By Augusto Semmelroth | Source: ABS, MLA, Stats NZ, Beef + Lamb NZ, ACU
The Eastern States Trade Lamb Indicator (ESTLI) has tracked sideways within a relatively narrow range since March. Although 550¢ has proved to be a solid support level for the ESTLI, the indicator has found solid resistance around 600¢/kg cwt. With the end of the 2013/14 season around the corner, will the ESTLI be able to move another leg higher and breach the $6 mark?
Despite the reported robust export demand, lamb markets have stalled in the last three months as large numbers of lambs continue to be slaughtered domestically and in New Zealand. Yet, that is about to change in the next couple to months. This will give the ESTLI its best chance to move above 600¢/kg cwt this season.
Figure 1 shows the official lamb slaughter for Australia and New Zealand (NZ) until March as well as estimates for the April-July period. The seasonal nature of supply is quite evident when looking at the 5-year average; this is largely the result of a major contraction in NZ’s lamb slaughter between April and August.
According to the latest mid-season update for 2013/14 from Beef + Lamb NZ, export lamb slaughter is expected to fall 5.3% year-on-year to 19.8 million head in the 2013/14 season (October-September). By March, 12.6 million head had already being slaughtered leaving just over 7 million head left to be killed between April and September. If its estimates are correct, this will see NZ slaughter numbers falling to less than 6.5% than year ago levels in the next six months.
On a similar note, domestic lamb slaughter between July 2013 and March 2014 (ABS figures) reached 16.5 million head. Based on MLA weekly slaughter figures we estimate that another 3.5 million head were killed in April and May, to total approximately 20 million head for the July-to-May period. That leaves only 900,000 head left to be slaughtered in June if the ABS official slaughter estimates of 20.9 million are correct.
Although ABS is likely to have underestimated the lamb crop by at least 0.5 million head, or 2.5%, domestic lamb throughput will have to retreat in the next couple of months. Monthly slaughter is likely to move back to around the 1.4 million head mark under average seasonal conditions. That would represent a 15-25% reduction year-on-year in lamb killings.
That, coupled with the anticipated reduction in NZ supply for the coming months, should see June and July combined (Aus+NZ) slaughter numbers around 15-20% lower year-on-year (figure 2).
While supply on its own does not provide the full picture of a market, lamb prices do have a relatively well defined seasonal pattern that is highly dependent on supply. Over the last 13 years, the ESTLI has risen, on average, 5% and 11% from May levels by June and July, respectively.
All other things being equal (i.e. demand), the expected supply squeeze over the next two months will give lamb markets some extra room to surpass the 600¢/kg mark before finding more resistance at around 625-30¢/kg cwt.
Heavier and well-conditioned lambs are best placed for a potential price recovery, irrespective of how winter rainfall conditions unfold. Lighter and poor-conditioned lines, on the other hand, could see a potential price upside eroded by below average seasonal conditions as supply would continue to be brought forward.
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