Mecardo Analysis - Have grass need mouths

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By Angus Brown | Source: MLA, Mecardo

Key points

· Most of Victoria and South East SA are having a good season and will get growth in spring.

· Current store lamb prices are strong and with good weight gain, will turn a reasonable margin, even at finished prices at 650¢.

· Potential trading margins need to be assessed versus other uses such as hay or cattle.

We often focus on the parts of the country that are struggling with dry conditions, but there are some key sheep areas which are currently doing ok. As we come into spring we take a look at lamb trading and what sort of margins might be achieved by stocking up to take advantage of expected growth.

After a slightly wetter than normal May to July, rainfall for August to date is within 25mm or normal for much of South East South Australia and Victoria. With soil moisture at good levels, we should see a reasonable start to spring for much of the southern sheep area, and with September rains, it could be a bumper.

With many producers doing some destocking during the long dry summer and autumn, there is now some demand for lambs to take advantage of spring feed. Figure 1 shows that in saleyards, the Victorian Restocker Lamb Indicator has been falling and is tracking a bit below the Eastern States Trade Lamb Indicator (ESTLI). Finished lamb prices are expected to head lower which is seeing lower restocker prices come early.

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Restocker lamb prices at 760¢/kg cwt puts the liveweight price at 333¢/kg lwt, which seems a bit light on. A quick look at AuctionsPlus sales last week shows good lines of first and second cross lambs largely making 450-500¢/kg lwt, which is likely what would be paid to get good lines of lambs.

So we know store lambs 25-35kgs lwt will cost around $120-160 per head. The money will be made in the sell price. November and December are likely to be the target sell period for lambs currently weighing 25-35kgs lwt. A target weight of 50kgs lwt, or 22.5kgs cwt, would see lambs fit most grids.

Current forward contracts (Figure 2) only run to the start of November, and after this growers will have to take the price risk.

Seasonality suggests November and December will be the low for prices for the year, but this is not always the case. It's hard to see lamb prices falling too far below last year's levels and as such, our worst case is 600¢. The expected price of 700¢ allows another 12.5% downside from here, while a good spring and rain in the north could see prices as strong as 750¢/kg cwt.

What does this mean?

Figure 3 shows gross margins for lambs bought now and sold at our worst, expected and best case scenarios in November or December. The margins look relatively healthy, even at the worst case scenario with solid profits available even after freight, labour and selling costs are factored in. The key is obviously getting weight into lambs. If we bring the sell weight back 5kgs lwt the margin at the low price is a bit thin at $16.9/head.

For those with, or expecting to have grass this spring, these lamb margins need to be weighed up against other uses, such as hay, cattle or different types of sheep.

www.mecardo.com.au

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