Strong supply, dry weather, and an El Nino forecast have caused a very strange inversion in lamb markets. Even during the depths of the 2018-19 drought we only saw very large discounts in store lambs for a short period, but we are now seeing it in new season lambs. It opens up some great opportunities for those who can finish lambs.
The cure for high prices is high prices. It seems the extremely high prices of sheep and lamb over the last three years have brought about more of a bitter pill than a cure. This is especially so for restocker lambs.
Figure 1 shows that restocker lamb prices consistently outperformed finished lambs for much of 2020-2022. Historically restocker lambs are priced a little higher than trade lambs, as the weight gain in the finishing equation makes the dollars per head numbers work.
While the lamb market as a whole has suffered from an increase in numbers, restocker lambs are being punished even more. Good store lamb prices have seen many producers gear up to pump out store lambs, without the ability to finish them.
Add more store lambs being produced to a worsening season and outlook for spring growth, and the oversupply has store lamb prices breaking new records in a negative sense. Figure 2 shows the NSW restocker lamb indicator spread to the Eastern States Trade Lamb Indicator (ESTLI). The restocker lamb indicator has spent August and September bouncing around a 40% discount to the ESTLI.
The low during the 2018-19 droughts was 35%, and it was only for a couple of weeks. The 2018 low was at the end of August, and the bounce was the arrival of new-season lambs. This year new season restocker lambs have remained very cheap relative to finished lambs, which are also cheap.
When something is cheap there is opportunity. Figure 3 partly explains why store lambs are priced as low as 185¢/kg lwt. If lambs are to be grain-fed, there isn’t much in finishing cheap store lambs if the final price in the New Year is 450¢/kg cwt.
If finished lamb prices improve modestly to 475¢, the margins improve, and a return to mid-500¢, which is entirely possible, see fantastic profits in the order of a 95% return on investment for those already set up to finish lambs. This is before transport, management, and treatment costs but it still looks attractive.
To make this calculation we have checked the AuctionsPlus and auction market prices, noting that while the price of good quality lambs suitable to turnout is in the 185¢/kg lwt range, there are secondary cheaper lambs available. While they are likely to take more effort to get to trade optimal weight, they may well fit the bill and should not be dismissed.
Note that this trade calculation does not allow for any feed costs; these will vary between enterprises and should be calculated on a case-by-case basis when considering any trade.
What does it mean?
After being in favor of breeders for several years, lamb markets have turned towards the finisher. As confidence grows in finished lamb values, and we get more certainty around harvest this year we should see improving store lamb prices and the squeezing of this margin, but it should be a good year for those trading, either on pasture, irrigation, lot feeding, or stubbles.
Key Points
- Store lamb prices are at extreme lows both in relative and absolute terms.
- Increased supply, a poor season, and a worsening forecast are depressing prices.
- This creates opportunities for those able to finish lambs to turn a profit.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: MLA, AuctionsPlus, Mecardo
