Mecardo Analysis - The Tyranny of distance discounting lambs
- By: "Farm Tender" News
- Ag Tech News
- Oct 30, 2018
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By Angus Brown | Source: MLA, Mecardo.
The spring flush and resultant low lamb prices seem to have been and gone. The last fortnight has seen lamb markets in NSW, Victoria and SA rally strongly as the supply at the yards has failed to materialize. No doubt over the hooks lamb supply is also tight in the east, but in WA sheep lamb seems to be flowing along normal lines.
Lambs markets across Australia are generally tied together. Base demand is generally set by export markets and prices fluctuate with supply. The relatively easy flow of sheep and lambs between NSW, Victoria and SA means that prices in those three states generally follow each other very closely.
Figure 1 shows that even in Tasmania, prices follow along pretty closely with those on the mainland. Lamb prices in WA are generally around those on the east coast, but the expensive freight to the east coast means we can see wider spreads in the West.
Price movements in the last few months have seen Western Australian, and to a lesser extent, Tasmanian, lambs sit at a larger than normal discount. There is some hope for higher values given the recent movement on the east coast.
We expect the reason for the discounts in WA and Tasmania is localized oversupply. Processors can only kill so many lambs and if there are more lambs ready than can be killed, prices will be discounted. Under this scenario, processors can offload lamb into export markets and make a profit.
For prices to rise in WA and Tasmania, supply needs to tighten and the current spread to the east coast might see this happen. A 22kg lamb in the west is currently worth around $130 per head. If we say the lamb will lose 1 kg cwt weight coming to SA, they will still be worth $160-165 per head.
The discount in Tasmania is probably not large enough to put lambs on a boat yet, but recent history tells us Tassie prices should match those on the mainland relatively soon.
The spread in Mutton values isn’t as pronounced. Figure 2 shows WA, Tasmanian and SA prices have all rallied to within 85¢ of NSW and Victorian prices. This equates to $15-20 per head for a 24kg cwt sheep. There might be a little further for the gap to narrow, but it is probably not far.
Key points
* Lamb prices have rallied on the east coast, but are lagging in WA and Tasmania.
* The discount to WA is wide enough to see lambs travel east, which suggests there is some upside.
* Mutton values are closer but might have some upside in WA and Tasmania in the medium term.
What does this mean?
Obviously, there are two ways for the gap between east coast and WA and Tassie prices to narrow. Either the discounted state prices rally or the east coast prices fall. It might be a bit of both. The coming weeks will tell whether the traditional Victorian spring lambs supply is able to push prices lower.
For those in WA and Tassie, there is little downside in holding onto lambs and looking for upside, given the discounts to the east coast, if there is sufficient feed to carry them through.
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