Mecardo Analysis - Lamb feeding equation remains tight

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By Angus Brown | Source: MLA, Mecardo

Key points

· Feed grain prices are lower this year, but potential lamb feeding margins remain tight.

· There is plenty of upside in feeding margins, but in the short term they look tight.

· It's likely that restocker lamb prices will ease, or finished lamb forwards rise, to encourage lamb feeding.

Last week we did some analysis on the economics of buying in store lambs to finish on grass, for those lucky enough to have received good winter rainfall. There are plenty of lamb producers in NSW which have mouths but not much grass. The question for them is whether to sell as stores or feed through to finished weights.

Feed grain is cheaper this year than it was this time last year, which should make the lamb feeding equation more attractive. But we know that margins on lotfed lambs don't just depend on the price of feed, buy and sell prices also come into it.

It's hard to believe feed grain prices could have come off $100, and still be at $350/t. Figure 1 shows Melbourne and Riverina wheat have come back to $350/t, while feed barley delivered to Melbourne is at $320/t. New crop prices are a little cheaper than old crop, but only in Victoria. The northern demand pull has Riverina prices at similar levels to old crop.

If you work on a lamb eating 100kgs of grain to put on 20kgs liveweight, this year lamb feeders will be able to do it around $10 cheaper.

The buy and sell prices we looked at last week still apply, but if we plug in a cost of feed at $40 per head, we get the results in figure 2. Forward prices for November at 700¢/kg cwt likely to mean feeding for nothing, if store lambs can be sold for $120/head now.

If prices hold above 750¢, feeding starts to become more attractive, especially for home grown lambs, where the added values won't be eaten up by freight and selling costs.

There will be decisions on whether to sell lamb as stores, or grow out to finished lambs all through the spring. As such calculations on margins will be constant. Figure 3 shows how much can be made, or lost, out of 30kg store lambs costing $120/head, at different finished prices, factoring in $40/head worth of feed.

There is more upside than downside, but the probability of prices being at the lower end of the range is stronger than the higher end.

What does this mean?

The lamb feeding equation doesn't look great at the moment, but this is more due to cheaper feed, in the form of grass, being available in the south. This is propping up restocker values to the point where lotfeeders need stronger than forward prices to make it work.

As we move through the season, and grass supply tightens, restocker lamb prices are likely to ease. Either restocker lamb prices will ease, or forward finished cattle prices will have to rise, as better expected margins will be required to see lambs finished.

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