Thursday, July 7, 2022

PULSE: More upside for store lamb prices

Store lambs have been the victors of the strong upside in slaughter prices recently.  Winter supply contracts have quickly established pricing expectations through to early spring, which has buyers facing a much more promising outlook than a few weeks ago. Prices in both the paddock and sale yards have surged, allowing vendors to cash-in on the higher returns as buyers scurry to secure winter trading numbers. 

Unfortunately, not all winter traders are in their usual position to lift numbers. Much drier conditions, particularly through Hawke’s Bay and parts of Canterbury, mean many only have a fraction of their normal numbers on-farm.  

If weather conditions turn for the better and feed levels improve, we may see a last-ditch rush to secure store lambs. But that will only occur if margins stack up. 

It begs the question whether lamb prices still have some gas left in the tank. In the last 10 weeks, AgriHQ data shows slaughter prices have lifted by 90c-$1/kg while store prices over the same timeframe have lifted by 65-70c/kg in the North Island and 40c/kg in the South Island.

To determine how buyable these lambs are, calculating the relativity between store and slaughter prices is an easy place to start. Paddock prices will be used as each selling centre has its own set of influences unique to them. However, the same principals apply. 

In the paddock at this time of the season, South Island store lamb prices generally track at 47% of schedule. Based on current AgriHQ data, store lambs are tracking at 45% of the slaughter price, meaning prices are undercooked by at least 10c/kg. 

Dry conditions plaguing major lamb finishing regions is generally behind the slower upside in South Island store lamb prices. 

North Island store lamb prices generally track at 48% of schedule in May. Based on current AgriHQ data, store lambs are tracking at 50% of the slaughter price – indicating they are overheated by as much as 20c/kg. 

However, current buyers are looking at the finish line and the margins they stand to make, rather than worrying about the additional 20c/kg needed to acquire lambs. 

For this upward trend to continue buyers will need to maintain confidence of further pricing upside. Winter contracts and spot-market upside support this theory. 

Those who are buying store lambs now without a signed contract must be content with the additional risk this brings. 

AgriHQ’s North Island Livestock Outlook is forecasting 21kg cwt lambs to average $177 in August. Based on current store values for a 38kg male in the paddock that will leave a gross margin of just over $30/hd. In the South Island the margin extends out to over $50/hd gross based on the softer buy-in price.

If buyers were to push out purchases until August or manage a second trade, they would be looking at a range of $4.15-$4.30/kg in the North Island and $3.95-$4.10/kg in the South Island for a 38kg store lamb. This is based on the historical relativity of store lambs to slaughter prices in August. 

A tightening supply of lambs, processor competition, and supply contract prospects could easily push prices to the higher end of that range. Under this scenario margins are likely to be slimmer than purchasing earlier on, and the opportunity to maximise returns will be tighter. 

While AgriHQ forecasts a further lift into September for prices, it’s worth keeping in mind that early expectations point to softening values through October.

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