By Augusto Semmelroth | Source: ABS, ABARES, MLA, ACU
This article aims to build on last week’s analysis into the current and future state of lamb markets. The main idea this time is to further investigate supply and price trends, and determine the potential upside for lamb prices over the next four months. The exact timing will be pegged to a widespread autumn break. Yet, we still think trade lambs will be worth +650¢/kg cwt by June-July.
Although we have shown this chart (figure 1) a couple of times before, it’s worth having a look at it again. Lamb slaughter in March continues to track above 2014 levels (based on NLRS-reported slaughter stats). As such, if we take ABARES forecasts as a reference, numbers should continue flowing at around 2014 levels until June. On the other hand, if we use MLA’s estimates, supply would have to fall 20% below year-ago levels between April and June.
Another interesting way to look at the prospective supply levels for the coming months is to look at it as a proportion of the annual throughput. Figure 2 shows the percentage of lambs killed during the April-June period (of the total) for the last seven years, as well as for 2014/15 under MLA and ABARES estimates.
This kind of analysis is very relevant as it puts into perspective how tight supply could get in comparison to previous years in autumn/winter. Even at the worst case scenario (ABARES), which in our view would require ongoing dryness until June, the number of lambs slaughtered would only be 24% of the annual tally. Under MLA estimates, which would require rainfall to be “much above the average”, an unprecedented supply deficit would occur in the months ahead.
As for the price trends, figure 3 shows the performance of the Eastern States Trade Lamb Indicator (ESTLI) between November and July since 2007. With the exception of 2010/11 and 2011/12 (shown separately), when autumn rainfall conditions were very poor across the east coast and a larger percentage of lambs were killed during the period, the ESTLI recovered 40-50% by June (from November).
After a good start in December, the ESTLI plateaued this year and is now only 10% above the lows seen in spring. In contrast, in seven out of the last eight years, lamb prices were already 20-40% above November levels by March. This shows how disappointing the performance of lamb markets has been this year. But on the flipside, it also demonstrates that lambs have a substantial “catch up” potential in the months ahead. The big question is – will they?
Read last week’s article – Current and future state of lamb markets – did we get it wrong?
As we discussed last week, lamb markets continue to be negatively impacted by the ongoing strong turnoff, a temporary supply glut in export markets, deteriorating seasonal conditions, and a delayed flow-on effect of a lower A$ on domestic prices. Yet, these downside pressures will surely abate going forward: if not all, at least some.
Further, the big impact on prices will have to come from supply and that’s where we think the positive outlook lies. Even at the worst case scenario (ongoing dryness), processors will only have around 24% of the annual supply available to slaughter. That’s at the very bottom of the eight year range and, on its own, should favour a mild but positive price recovery.
If seasonal conditions turn out to be around average, we believe lamb markets will quickly rebound, and move back in line with the seasonal performance of most years. This would see the ESTLI around 40% above November lows by June, which translates to a target price of 650¢/kg cwt.
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