Mecardo Analysis - Record mutton prices but is there more

By: "Farm Tender" News
Ag Tech News
May 09, 2019
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By Angus Brown | Source: MLA, NRLS, ACA, DAWR, Mecardo.

This article is bought to you by Australian Fodder Industry Association.

Earlier in the year, we made the not so bold prediction that Mutton prices would hit new records. With slaughter declining sharply, the National Mutton Indicator has indeed reached a record, which now begs the question, can it go higher?

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The last month has seen sheep slaughter on a downward trend but it seems to have found a base for the time being. Last week sheep slaughter was down 44% from the peak back in February. It was also 14% below the same time last year. Given the very strong sheep supplies last August, it shouldn’t be that surprising that things are now tightening up.

There is little debate around where sheep supply is headed over the coming months. The lows of last July are the initial target, but figure 1 shows where sheep slaughter is likely headed, and it’s to the 2010 and 2011 levels.

Mutton supply is not that tight, yet. But we are already at record prices. Figure 2 shows the NSW Mutton Indicator hitting 548¢/kg cwt last week, which was 30¢, or 6%, above the previous record set last July. If supply is going to get tighter, the question is whether prices can get higher.

2019-05-09 Sheep 1

Almost all the mutton produced in Australia is exported. As such mutton prices are almost solely driven by supply and export demand. The Global Trade Atlas produce an average export price for mutton, as shown in figure 3. The latest data is for February, but we can see the maximum export value, or the maximum average price export markets have paid, hit 846¢ last September.

2019-05-09 Sheep 3

Export values averaged close to 650¢/kg swt during the high sheep prices period of 2018. This is 8% higher than the export values from early in the year when mutton prices were ‘just’ 400¢/kg cwt.

During the tight supply period of 2010 and 2011 mutton prices moved to just a 20% discount to mutton export values. In January and February this year, mutton averaged a 45% discount to the export value. From current mutton prices of 550¢, a 20% discount would put export values at 660¢/kg swt. There is every chance current export values are there already.

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Key points

* Mutton prices are at record highs in saleyards, as supply has tightened in autumn

* The supply of sheep is likely to get tighter in the coming months, with more upward price pressure

* Further mutton upside will be limited by how high export values can rise

What does this mean?

Mutton export values will have to rise further to see mutton prices continue to rally. There will come a point where lamb and mutton processor margins become too negative for processors to continue, and demand will weaken.

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Current mutton prices look like they are close to a sustainable level, but 600¢ will start to put some pressure on. Given the impending flock rebuild, it’s hard to see higher prices pulling too many more sheep out anyway. There might be another 10% upside for mutton during the winter, but further upside seems unlikely.

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