Monday, April 22, 2024

What’s going wrong for lamb right now?

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With export markets still volatile and susceptible to fast-paced change, lamb’s recent good fortunes could be coming to an end.
A rapid deterioration in demand and pricing of lamb from China is starting to ripple through other key markets.
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Procurement pressure has masked the deterioration in export markets for the past six weeks, allowing farmgate lamb slaughter prices to lift. But it seems those good fortunes could be coming to an end. 

At least one meat company has called time on further upside, pulling money out of premiums to get prices better aligned. Whether or not this can stick, with more companies possible choosing this option, will become clearer in the weeks ahead. 

After bottoming out in early February, lamb slaughter prices started to slowly improve. The idea of China loosening its covid lockdown restrictions boosted expectations for a strong improvement in export demand. Upside to export prices was visible by mid-March and continued into April. Everything looked like it was tracking as it should be. So much so, store demand spiked as most expected a return to winter pricing trends witnessed over the last couple of years. 

But as we have seen in recent weeks, export markets remain volatile and susceptible to fast-paced change. At the core has been a rapid deterioration in demand and pricing from China, and this is starting to ripple through other key markets. 

Pricing downside is uncommon at this point of the season. We did witness it through the first global covid-19 lockdown in 2020. But usually demand tracks sideways through the winter months as northern hemisphere markets contend with lower consumption in summer, before sparking higher in the later stages of the year.

The tripwire to this downside has been increasing inventories and lowered consumption in key markets. In other words, demand is no longer outpacing supplies, rather it’s quite the opposite.  Not only are key markets contending with average economic conditions, but the supply of lamb on offer has soared. 

Between New Zealand and Australia last month, over 61,000t of lamb was exported. This was a lift of 9000t on April’s volume and over 3000t more than May 2022. While it may sound promising that markets are absorbing larger export volumes, it is coming at a cost of much lower asking prices.

A whopping 24,000t of lamb was shipped to China from NZ and Australia last month, compared to 15,000t a year ago. Effectively this market is being saturated with lamb, giving China the ability to determine prices, especially as inventories grow. Prices for key cuts such as flaps into China have fallen from US$7.25/kg in early April to now be closer to US$5.50/kg. Over the same period last year, flap prices fell by a much smaller amount, but they started out a lot higher at US$9.05/kg in early April, limiting any pricing impact at the farmgate.

It’s hard to envisage a turnaround in export fortunes in the next couple of months. As NZ’s production seasonally reduces, it will limit our exposure to the export scene. However, reducing exports in a bid to build demand won’t be as simple as previous years. Australia will keep its foot on the lamb production peddle, plugging any gaps in supply from our smaller presence. 

Anyone setting pricing expectations based on what’s happened over the past two winters will need to readjust their figures. Current export pricing and direction simply does not support a run in farmgate prices to record levels. For most that means prices won’t return to $9/kg or above as we have enjoyed over the last two winter trade seasons. 

For those that choose to ride the season out, it would be wise to lock in processing space, especially as contracts are thin on the ground. Despite industry forecasts for less lambs this season, the already-slow flow into plants means congestion will still feature late in the season.

AgriHQ’s outlook for lamb has been revised lower but still points to subtle upside through to spring. For anything greater to develop, export demand would need to pick up. Otherwise increased global supplies will continue to stifle prices. 

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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