Farm Tender

Mecardo Analysis - The FX effect

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By Matt Dalgleish | Source: MLA, Mecardo

A premium subscriber asked us to compare current market highs for lamb and mutton, considering the softer exchange rate to the US, to see if our strong domestic prices are flowing through to record prices being paid by export buyers in their local currency terms. We focused on our two largest export markets for mutton and lamb, the USA and China.

The Eastern States Trade Lamb Indicator (ESTLI) hit 950¢/kg cwt this week, 7.5% higher than the winter peak achieved during the 2018 season of 884¢. However, when we look at the ESTLI in foreign buyer terms we are yet to see it reach above previous highs – Figure 1.

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Looking at the ESTLI in US$ terms since 2009 we can see that the market peaked at 673US¢ during 2011, when the Australian dollar was worth more than one US dollar. Since the peak in 2011 the A$ has depreciated 36% and the net effect of the falling currency has been to keep our exports competitive in offshore markets despite the record local prices being paid at the sale yard.

Currently the A$ is trading close to 70US¢, which places an ESTLI of 950¢ in local terms at around 665US¢ in the USA, 1.2% below the 2011 peak and 4.6% above the 2018 winter peak of 636US¢.

A similar story is displayed when comparing National Mutton Indicator (NMI) in A$ and US$ terms. The current high of 598¢ in local currency terms sits 15.2% above the 2018 peak of 519¢. However, converting to US$ terms the 2019 peak of 419¢ is just 8.7% higher than the 2018 peak of 386US¢ and still 15.1% below the 2011 peak of 494US¢ - Figure 2.

2019-07-18 Sheep 1 2019-07-18 Sheep 2

Converting Australian dollar prices for the ESTLI and NMI into Chinese Yuan (CNY) terms shows that lamb prices are only just making new highs in this most recent rally in the ESTLI, pushing 3% above the 2011 peak. Meanwhile, NMI in CNY terms remains 11% below the 2011 peak – Figure 3.

2019-07-18 Sheep 3

Key points
   * Despite record lamb and mutton prices in local currency terms prices remain below historic highs for mutton in China and lamb/mutton in the USA
   * The ESTLI in Chinese Yuan has only made a record high this week, a mere 3% above the previous peak during the 2011 season, while the NMI is 11% below the 2011 high
   * ESTLI in US$ terms remains 1.2% below the 2011 record level and the NMI is 15% below the 2011 peak

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What does this mean?
Over the last five years combined mutton and lamb export volumes from Australia have represented 69% of total lamb/mutton production on average, with 20% of these exports going to China and 16% to the USA.

In the last decade export buyers in these two destinations have paid more in their local currency terms for lamb and mutton product. Only in this last rally has the ESTLI in Chinese terms been more expensive, and not by a great amount. Considering the issues currently facing the pork industry in China it is any wonder they are still happy to pay up for Aussie lamb and mutton given the falling A$ has insulated them somewhat from the strong domestic Australian market.


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