Mecardo Analysis - Lamb forwards hit the magic $10
- By: "Farm Tender" News
- Ag Tech News
- Jul 09, 2019
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By Angus Brown | Source: MLA, Stockdirect.
The Eastern States Trade Lamb Indicator (ESTLI) has just broken through 900¢, but at least one buyer thinks prices are headed higher. There were reports last week of forward contracts for August being offered at the magic 1000¢/kg cwt, but will the market get there?
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Monday mornings ‘Stock Direct’ quoted forward prices from a ‘major supermarket’ for August at 980-1000¢/kg cwt for new season lambs. These extraordinary price levels are no doubt driven by the expected dearth of spring lambs and a desire to ensure some supply.
Figure 1 shows that the forward prices look very strong on the trade lamb chart. The ESTLI closed at 911¢/kg cwt last Friday, so a $10 forward contract is 9.7% higher. In reality, however, trade lamb buyers are probably paying close to $10 for a lot of old season lambs now.
Current over the hooks rates for old season lambs are 850-920¢, with the upper end being supermarket buyers. However, the east coast ‘Heavy Lamb’ Indicator, which is for lambs over 22kgs cwt, is currently at 956¢/kg cwt.
The indicator is an average, and you only have to trawl through a few individual saleyard reports to find plenty of pens of lambs selling for more than 1000¢. When bought in saleyards, the buyers have to pay freight to the works, which adds 8-20¢/kg cwt, depending on how far they have to go.
Come August, the grass will be growing in regions lucky enough to have had winter rains. There will be a temptation to hold lambs for more weight gain. This comes with significant risk. A 22kg lamb at 1000¢ is worth $220.
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Hold until mid-September, and the lamb will weigh 26kg cwt with good growth rates. To break even, the lamb will have to make 845¢/kg cwt. This is 15% below the August forward contracts. This is large on a historical scale, but last year we saw a 22% fall from spring highs.
There is little doubt the strong prices will see lambs hit the market as soon as they are ready, and we are likely to see a strong price fall at some stage. The bottom will still be historically high, but economics are likely to suggest grass could be better used than putting more weight on lambs.
Key points
* Forward contracts for August have been released at 980-1000¢/kg cwt for new season lambs.
* The forward prices look strong relative to current saleyard trade lambs, but plenty of lambs would be costing more than this now.
* With resistance to current prices and potential spring downside, the forward contract looks like very good value.
What does this mean?
Should those who have early new season lambs lock in the price? There are two reasons not to. We think prices will be higher, or we think we’ll make more money by adding weight and selling later.
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Figure 2 shows that lamb supply is likely to around last year’s levels in August, so prices could creep higher, but we are starting to see plenty of resistance. Supply will remain tight into September as well, but it’s hard to know when the tipping point will come, and when it does prices will fall quickly
If growers are confident they will have lambs ready in August, we can’t make much of a case for not taking the forward prices on offer.
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