Lamb strong for the long haul

Lamb strong for the long haul


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The Stock Take: Mecardo's Angus Brown writes about rising lamb prices.

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How long will the good times last for sheep and lambs? We know both varieties of ovine stock are currently at or close to record values, but can it last?

Lamb prices have been on a rising plane for the best part of five years, but supply forecasts suggest they might have to fall at some stage.

FIGURE 1: Eastern States Trade Lamb Indicator (ESTLI). After a year of downward pressure in 2012 lamb prices have risen relatively consistently.

FIGURE 1: Eastern States Trade Lamb Indicator (ESTLI). After a year of downward pressure in 2012 lamb prices have risen relatively consistently.

The ESTLI has set higher highs, and higher lows each year for the past seven (Figure 1). It's rare to see a market of any description post new highs year after year.

This is especially the case in commodity markets.

The old adage, 'the best cure for high prices is high prices' usually rings true for commodity markets. High prices encourage stronger supply, which sees prices fall.

Supply increases have occurred over the past seven years, but demand has been stronger.

The record supply years of 2015 and 2016 actually coincided with record prices. Since 2016 lamb supply has been relatively steady on an annual basis, with slaughter above 22 million head.

FIGURE 2: Lamb demand curves. 2019 lamb prices are expected to average between 775 and 825c/kg cwt. Given the ESTLI has averaged 750c for the year to date, this might be a bit ambitious, but it fits the demand curve.

FIGURE 2: Lamb demand curves. 2019 lamb prices are expected to average between 775 and 825c/kg cwt. Given the ESTLI has averaged 750c for the year to date, this might be a bit ambitious, but it fits the demand curve.

The small drop in lamb supply in 2017 was met with stronger prices, while 2018 saw another increase in supply and an increase in price (Figure 2). Again, rising demand has negated strong supply.

This year lamb supply is expected to fall back under 22 million head. Without an increase in demand, lamb prices are expected to average between 775-825c/kg cwt.

If we plug Meat & Livestock Australia's (MLA) slaughter forecasts for 2020-22 into our demand curve it tells us that average annual prices are expected to ease. This is assuming demand is steady.

While prices might fall, they are likely to spend the next three years at levels higher than any time before 2019. If demand continues to rise, however, there's every chance lamb prices could be stronger.

What does this mean?

We won't find many lamb producers unhappy with lamb prices ranging between 600-850c/kg cwt across a season. As such, supply should continue to grow when climate allows.

A quicker increase in lamb supply could see prices fall more quickly, but at current demand levels supply would have to be close to 24 million head to see prices average 600c again.

The story Lamb strong for the long haul first appeared on Farm Online.

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