Friday, February 23, 2024

Store lambs cheap for this time of year

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December prices haven’t been this low since 2017 as export dynamics keep a lid on returns, says Mel Croad.
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It has been an interesting start to the new season for lambs. Weather has actively played a part in dampening down the flow of lambs into the processors, especially in the North Island. Slaughter rates continue to lag expectations and, as such, the downward pressure on prices has reduced. The flow of lambs into South Island processing plants appears more normal and this has been reflected in a sharper fall in farmgate returns in the past two weeks.

The AgriHQ lamb indicator ranges from $6.15-$6.20/kg this week, versus $7.45-$7.65/kg a year ago. Last year, however, export demand was slumping with speed. This was reflected in farmgate prices that dropped by over $2/kg from their peak in early October to Christmas. 

This year the downside has reduced to 90c/kg but, having started from a much lower position, it has been equally as tough to bear.

With lower farmgate returns come lower store prices. Store prices haven’t been this low for December since 2017. However, back then, a different driver was in control. A hot, dry start to summer drew large volumes of lambs onto the market. With very little appetite from buyers, prices plunged, falling by 50-80c/kg from their November levels to average $2.60-$2.90/kg.

This time around the downside has been more gradual, month to month, and the key driver is weaker export markets rather than a blazing hot start to summer. Current store prices in the paddock for 28kg lambs are averaging $74 and $76 in the North and South Island respectively. A year ago 28kg lambs were trading for $87 and $91– a $13-15 premium on current returns. 

Back in December 2021 buyers had deep pockets, buoyed by farmgate returns still holding at $8.65-$8.75/kg, and 28kg lambs traded for $108-$110.

The lower buy-in price this year has encouraged some to take a punt on store lambs for an early summer trade, before switching to the usual winter trade. Those looking to double their lamb trades this season are being selective in their requirements, opting for something closer to 30kgLW that they can keep moving. Most are steering clear of lighter, longer-term lambs that may struggle through a dry summer, if that is what eventuates.

The aim of the game will be to drive weights to ensure a decent return, something that was lacking on winter trade lambs earlier in the year. Taking that 28kg lamb through to a 20kgCW would see it offloaded in late March/early April, depending on the systems implemented on farm. Based on forecasts within AgriHQ’s December Livestock Outlook report, that lamb is estimated to gross $44/head before costs. 

Depending on the scale of these summer trades and their success, it has to the potential to slow the flow of lambs into processing plants through February, particularly if more lambs are weight-gaining under summer-safe grazing systems.

The big question for some contemplating diving into the store market is, will store prices go even lower from here? Store prices invariably mirror the direction of slaughter prices and with more downside forecast in that space, it’s reasonable to expect store lambs have room to move lower into the new year. 

Based on the five-year average relativity with slaughter prices, this would place January store prices for 28kg lambs at $2.60 and $2.75/kg in the North Island and South Island respectively.

A falling store market in January contrasts with what occurred through January this year. A clear disconnect between store and slaughter prices developed due to too much feed and not enough mouths to control it. As a result, store lamb prices continued to climb through January, despite flat to softer slaughter prices.

While most are in a feed-positive situation currently, a drier summer outlook has been on the radar for some time. This increases the chance of store prices returning to normal trends through January as opposed to what happened earlier this year. 

If securing a lamb at the cheapest price possible is desired then generally that needs to occur before mid-February as AgriHQ data shows from that point, store prices start to ratchet higher.

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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