How sustainable are current lamb prices

With the lamb market soaring to record heights, there is no doubt current lamb pricing is putting pressure on processors and exporters. So where to from here?

Where to now for a lamb market which has surged to record heights this June and frankly appears out of step with other sectors of the livestock industry?

The difference between lamb and beef has never been so exaggerated, the graph on this page showing the trendline between heavy steers and heavy lambs over a 20 year time period.

At a current rate of $10.50c/kg carcass weight equivalent, heavy lambs are now at a nominal $7 bonus to heavy slaughter steers (noting the steer price is in liveweight terms and the graph is to illustrate the relationship between the two sectors over time).

The connection between lamb and beef is somewhat debatable, even though both sectors are subject to similar trading factors such as global exchange rates, political forces, consumer spending and sentiment, etc. But they do differ in terms of supply, with lamb driven more out of the south and cattle out of northern regions of Australia.

The graph just really highlights the dramatic increase in heavy lamb values over other classes of stock this winter.

Heavy lamb versus heavy steer prices.

The question it all raises is how sustainable is $10/kg-plus for heavy lambs and where to from here for an industry that, on paper at least, looks to be facing a shortage of good processing lamb until deeper into spring due to the likelihood of suckers running late and lacking condition and weight.

Livestock auctioneer Alex Collins of McKean McGregor at Bendigo sold the new Victorian record priced lambs at Bendigo on Monday – 204 White Suffolk sired lambs out of composite ewes which made $426 a head on an estimated weight of 38-40kg. The same vendor, who declined to be named, averaged $420.80 for 357 grain-fed lambs sold – for those reaching for the calculator it is a gross of $150,000.

To play around with the figures, it would take 79 grown steers weighing 500kg at an average price of 380c/kg liveweight to gross $150,000. At the rule of thumb carrying capacity of 10 lambs for a grown steer, it calculates out to 790 lambs that in theory could have been turned-off. Even at an average of $350 a lamb the sale of 790 lambs would generate $276,000, showing how inflated the lamb market is versus cattle returns at the moment.

Mr Collins said it was exciting time for lamb but also “dangerous” as the rapid price rise put immense pressure on those further positioned down the supply chain, such as meat wholesalers and processors.

“I don’t really like to see such an aggressive price rise in a market as it can be dangerous for those having to deal with it further along in their businesses,” he said.

The scenario he believes has been playing out is exporters and processors were caught extremely short of lamb supply to fill existing overseas and domestic orders that were already locked in.

He suggests this could fade out of the market to some degree in coming weeks: “Everyone had orders they had to fill for a period of time and what we could see as we head further into June and July is some of this demand drops out as processors work out how they can afford to do less numbers or shut for maintenance.”

It is already starting to happen. The Weekly Times understands Wagstaffs in Melbourne will only process lambs on one day this week, while Fletchers International from Dubbo, NSW, is believed to be shutting for maintenance for three weeks later this month. Many other processors have already tweaked lamb processing schedules.

But will it affect heavy lamb prices? Mr Collins said it was unclear, especially as the high lamb prices had already dragged numbers forward, with yardings up in recent weeks at many saleyards as producers chased the record $10/kg-plus on offer.

There has also been reports of some finishers sending out lambs as trade weights rather than continuing to feed, which could exacerbate the shortage of heavy stock later in the winter.

“We are in uncharted territory,” Mr Collins said.

“I wouldn’t like to say what lamb prices could do, I don’t think anyone really knows.”

Episode3 director and market analyst Matt Dalgleish made the prediction earlier this year that lamb prices could potentially hit $11/kg this winter — a forecast that copped some flak and a $10,000 bet issued through The Weekly Times by producer Tom Carroll of Deniliquin, NSW.

Mr Carroll has conceded that if the bet had been formalised, Mr Dalgleish would have won the money.

Mr Dalgleish said there was no doubt current lamb pricing was putting pressure on processors and exporters, but the lag in export data made if difficult to decipher how much of the cost rise for lamb had been able to be passed onto customers.

“We need to see the figures of how export volumes are translated into (financial) receipts for lamb – the April figures weren’t great but more of the cost of lamb could have been passed on since then,” Mr Dalgleish said, adding there was a lag on these reported statistics of about a month.

He said export demand had been very strong, and coupled with the tight availability of prime slaughter lamb, the market had been able to reach record highs despite the extremely dry conditions which existed up until this month.

“We have seen very strong export demand, probably higher than our original modelling predicted, and coupled with the supply constraints, the market was able to reach these higher price levels much earlier than we anticipated.’’

Mr Dalgleish said he doesn’t rule out further price gains for lamb, with the August period and transition from old season lambs to new season suckers appearing difficult for processors.

“There is still a bit of concern coming forward in the processing space about the supply of lamb in the August period,” he said.

“I think anyone who can produce lambs with weight in them going forward stands to do quite well.”