Wednesday, April 24, 2024

Lamb metrics edge closer to the end goal

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But is this lift a directional shift in demand – or is it driven by the lack of product out of New Zealand, asks Mel Croad.
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Earlier forecasts pointed to a blanket drop in average farmgate lamb prices to mid-$5/kg by February. Fortunately, the lack of lambs into processing plants from late-January to March meant no one had to suffer that fate. That’s not to say that the fall in AgriHQ’s lamb indicators to $5.80-$6.10/kg has been anything to crow about, but it still looks better against earlier budgets.

While a shortage of lamb over the past six weeks put a floor into lamb prices, we have also seen some improvement in demand from some of our more traditional markets. Many customers held off buying late last year, on the back of our potential drought and surge in supply. They are now finding their inventories are lower than they would like. If this momentum can be maintained it will be positive for farmgate prices.

What needs to be determined, however, is if this current lift in interest is a directional shift in demand or is being driven by the recent lack of product out of New Zealand. Ultimately a solid recovery in export prices and therefore farmgate returns needs to be demand driven rather than reactionary to supply constraints.

The broader global picture still points to supplies outpacing demand, especially when we add Australia into the equation. While this drove export prices down, it enabled the continued flow of lamb into markets, preventing any build-up of stocks. 

Global consumers are still showing willingness to purchase lamb, but their ability to pay a high price has eroded. The lower prices have helped keep lamb on the menu for a lot of consumers, which is considered a win during an almost global cost-of-living crisis. This crisis is determining how and where consumers choose to spend their money – and consumer spending is expected to remain sluggish through 2024.

Driving most of the upside in global supplies have been shipments out of Australia, signalling growth in its breeding flock and subsequent lamb production. In the 10 months to the end of February 2024, Australia exported 294,000 tonnes of lamb. This is a 70,000t increase on the same period for the four years prior.

Recent analysis from Meat & Livestock Australia (MLA) highlights another big production year for Australian lamb, with 2024 exports forecast to lift by another 9000t to a record 335,000t. Heading in the opposite direction are NZ lamb production and exports. 

Tighter supplies may have supported NZ returns on an individual market basis in recent weeks, but that advantage almost evaporates on a wider, global scale. Australia’s sheer size on the global market now means it sways the direction of global lamb prices. If this sounds familiar, it’s because it wasn’t long ago that NZ held this position.

MLA is forecasting Australian lamb production to peak in 2024. On face value that should mean NZ will start to face less competition in our export markets in the years following. But it’s not that simple.

Not only has the Australian sheep flock experienced significant growth in the past two years, but productivity gains have also been substantial. Any downside is only forecast to drop production and exports back to the 2023 levels. 

Balancing this, however, is the expectation that global demand will start to outpace supplies as economic conditions improve from later this year. Ultimately this means a further wait for a sustained improvement in export returns and farmgate prices. 

The alternative scenario is that global economic conditions improve faster than forecast and the upside to farmgate prices is felt sooner. This aligns with sheep farmers’ wish for the sector, but gut feel is that we are not quite at that scenario yet.

This article was written by AgriHQ analyst Mel Croad. Mel reports provide key insights into what makes our sheep and beef markets tick. Subscribe to AgriHQ reports here.

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