Benchmark for mutton set to fall below 100c/kg

Australian mutton prices have fallen steeply at saleyards in the past month and now the average is likely to drop below 100c/kg. See the analysis here.

The fall in mutton prices at saleyards has been savage in the past month, and the average is likely to go below a benchmark rate of 100 cents per kilogram this spring.

The feedback to questions as to why sheep prices have melted down to shock levels not seen for more than a decade revolves around three issues: a downturn in demand from China, labour shortages impacting kill capacity, and an oversupply as sheep are quit after the flock rebuild heading into a predicted dry season.

To look at these areas more closely.

By converting the value and volume of mutton sold into a market, it is possible to calculate an indicator price per kilogram sold.

The conversion was supplied by MLA market analyst Tim Jackson and a special thanks for all the number crunching.

Sheep and lambs go under the hammer at Bendigo. Picture: Zoe Phillips

For China, the largest destination for Australian mutton, the average price was built from the low $3kg range in 2016 and had doubled by 2019 to reach a peak of around 834c/kg in early 2021.

It is worth noting how the African Swine Fever outbreak in China, which decimated its pig industry, put a lot of momentum into the Chinese mutton market over the years 2019 to 2021 as it sourced different protein to cover the downturn in pork supply.

The latest available data for the month of July suggests mutton values into China have now dipped back below 600c/kg.

The graphic on this page compares the trend line for mutton values in China against the price averages recorded for sheep sold at weekly prime markets monitored by the National Livestock Reporting Service.

It shows swinging fortunes for sellers and buyers over recent years. When the saleyard price peaked at 687c/kg carcass weight in March 2020, the indicator value for mutton into China was 672c, showing the pressure on exporters during the flock rebuild phase.

That cycle has now turned drastically. On the latest data for July, when the saleyard average for sheep was 305c/kg, the indicator value for mutton into China was 584c/kg as trading margins opened up in favour of processors.

Now, the mutton price is struggling to hold onto 100c/kg, and a fair number of sheep sold in the past fortnight have cost under a buck a kilo. Due to the time lag for export data, there has yet to be a price indicator for mutton into China for the recent months of August and September.

But this data set dating back to 2016 shows the most significant price shift from one month to the next into China has been about 60c/kg.

To play devil’s advocate, if you subtracted 60c off the July rate for mutton into China (of 584c/kg) for August and September, it would put it down around 460c – still well above the ruling saleyard rate of 100c for sheep.

Verdict: the drop in mutton value appears harsh, and margins for processors look very healthy. It is not a big statement, as most data points to the current environment being a high-profit one for meatworks.

From a farmer perspective, if you want to depress yourself, study the price gap that has opened up between the saleyard cow price and the commodity value of 90 chemical lean grinding beef into the US.

But to be fair, and as pointed out to me by a buyer recently, the high livestock prices of the past three years purchased a lot of new farming toys and Toyota LandCruisers for producers. That profit has now shifted down the chain.

The argument of the labour shortage still impacting kills is an interesting one. On the one hand, kills have ramped up, and the latest weekly figures have the cattle, lamb and calf slaughter at their highest levels in the past three years.

This is the latest weekly kill figures in comparison to a year ago, as published by the NLRS:

Cattle: 622125 head against 87,219 in early September 2022;

Lambs: 463,813 compared to 385,609;

Calves: 7892 against 5786; and

Sheep: 154,505 head versus 109,268 head.

Although interestingly, the sheep kill as not as high as it was early this year during the autumn. There appears to be some truth to the argument more labour and kill capacity is being directed towards cattle and lambs.

Where kill capacity becomes interesting is when slaughter is analysed over an extended period of 20 years. Processing in the pre-Covid years was at much higher levels than today.

Just before Covid hit, there were more than 1 million sheep processed in Australia during November 2019, according to MLA data. The best month since then was March this year at 763,000 head. It helps explain why mutton prices have collapsed much more than export values would deem necessary.

On the supply side, saleyard numbers of sheep haven’t exploded. Rather, it seems the unpredictable and cheaper rates in the auction system have producers selling direct and filling up available kill space.

It was shown when several buyers didn’t follow on from the lamb sale into the mutton run at Bendigo this week. Processors report blocks of kill space being booked ahead for sheep, with the price revealed a week out from delivery.

With all three issues of overseas demand, kill capacity and supply having a negative influence on the mutton market, there doesn’t appear to be much price upside in the short to medium term.