quite simply, the market has defied gravity and maintained its strong level despite growing supply. So what is going on? Has demand improved and, if so, what is driving it?
Figure 1 shows a 23% higher average Eastern States Trade Lamb Indicator (ESTLI) in August 2015 compared to year ago levels, even though lamb supply is just 2% lower. Also interesting is the fact that lamb slaughter in August was 11% higher than July, and 7% higher than June, yet the price remained at the same level (figure 2).
So what does this mean?
It looks like demand increased in July, as the extra lambs were soaked up at the same price. This suggests processors are still keen to source stock, and can make money at the current prices. The question that remains is: what is driving this increased demand for lamb?
Firstly, we may be seeing the benefits of the lower Australian dollar starting to flow through to lamb producers. Figure 3 shows the ESTLI in US dollar terms. With the local currency falling 23.5% over the last year, so far in 2015 lamb importers have been enjoying lamb prices that have been actually 13% lower than last year.
Only in the last month has the ESTLI in US terms reached the level of 2014. This means that lamb values in international markets are not really expensive, except when compared with the lows of spring 2014, and autumn 2015. And even then, the lows are only 6% away.
The domestic market also looks to be impacting demand, as recent slaughter statistics indicate that more lamb is being consumed locally rather than being exported. While it’s difficult to measure, we expect that rising beef prices at retail level are seeing an increase in lamb demand, because lamb prices haven’t experienced the same extraordinary rise in values in saleyards or at retail level. As such, there is likely to have been substituting of demand between the red meats.
At some stage over the coming months, lamb supply will overcome slaughter capacity and prices will drift lower. However, many growers in NSW are likely to have options other than to just sell, so significant price declines may be limited. This will spread supply and remove some of the volatility, but we’ll find out in the New Year if demand can push lamb prices consistently beyond the 600¢/kg cwt level.
If the ESTLI follows the seasonal trend in US terms, the low will be at a very strong US554¢/kg cwt. And while we don’t think this support level will hold, it’s hard to see lamb prices below 500¢ without a very large supply surge.
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