The last peak in lamb prices was 22 months ago, since then the lamb price (NSW trade lamb) has fallen 54%, hovering around 450¢/kg cwt. The question is, how did we get here and what is the outlook? The answer is entangled in a number of supply and demand factors that have created a market environment like we may not have seen before.
It all starts with drought
To understand the fall, we need to first look at the drivers
of the extreme prices we saw in the 2019 to 2022 period. The drought, or the
breaking of the drought was the significant factor in the early part of 2020.
The break in the season, combined with rising market prices encouraged
producers to rebuild the flock. Transporting circa 2.0 million sheep from WA
was also a factor, but it was the excellent pasture growth on paddocks that
were understocked because of the drought that gave producers the incentive to
retain breeding sheep to bolster their flocks. This enhanced breeding flock went
on to produce the large “crop” of lambs now coming through the system.
The retaining of sheep to build flocks came at a time when
the world’s consumers were looking to build buffer stocks, there were real
concerns that the “just-in-time” supply systems they had built were vulnerable
in the Covid pandemic. So tight supply and strong demand were in play, the
“perfect storm” for a market boom.
The cure for high prices
The downturn in the market was in the first instance, a
response to the extreme prices. There is nothing like high prices to fix high
prices! We also know that we lost existing markets as sheepmeat prices reached unaffordable
levels for some key customers, further compounding the retracement when it came
and reducing demand.
However, there were two game-changers that were of most
significance. Close to home was the increased supply offered to processors as a
result of the flock rebuild. This was the major factor in the increased supply
situation.
Flood of supply meets supply chain challenges
Running alongside this was processing capacity limitations. Meat
processors were still recovering their staff levels post Covid-19, and while
they have remarkably been able to process record numbers in recent times, the
“catch-up” phase was a drag on their demand when supply increased. This is
particularly an ongoing problem in WA, where labour availability is scarce, and
the live export debate has contributed to increased sheep turnoff.
The elevated overseas meat stocks issue has also
contributed. As the risk of Covid-19 induced supply interruptions reduced, overseas
customers began changing their view on the risk to their reliable supply. Customers
who were building meat inventories to mitigate supply risk have this year decided
to reduce back to more normal levels and not to continue holding excess stocks.
Markets adjusting to the new level
But we are seeing positive signs for the longer term. There are
already examples of new or returning markets to Australian lamb & sheep
meat because of the cheaper saleyard prices. As an example, the light lamb that
in the past two years that was purchased by restockers, is now finding its way
to the Middle East on planes as “lightweight bag lambs”. This will have an
impact in the back half of this selling season. Over the past two years these
lambs haven’t arrived at the processor until the Feb – April period, and then
as heavy lambs. It is also of note that contrary to previous seasons, the lamb market
in the Autumn & Winter period has failed to rally mostly due to more than
adequate supply because of restocker activity. There will be less lambs
available in the March to July period this season so perhaps the market returns
to more normal patterns?
These factors will be at in the minds of those producers who
have the capacity to background lambs. It has been years since the buy-in price
of a 36 Kg LWT lamb has been at these levels. With the three components of the
trading equation consisting of buy price, weight gain (as well as cost of
gain), and sell price, the first part of the equation looks attractive.
As with high markets, low prices are a cure for low prices.
Demand for lamb at the new price point is on the up, with retailers now able to
offer specials to attract the consumer. Spreading this demand across more
diverse markets will open demand and competition, as well as diversifying
further market risk.
When will it improve?
It is not possible to say that we will see a quick fix;
there is not just one issue impacting the market. With supply more than meeting
demand and processing capacity, and with the current large numbers still to
come this season, the current price level might be where we sit for some months.
The global economy also poses concerns for demand, and while it is not clear as
to its future direction, we know uncertainty in the world conspires against
commodities.
On the export front, our biggest lamb customer last year,
the US, is currently relegated to number 2 spot, with volumes down 16% year on
year, however the new number one customer China is up a massive 37%. China is
now the biggest customer of Australia’s total lamb exports YTD, up 12% higher
than in 2022.
What does it mean?
Sadly, there is no quick fix, but there clearly is a sound
future. Markets are strong and new ones are coming online, and processing is
running as fast as it can so we will get through this glut of supply. Looking
down the track there is cause for optimism, Australian lamb and sheep meat is
well positioned as a premium product on the global stage. The 2023-24 lamb season will be long
remembered as will the contrast between the years post drought, a timely
reminder that markets are constantly on the move and are not always predictable.
Click on figure to expand
Click on figure to expand
Data sources: MLA, ABS, DAFF, Mecardo
