Farm Tender

Mecardo Analysis - Mutton strong now but set for new records

By Angus Brown | Source: MLA.

A couple of weeks ago we took a look at Meat and Livestock Australia’s (MLA) flock and slaughter projections for the sheep flock and lamb slaughter. While lamb supply and prices fill the headlines nicely, some of the more interesting, and volatile numbers came out of the sheep slaughter projections. Tightening sheep supply could see some record prices posted in the near future.

We can see in figure 1 that Australian sheep slaughter has been on the rise since the middle of 2017. The 12-month moving average has increased every month for the 14 months to September this year, and looking at MLA’s slaughter figures, it is set to increase again. This means that for the last 14 months each new month has been higher than the same month the previous year.

Obviously, the increase in sheep slaughter has been due to drought induced flock reduction, but the smaller flock this time around means sheep slaughter hasn’t managed to reach the 12-month rolling average peaks of 2014. We have however, seen monthly sheep slaughter broach the 1 million head mark in August, and is likely to have done the same in October.

If we look at MLA’s projection for sheep slaughter in 2018, it has increased markedly from the start of the year. In January MLA were forecasting annual sheep slaughter to be lower than 2017 at 7.2 million head. It’s likely this level was passed in October, with the September projection update revising it to 9.3 million head.

If we use 9.3 million head as the annual total, and deduct what we have already seen slaughtered, and our estimate for October, we can see that November and December slaughter will have to be lower than last year. We feel this is unlikely, and that 2018 sheep slaughter might push through 9.5 million head. This would make 2018 will be the third highest slaughter year of the last ten years.

2018-11-13 Sheep 1 2018-11-13 Sheep 2

MLA’s projected sheep slaughter for 2019 onwards have been revised downward, and sharply. MLA expect just 6.75 million head to be slaughtered in 2019, increasing to 8.2 million head in 2022. With mutton demand fundamentals currently very strong, such a decline in sheep slaughter will no doubt see significant upward pressure on prices.

Key points
   * Sheep slaughter remains very strong, with the 12 month moving average at a 3 year high.
   * MLA’s projections suggest significant tightening in sheep supply in the coming years.
   * The mutton discount to lamb should narrow, likely seeing new record mutton prices

What does this mean?
What do you mean, upward pressure? We know that sheep and lamb prices are strongly linked, with heavy sheep supply seeing mutton prices at a large discount to lamb, and vice versa.  Figure 3 shows that the recent weakening in lamb prices has seen the mutton discount close from 90% to 58%.

2018-11-13 Sheep 3

Tightening sheep supply should see mutton move to a 30-50% discount to lamb, and even as high as 20%. If we use 700¢ as the benchmark for lamb prices, a 20% discount give us 580¢/kg cwt, a 30% discount is 540¢ and 50% is around current mutton levels of 440¢. Obviously, there is upside in these prices with stronger lamb values.