Mecardo Analysis - Restocker Lambs hitting records for a reason

By: "Farm Tender" News
Ag Tech News
May 23, 2019
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By AB | Source: MLA

All lamb prices are streaking upwards, but some are higher than others, in a relative sense. This year, restockers have some serious confidence in where prices are going to spend the next months. This article takes a look at why and how lamb feeders are paying record money for restocker lambs.

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At this time last year restocker lamb prices were seriously lagging the rally in finished lamb values. Figure 1 shows that the NSW Restocker Indicator tracked around 600¢ while the Eastern States Trade Lamb Indicator (ESTLI) rallied to 800¢. Restocker lamb prices eventually took off, just before lamb prices fell back.

This year the NSW Restocker Indicator has moved well ahead of the ESTLI, setting a new record, just shy of 900¢/kg cwt last week. Strong forward lamb prices and weakening grain prices are no doubt adding confidence for restockers, who are buying lambs up to 24kg cwt.

In dollar per head terms, a 35kg lamb is making $147/head, including a $5 skin. Even earlier this year $150 was a good price for trade lambs, so it must be tempting for producers to flick unfinished lambs for a similar price. For buyers, it would be a little scary to spend so much money on lambs, but the potential gains are large.

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Trade lamb prices have this week broken through 800¢, with many pens making 850¢ or more. A few weeks back we talked about the forward contracts on offer at 830¢/kg cwt, and whether they were enough, it would seem not. Restocker buyers are banking on 830¢ or more.

Figure 2 shows the margins which can be made on buying 35kg lambs now, and growing to 55kgs, at different prices. The gross margin on lambs, even when paying record prices, has never been better. Every kilogram gained is adding $3.50-4 per head, and even at high grain prices this will cost just $2-3/kg. Hence lamb feeders can expect to make money with finished lamb prices as ‘low’ as 750¢/kg cwt.

2019-05-23 Sheep 1

If prices reach new records, expensive lambs bought now will return some exceptional margins, which equate to a 22% return.

Key points

* Restocker lamb prices have rallied to new record highs.

* Very strong finished lamb prices are higher than the cost of gain.

* At trade and heavy lamb prices above 800¢ there should be good margins in expensive store lambs.

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What does this mean?

Crunching the numbers show just why restocker lambs are making such good money at the moment. It also highlight the opportunities which can be realized in a lamb finishing system the coming two to three months.

The main risk come from weakening demand in the form of processors cutting shifts in response to tight margins. Markets will always overshoot in a rally, and fall sharply when processors adjust. Last year the peak came at the end of August. The peak could be earlier this year, but the sustainable levels looks to be higher this year, closer to 800¢ rather than 700.

www.mecardo.com.au