Thursday, July 7, 2022

PULSE: Still time to enter the store lamb market

Store lamb prices have consistently lifted in recent weeks. After bottoming out under $3/kg earlier on, North Island paddock prices have staged a slight recovery, averaging close to $3.30/kg for 35kg-plus male lambs through April.

Upside in the South Island has been much softer, influenced by dry weather patterns and declining feed levels. Heavier male lambs are struggling to push much above $3/kg in the paddock, while ewe lambs have been a little more receptive to upside, managing to average closer to $3.10/kg.

Disregarding covid-19 impacted markets a year ago, current store prices are tracking similar to 2018 and 2019 levels. The difference back then was April farm gate lamb prices were averaging $7.20/kg in the North Island and $6.75-$7.05/kg in the South Island. To date this month, North Island lamb prices are averaging $6.80/kg and $6.50/kg in the South Island. This indicates that store lamb prices have been slightly overcooked relative to current farm gate prices – a byproduct of the recent surge in demand.

If this trend were to continue, then end margins would come into question. Fortunately, farm gate prices have moved in tandem and it looks like farm gate prices can ably maintain this upward momentum, as exporters note overseas markets continue to go from strength to strength. The only challenge is the inability to get product into markets with shipping logistics unlikely to be resolved until later in the year.

While export demand runs hot, the recent rally, particularly for North Island store lamb prices, is lacking consistency. There is a clear desire by some to build numbers to capitalise on the solid winter trade market, but many other buyers are being forced to wait on the sidelines. A long, dry autumn for many has swallowed farmer confidence around increasing stocking rates leading into winter, despite positive signals from processors. Unfortunately, for those still wanting to up numbers, history has shown us that store lamb prices will invariably continue to lift right through winter, even following a dry autumn. According to AgriHQ data, the store lamb market consistently tops out in August, as winter lamb traders, buoyed by strong pricing, take one last run at the store market.

At this point, however, there is still a chance to secure a store lamb that allows for a reasonable margin to be made. Store lamb prices in the North Island typically track at 46% of the farm gate price through May and June. This would place store lamb prices around $3.30/kg and $3.45/kg respectively. In theory this means little movement in store prices next month compared to where they have been in recent weeks, which allows for some breathing space.

Right now, the store lamb market is sitting at 48% of farm gate price. So, while stronger prices at the farm gate are forecast over the next month or two, store lamb prices won’t lift as fast, indicating some buying opportunities still exist. In the South Island the window to purchase on a lower store to slaughter ratio is limited to May where store prices track at 47% of the farm gate price before lifting to 48-49% in June. On this basis this would add another 30c/kg to store prices between May and June. 

However, with all forecasts there are provisos; the key one at this time of the year being weather. If those dry regions receive the rain they need, then any extra demand could start to push that store price beyond those ratios, effectively reducing any margins at processing time.

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