In the Australian flock, the swing factor in terms of sheep numbers is the number of adult sheep sent to abattoirs, which do not return to production. Figure 1 compares the annual (fiscal) sheep offtake with the change in the flock size, from 2002 onwards. The sheep offtake (annual sales of adult sheep to abattoirs expressed as a proportion of the flock size) accounts for nearly 60% of the year on year change in the flock size in recent decades, so it is the main mechanism for change in the flock size.
As a rule, the experience of the past few decades shows that the sheep offtake has to be below 10% before the flock can grow. Somewhere in the 10-12% is a “neutral” sheep offtake and above 12% the flock is probably shrinking.
In the latest MLA sheep projections, the flock is projected to grow by around 4-5% in F2021 and F2022, which given the rainfall is quite possible. The catch is MLA forecast the sheep offtake to be around 10.5%, with the lamb offtake slightly lower in the 31-32% range. For the flock to grow the sheep offtake will have to be a good 2-4% lower than these projections, which with a flock around 65 million translates into lower adult sheep sales of 1.3 to 2.6 million. For farmers, this will translate into stronger mutton prices in relation to lamb and higher store sheep prices.
The prospect of a growing flock is a welcome prospect, as the industry cannot continue to underpin higher sheep meat and merino wool prices with lower supply on an international scale. Figure 2 looks at the key factor in determining whether the flock will grow in the next couple of years. It compares the average (weighted) rainfall 12 month rank for sheep regions with the annual sheep offtake since 2002.
Rainfall or seasonal conditions have been the key driver of sheep offtake, accounting for two thirds of the number of sheep sent to abattoirs. The 12 month rainfall rank for the current season to date is running at a low 0.2. For the flock to start picking up we need the rainfall rank to rise above median (0.5) and ideally stay there for a couple of years. Until it does the sheep offtake is likely, at best, to stay in the neutral (10-12%) level.
What does it mean?
In short, the flock size remains hostage to rainfall. There is nothing really new about this except that the flock size is small. It is not an exciting concept to explain to processors, who have big fixed investments which require throughput, that they too are hostage to rainfall. Projections of an increase in the Australian sheep flock depend on rainfall being median or greater. In this scenario, adult sheep sales to abattoirs will fall significantly lifting the price of mutton in relation to lamb and underlying store sheep prices.
- The adult sheep offtake is the main mechanism by which Australian farmers adjust their flock sizes.
- The adult sheep offtake needs to fall to around 6-7% level (from its current level around 14%) for the flock to grow significantly.
- Rainfall is the key determinant of the adult sheep offtake. Rainfall needs to rise above median levels for the sheep offtake to fall so the flock can grow.
Click on graph to expand
Click on graph to expand
Data sources: ABS, AWPFC, MLA, BOM, ICS, Mecardo