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Wednesday, April 08, 2015

Short term upside in lamb markets, but what’s after that?

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

Key points

  • It is well documented that we expect lamb prices to rise over the coming three months, but they are likely to fall again in the spring.
  • Lamb price depends on supply, with prospects good for spring lamb prices similar to higher than last year.
  • Autumn lambs being dropped now should be worth between 460¢ and 530¢/kg cwt during the spring supply flush.

2015-04-08 Spring Lamb Outlook FIG 1

2015-04-08 Spring Lamb Outlook FIG 2

We have been talking for some time about the potential upside in lamb markets if it rains and under a number of supply scenarios. The reality is, however, that most producers have already sold their lambs, with autumn lambing flocks now starting to see new lambs hit the ground. What price can we budget on for these lambs that will be marketed in spring?

Lamb prices are largely dependent on supply, and the relationship between supply and price is relatively consistent apart from occasional demand shifts.  Figure 1 shows the simplified supply/price relationships that have existed in the lamb market over the past 15 years.  The most recent increase in demand has moved the curve higher, but it appears to be flatter than the 2008-13 curve.

Interestingly, the 2015 to date point sits closely with the 2014 average, and should move to the left as supply tightens.  For the purpose of this article, we are interested in where supply might sit in the 2015 spring, relative to slaughter having been at an average of 2.05 million head in 2014.  Even with the very high slaughter level, lamb prices in spring 2014 were historically strong, with the Eastern States Trade Lamb Indicator (ESTLI) averaging 466¢/kg cwt (figure 2).

If we apply the ABARES forecast of steady lamb supply over the coming year, we’ll see spring prices at similar levels to those seen in 2014 under steady demand.  If we apply MLA’s forecast of a 12% fall, and this holds in the spring, we’ll see lamb slaughter at 1.83 million head per month, and prices at 530¢/kg cwt.

Realistically, it’s very difficult to forecast lamb supply for next spring, as a lower flock pulls numbers lower. However, the continued shift to terminals and meat sheep we hear about anecdotally is pushing lamb supply higher.  It’s safe to expect lamb supply to be somewhere between the low MLA forecast, and the high ABARES forecast, which gives us a price range of 460-530¢/kg cwt for the spring (figure 2, red circle.  Obviously spring supply depends on the season, but we still expect it to represent the peak of lamb supply for the year.

What does this mean?

There is always a caveat on price forecasts. This time, it’s that if demand remains at similar levels to those currently seen, the idea that the ESTLI will be between 460 and 530¢/kg cwt in spring holds pretty well. 

Seasonal conditions tend to have less impact on lamb prices than cattle or sheep prices, at least on the downside, as lamb supply is finite each year.   Sheep and cattle supply can, in general, be increased through flock or herd liquidation. As such, lamb price forecasts can be more accurate at the bottom end, providing maximum supply assumptions are close to the mark. 

That said, there is always upside in forecasts. We saw this in 2011 when lamb supply contracted sharply under a flock rebuild. Female and merino lambs were held rather than sold, and this saw prices head towards new records.

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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