Last week we took a look at Meat & Livestock Australia’s Sheep Industry Projections, focusing on supply. This week we take the projections and try to put some numbers around price for the coming year. Needless to say, 2020 is looking like a strong one for lamb prices.
Long time readers will be familiar with our demand curves, we plot supply against price on a yearly basis. Figure 1 shows the demand curves for lamb since 2000. As export demand for lamb has increased, the average Eastern States Trade Lamb Indicator (ESTLI) for the year has risen, even though lamb slaughter has risen.
The jump in demand in 2018 was marked, with the average ESTLI lifting over 80¢/kg cwt, despite a 1% increase in lamb slaughter. In 2019, the reaction was more in line with steady demand, with prices lifting 12%, but supply down 5%.
If we assume steady demand in 2020, the demand curve from 2018 and 2019 puts the average ESTLI at 800¢. Two years is a very small sample for a demand curve, but given recent price action, values around 800¢ look like a reasonable target.
Looking further out, MLA is forecasting increases in lamb slaughter, which with steady demand, should see prices ease. We are not sure there will be too many growers complaining about average lamb prices above 700¢ for 2021 and 2022 however.
In Figure 2 we have taken MLA’s lamb slaughter forecast for 2020, of 21 million head, and allocated it monthly according to five year average supply seasonality. The forecast is for lamb slaughter to be down 2.1%, but the abnormal 2019 supply curve shows that under average seasonality, the supply dearth on a year on year basis is likely to be concentrated in the first five months of the year.
For the second half of the year, the improving season might fit with lamb slaughter matching or outstripping the lower levels of 2019. Still, lamb supply is expected to be well below the five year average.
What does it mean?
Given the ESTLI is currently at 900¢/kg cwt, with little relief in sight in terms of supply, it would take a significant and sustained decline at some stage to see the ESTLI average 800¢ in 2020. If the ESTLI does average above 800¢ in 2020 it is likely to be driven by restocker demand pushing up prices of light and light trade lambs, with flow-on effects up to heavier lambs.
Key Points
- Lamb slaughter forecasts point towards an average ESTLI of 800¢.
- The year on year supply dearth should be felt most in the first half of 2020.
- Strong restocker demand could push lamb prices above forecast levels.
Click on graph to expand
Click on graph to expand
Data sources: MLA, Mecardo
