Mecardo Analysis - Supply and demand outlook still favours lamb
- By: "Farm Tender" News
- Ag Tech News
- Oct 04, 2018
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By Matt Dalgleish | Source: ABS, MLA, Mecardo.
Earlier in the week we looked at how the September release of annual lamb slaughter revisions from Meat and Livestock Australia (MLA) is likely to play out for monthly slaughter volumes to the end of the 2018 season. This piece projects what the changes to flock and slaughter levels mean for prices into 2019, and beyond.
Click here to recap on the flock and supply analysis from earlier in the week.
Analysis of the relationship between annual changes to lamb supply (slaughter) and price (Eastern State Trade Lamb Indicator, or ESTLI) since 2002 demonstrates a reasonably strong negative correlation. A reduction in slaughter is synonymous with increased price levels while expanding supply through increased slaughter rates is consistent with falling prices (Figure 1).
This suggests that lamb slaughter levels are an important indicator of the potential ESTLI level for a given season. Indeed, annual lamb slaughter and average annual ESTLI levels can be used to represent the demand curve for lamb during different time periods and show how the demand for lamb has expanded over time (Figure 2).
In early August we released an analysis piece that summarized the economic rationale fueling the expansion in demand and also indicated that the elevated ESTLI levels during 2018 show that the demand curve for lamb has expanded further from the position set during the 2015-2017 seasons.
If the lamb demand curve can stabilise at these new levels, we can calculate an estimate of the annual average ESTLI based on the MLA slaughter projections for the next five years. An estimated reduction of 2.8% in the lamb slaughter in the 2019 season to 22.25 million head puts the annual average ESTLI for 2019 at around 740¢/kg cwt.
As the flock and supply analysis pointed out earlier in the week a smaller sheep flock, and reduced number of lambs for slaughter will offer strong support for prices at least until 2022 if demand can remain at current levels.
Key points
*Falling lamb slaughter levels tends to coincide with higher ESTLI levels and MLA forecasts for the 2019 season points to a drop in slaughter of 2.8% to 22.25 million head.
* The demand curve for lamb has staged an expansive shift to the right during the 2018 season which will help underpin elevated prices for the next few seasons.
* Based off the current demand and supply scenario the ESTLI is anticipated to average 740¢ over the 2019 season.
What does this mean?
Indeed, as outlined in Figure 3 the annual average ESTLI is not expected to move below 700¢ for the next few years. That’s not to say there won’t be a seasonal trough during each year that puts a six in front of the ESTLI at some stage during the annual cycle, but movements under 600¢ for an extended period of time are looking to be a bit of a rarity.
Furthermore, it’s not until 2022 that lamb slaughter is expected to breach 23 million head according to MLA and start to weigh upon trade lamb prices. By that stage, the lamb demand curve may have expanded yet again.
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