Mecardo Analysis - Rain pushes restocker prices back to a premium
- By: "Farm Tender" News
- Ag Tech News
- Dec 04, 2018
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By Angus Brown | Source: MLA, Mecardo.
November has come and gone, and while you couldn’t say the rain was drought-breaking, New South Wales received better than average rain across the entire state. Sheep and lamb markets are yet to move into the rebuilding frenzy but confidence is pushing restocking lamb prices higher and squeezing finishing margins.
Restocker lamb prices usually follow finished lamb prices closely. This makes sense as those buying store lambs will use the current finished lamb price as a guide to what they can pay. There are occasions when the two price series get out of kilter, however. Such as winter this year, when rising grain prices and a lack of feed saw restocker lamb values at very cheap levels (Figure 1).
Since September the NSW Restocker Lamb Indicator has been tracking the Eastern States Trade Lamb Indicator (ESTLI) closely, but it has only been in the last month that it has moved to a consistent premium.
The spread between the NSW Restocker Lamb and the ESTLI is shown in Figure 2. Restocker Lambs are not always at a premium to the ESTLI, but we can see that since 2010 restocker lambs have generally been more expensive than finished lambs in ¢/kg terms.
Growers holding store lambs, or growing grass and thinking about buying some, will be crunching the numbers on margins on finishing lambs. With grain prices at close to ten-year highs, those with green feed will be in the box seat.
Figure 3 shows why the restocker price spread to the ESTLI has been rising in line with growing green feed. Even if prices stay at around 700¢/kg cwt, there is a gross margin of $44 in finishing lambs. At the forward contract rates which have recently been on offer, the margin is $62/head.
Restockers who can finish lambs on grass only have to compete with lamb lotfeeders. With a full ration for lambs coming in at around $550/t the cost of feed to put 15kgs on lambs will be around $50/head.
Key points
* NSW Restocker Lamb prices have moved back to a premium to the ESTLI in ¢/kg terms.
* Gross margins on finishing lambs are very good, but feed costs are high.
* Restocker lamb prices will struggle to rise further without a big lift in finished lamb prices.
What does this mean?
If we take the forward contract rates of 780-800¢ as the price of lambs in January and February, we might have seen the lift in restocker lamb prices run its race, so to speak. The important number is the net margin after feed of lambs bought now and sold at 780¢.
The estimated margin comes in at only $12.20/head. After overhead and labour costs, feeding is pretty marginal at this level. This suggests that we’ll either need to see a solid rise in finished lamb prices or more rain and grass growth to see restocker lambs values rally further.
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