Analysis: What will lamb prices do this sucker season

A flush of lambs from the nation’s biggest flock in decades are about to hit the market as the gap between input costs and returns on prime lambs widens.

High grain prices versus low lamb prices mean the option to feed lambs is virtually off the table this coming production season.

The widening divide between input costs versus returns for prime lambs is arguably the biggest challenge facing the industry, as it has the potential to distort the turn-off of sucker lambs and have huge ramifications on price.

The problem has been acknowledged, and The Weekly Times understands livestock agency companies have been attempting to converse with major processors to see if some forward pricing could be issued to give producers confidence to finish lambs and the market some much-needed direction.

The only other way to salvage the situation is for store lamb prices to be dragged so much lower than finished lamb prices that it creates enough margin to make grain feeding viable.

There is a lot at stake as the market is awash with negatives:

•A season that is predicted to turn dry, with some northern areas already feeling the pinch.

•A lack of confidence and price direction in the market, with rates already low heading into the spring flush;

•Producers who purchased or carried over store lambs last spring and fed for the autumn and winter market have been burnt financially and are reluctant to commit again, particularly as the 2021/2022 trading year was also unrewarding for many;

•The ‘bag lamb’ or MK processing trade for light 14-17kg carcass weight lambs is slow and won’t support the light lamb market like it has in past years; and

• A lack of finishing options with grain and hay prices high against current returns of less than 500c/kg carcass weight for trade and heavy slaughter lambs.

Combined, it could all lead to a mass and uncontrolled sell-off of sucker lambs this spring, putting further pressure on prices and stretched kill space.

The grain versus lamb issue is a key problem. The graphic on this page shows the price trend line for feed barley and some key price points for heavy-processing lambs.

While there are a lot of variables when grain feeding stock, the quoted industry average is a conversion rate of 6:1, meaning it takes 6kg of grain to put 1kg of liveweight on a lamb. Therefore it takes 60kg of grain to add 10kg liveweight, which converts to 4.6kg carcass weight on a yield of 46 per cent.

At a ration cost of $450 tonne (grain plus buffers and additives etc), the 10kg of liveweight costs $27, which breaks down to a cost of 586c/kg carcass weight. The current saleyard indicator for heavy lamb is 489c/kg and trade lambs 481c/kg, and therein lies the problem.

At $400 a tonne on a more simple grain ration, the weight gain works out to 520c/kg carcass weight – still a bit too high.

Looking back when barley was peaking at around $550 a tonne, the 10kg gain of liveweight cost $33 or 717c/kg carcass weight. At $600 a tonne, the cost converts to 782c/kg carcass weight.

But leading into this record grain price period, the heavy lamb price was tracking between 971c to 747c/kg carcass weight, giving producers the incentive to feed.

It is believed agents were canvassing for a forward rate or price commitment of around 600c/kg carcass weight from processors to build some support and confidence into the coming spring market.

online artwork August 9 kelly country

But feedback from exporters The Weekly Times spoke to this week was it was highly unlikely they would commit to any forward pricing. One processor stated it was not “their job’’ to create a profit margin for feeding lambs, and the store lamb price would just have to become a lot more realistic than it has been in recent springs.

Sounds harsh, but these processors said they were facing the same problems of an uncertain market and overseas buyers unwilling to commit to longer-term pricing weeks as they monitored a volatile economy and financially pressured consumers.

The big talk among industry this week was the “stockpile’’ of meat in storage and overseas buying activity slowing as these importers faced up to a lot of frozen meat to sell in a deteriorating market.

The latest United States Department of Agriculture cold meat in storage data listed lamb and mutton at 24,839 tonnes at the end of June, up around 8 per cent on year-ago levels.

So with no relief pending from processors or the demand side of the meat market, how low do store lambs have to go to carve out a feeding profit?

Some ballpark figures. To add 10kg of carcass weight to a 20kg store lamb would cost around $54 in grain on a ration cost of $450. There would then need to be an allowance of at least $15 per head in shearing, vaccination, selling, transport costs, etc. It takes the costs to within the vicinity of $70 to take a 20kg carcass weight lamb to a 30kg carcass weight heavy kill lamb.

At 500c/kg, a 30kg lamb returns $150. Take out $70 in costs, it leaves $80. This suggests the buy-in price has to be below $70 for a decent crossbred store lamb weighing 20kg carcass weight.

The bottom line is that the store market will need to be crushed to much lower levels than producers have been used to in order to create a profit margin to feed on a sell price of 500c/kg carcass weight.