‘Sale of the century’ might be a bit of an overreach, but it is a great line from a classic movie. This week, we’re looking at the spread between lambs, sheep, and cattle, with ovine stock reaching the limits of their premium to cattle.
While sheep, lambs, and cattle are not direct substitutes, they are related through a number of market mechanisms. At the retail level, lamb and beef will compete for the consumer dollar, with price being a key driver in determining which might be bought.
At the farm level, cattle and sheep can compete for grass in mixed enterprises. At the extreme level, whole farms can be converted from sheep to cattle, or vice versa, based on gross margins. Add cropping into this and it gets very complicated, but we’ll just focus on livestock enterprises today.
The reason we are bringing this up is that cattle have once again moved into the extreme range in terms of their discount to lamb and mutton. Figure 1 shows the Eastern Young Cattle Indicator (EYCI) and the Eastern States Trade Lamb Indicator (ESTLI).
Lamb has been trading at a premium to cattle since early 2024, but in the last month, the ESTLI has rallied to a 350¢ premium, which equates to over 30%. We have seen this in the past, most recently in the 2018-19 northern drought. Additionally, the strong lamb premiums have tended to persist until the cattle sector has moved into a strong rebuilding phase. The then-year average EYCI/ESTLI discount is 5%, and the 20-year average is 12%.
The EYCI versus mutton spread, shown in Figure 2, tells us that it might be mutton prices that are in rare air. The NSW Mutton Indicator is close to parity with the EYCI at the moment. So old sheep are making the same money as young cattle.
Only during droughts in the north does mutton trade at a similar price to the EYCI. The drought in the south has seen mutton hit extreme discounts in recent years, and the exodus of stock has some home to roost in recent weeks.
The long-term average EYCI premium over NSW Mutton sits at 54%. We know the supply of mutton is not going to improve in the short term, but this does provide support for cattle prices.
What does it mean?
There are plenty of arguments for higher cattle prices, and the current extreme discounts to lamb, and being at parity with sheep, only add to the support. A potential trade here is to sell sheep and buy cattle.
This might be easier said than done, but with potential upside for sheep limited and cattle quite strong, it’s worth doing the numbers.
Key Points
- Lamb and mutton prices have rallied strongly, leaving cattle prices behind.
- Cattle have been heavily discounted to lamb before, but current discounts are well below average.
- Selling sheep to buy cattle is a potential trade if conditions allow.
Click on graph to expand
Click on table to expand
Data sources: MLA, Mecardo
