Australian Lamb and Sheep Meat Annual Review - Rural Bank

 
 
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Australian Lamb
and Sheep Meat
Annual Review
2018
Australian Lamb and Sheep Meat Annual Review - Rural Bank
About the research                                                                 About Rural Bank
The Australian Lamb and Sheep Meat Annual Review includes                          Rural Bank has been a wholly-owned subsidiary of Bendigo and
data and outlooks on factors affecting Australian and international                Adelaide Bank Limited since 2010. It is the only Australian-owned
sheep markets, such as production, seasonal conditions, prices and                 and operated dedicated agribusiness bank, providing exceptional
demand. Significant effort has been taken to secure the most recent                financial services, knowledge and leadership for Australian farmers
data available.                                                                    to grow.
Where appropriate, Middle East and North African nations are                       About Ag Answers
referred to as the Middle East and North Africa (MENA).
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MENA includes: Algeria, Bahrain, Djibouti, Egypt, Gaza Strip, Iran,                that good information is the key to making good business decisions,
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Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank                      values, farm business performance and topical agricultural issues to
and Yemen.                                                                         enable farmers to make informed decisions.




This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s).
The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Rural Bank Limited, ABN 74 083 938
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© Copyright Rural Bank Ltd ABN 74 083 938 416 and Bendigo and Adelaide Bank Ltd ABN 11 068 049 178 (RBL19085) (07/18)

                                                                               2
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Summary

The Australian sheep industry continued its strong run in 2017 with               stock when they would otherwise seek to increase flocks to take
a fifth consecutive year of growth in the average annual trade lamb               advantage of historically high prices. This has seen slaughter rates
price, and fourth consecutive year of growth in the mutton price.                 trend higher, putting downwards pressure on sheep and lamb prices
Lamb production in 2017 was 1.3 per cent lower than 2016, the                     earlier in the year. However the strength of demand is such that
first year of decline after five consecutive years of growth. Growth              prices only declined marginally under the weight of the extra supply.
in both production and prices for a sustained period is a remarkable              Tightening supplies in June have seen prices trend higher, with lamb
combination, and highlights the growing strength of demand over                   entering record territory above 700c/kg.
that time. Given that domestic consumption of sheep meat has
                                                                                  The outlook for the industry remains very positive with global
remained steady, the growth in demand is almost exclusively from
                                                                                  demand set to continue to outpace supply, meaning increased
export markets, namely the US, China and Middle East.
                                                                                  opportunities for Australian sheep meat exports and sustained
The value of exports from the Australian sheep industry was $3.7                  support for prices. The low Australian flock is a limiting factor
billion, equivalent to 7.4 per cent of Australia’s total agri-food exports.       to supply, and producers will be looking for improved seasonal
Sheep industry exports grew by $622 million in 2017, accounting for               conditions to allow for flock expansion.
10.5 per cent of the almost $6 billion growth of agri-food exports; a
                                                                                  This report provides analysis of historical trends of seasonal
significant contribution to the sector’s growth.
                                                                                  conditions, prices, production and demand, both domestically and
Positive sentiment has continued for sheep producers into 2018, but               from a global perspective. It also investigates the outlook for the
has been tempered slightly by poor seasonal conditions which have                 Australian sheep industry and the likelihood of the current strength
forced some producers to buy in more feed or consider turning-off                 of the industry continuing.




                                                                              3
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Seasonal conditions

Australian sheep producers have experienced mostly dry conditions                    South Wales, the Mallee and Wimmera in Victoria and parts of
in 2018. A good, albeit late, spring in 2017 provided most regions                   South Australia where some areas were ‘greener’ than average.
with a good feed base to get through summer. However, the early
                                                                                     Drier than average conditions are expected to continue through
months of 2018 have been drier than average and have seen pasture
                                                                                     winter. The major sheep producing regions of New South Wales,
conditions deteriorate in most sheep producing regions, except
                                                                                     northern Victoria and South Australia are unfortunately among the
for western Victoria and Western Australia which are experiencing
                                                                                     areas with the least likelihood of receiving median rainfall. Conditions
favourable lambing conditions. Autumn largely failed to provide much
                                                                                     are also expected to be warmer than average for most of Australia
improvement in conditions, resulting in poor pasture conditions going
                                                                                     during winter.
into winter.
                                                                                     Both the El Niño – Southern Oscillation and the Indian Ocean Dipole
The extended period of dry conditions is reflected in soil moisture
                                                                                     are forecast to hold their neutral state during winter and therefore
estimates. Most major sheep producing regions had below average
                                                                                     have less influence on Australia’s climate, making local drivers more
root zone soil moisture during May. Soil moisture was average to
                                                                                     influential. The rainfall outlook for south eastern Australia is being
above average in south eastern South Australia, south west Victoria
                                                                                     influenced by below average pressure (warmer water) over the
and Tasmania.
                                                                                     Tasman Sea, which is expected to reduce the rainfall making its way
The effects of below average soil moisture are shown in the                          to Australia by weakening the westerlies. Longer range models are
normalised difference vegetation index (NDVI) where vegetation in                    beginning to suggest an El Niño may develop in spring, with La Niña
May was lower than the long term average for the month in many                       the least likely scenario later in the year.
sheep producing areas. The exception to this was in southern New

        Recent rainfall deciles – Mar to May 2018                                    Chance of above median rainfall outlook – Jul to Sep


                                                                                                                                                       80
                                                          Rainfall Decile
                                                          Ranges                                                                                       75

                                                                                                                                                       70




                                                                                                                                                              Chance of exceeding median rainfall (%)
                                                               Highest
                                                               on record                                                                               65

                                                    10         Very much above
                                                                                                                                                       60
                                                               average
                                                    8-9        Above average                                                                           55

                                                                                                                                                       50
                                                    4-7        Average
                                                                                                                                                       45
                                                    2-3        Below average
                                                                                                                                                       40
                                                               Very much
                                                    1
                                                               below average                                                                           35
                                                               lowest on
                                                                                                                                                       30
                                                               record
                                                                                                                                                       25

                                                                                                                                                       20


Source: Bureau of Meteorology, 2018                                                  Source: Bureau of Meteorology, 2018


      Relative root zone soil moisture – May 2018                                              Vegetation index anomaly – May 2018


                                                          Root zone                                                                                    5.0
                                                          soil moisture                                                                                3.0
                                                                                                                                                       2.0
                                                               Highest 1%                                                                              1.5

                                                               Very much above                                                                         1.0
                                                               average                                                                                 0.6

                                                               Above average                                                                           0.2
                                                                                                                                                       -0.2
                                                               Average
                                                                                                                                                       -0.6
                                                                                                                                                       -1.0
                                                               Below average
                                                                                                                                                       -1.5
                                                               Very much
                                                               below average                                                                           -2.0

                                                               lowest on                                                                               -3.0
                                                               record                                                                                  -5.0

                                                                                                                                                       No Data




Source: Bureau of Meteorology, 2018                                                  Source: Bureau of Meteorology, 2018

                                                                                 4
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Australian production

Australian lamb slaughter fell 2.3 per cent in 2017, brought down by                               be tighter supplies during winter as most old season lambs will have
tighter supply in the first half of the year when seasonal conditions                              already been sold and new season lambs are expected slightly later.
allowed for greater stock retention for flock expansion. Slaughter in                              Winter and spring rainfall will be a major factor in determining lambing
the second half of 2017 was higher than 2016 as conditions began                                   percentages and overall production for the year.
to deteriorate and forced some stock turn-off. The trend of increased
                                                                                                   The Australian sheep flock recovered 4.2 per cent to 70.2 million in
slaughter has continued in early 2018 with year to date lamb
                                                                                                   2017 after a dip in 2016. Producer intentions to continue expanding
slaughter trending 8.1 per cent higher than 2017 as dry conditions in
                                                                                                   flocks to take advantage of strong returns for both sheep meat and
NSW and Victoria have prompted increased stock turn off.
                                                                                                   wool were evident in early 2017, when seasonal conditions allowed
Mutton production also experienced a year in two parts, with tight                                 for greater retention of stock for breeding and wool production.
supplies in early 2017 and a significant rise in slaughter in the                                  However, despite price incentives to expand flocks, the dry seasonal
second half of the year leading to an annual increase of 10.9 per                                  conditions later in the year and in early 2018 produced headwinds
cent. Mutton production has continued to grow in 2018 with year to                                 for flock expansion. The increased slaughter observed in 2018 will
date production trending 14.8 per cent above 2017 as producers                                     delay growth in the flock and subsequently limit production growth.
reluctantly continue to turn-off older stock.                                                      It is expected that producers will switch into flock expansion activities
                                                                                                   when seasonal conditions improve.
Sheep and lamb slaughter in 2018 continues to exceed expectations
as a result of poor seasonal conditions, and indicates that there will

                           The Australian sheep flock was approximately 70.2 million after a 4.2 per cent increase in 2017
                     130                                                                                                                                                                    25
                     120
                                                                                                                                                                                            20




                                                                                                                                                                                                  million head slaughtered
                     110
                     100
million head




                                                                                                                                                                                            15
                     90
                     80                                                                                                                                                                     10

                      70
                                                                                                                                                                                            5
                     60
                     50                                                                                                                                                                     0
                           2000


                                  2001


                                          2002


                                                 2003


                                                        2004


                                                                  2005


                                                                         2006


                                                                                 2007


                                                                                        2008


                                                                                                   2009


                                                                                                                        2010


                                                                                                                                2011


                                                                                                                                       2012


                                                                                                                                                2013


                                                                                                                                                          2014


                                                                                                                                                                  2015


                                                                                                                                                                           2016


                                                                                                                                                                                    2017




                            Sheep flock (LHS)      Lamb slaughter (RHS)         Sheep slaughter (RHS)                                               Data: Meat and Livestock Australia (MLA),
                                                                                                                                                          Australia Bureau of Statistics (ABS)



                            Australian lamb production for January to                                                          Australian lamb production for January to
                            April 2018 was 8 per cent higher than 2017                                                         April 2018 was higher in Victoria and NSW
                     55                                                                                                100
                                                                                                                        90
                     50
                                                                                                                        80
                     45                                                                                                 70
   ‘000 tonnes cwt




                                                                                                     ‘000 tonnes cwt




                                                                                                                        60
                     40                                                                                                 50
                                                                                                                        40
                     35
                                                                                                                        30
                     30                                                                                                 20
                                                                                                                        10
                     25                                                                                                  0
                           Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                                      VIC           NSW        SA          WA           TAS       QLD
                           5yr ave       2016    2017          2018                                                            Jan-Apr 2016         Jan-Apr 2017         Jan-Apr 2018
                                                                                Data: MLA                                                                                                  Data: MLA


                                                                                               5
Australian Lamb and Sheep Meat Annual Review - Rural Bank
International production

World sheep meat production is expected to continue its upward                with average annual lamb slaughter 20.6 per cent lower than the
trajectory in 2018 and reach 15 million tonnes for the first time. This       early 2000s. This is largely due to a shift towards expansion of dairy
follows a 1.2 per cent increase in 2017. The growth in world production       and beef production. New Zealand and Australia are the dominant
has been a long-term trend with a 29 per cent increase being                  exporters of sheep meat, each accounting for approximately 34
recorded since 2000, driven by increases in China and Africa of 70            per cent of global exports. Declining capacity for growth in sheep
and 63 per cent, respectively.                                                meat exports from New Zealand has the potential to create more
                                                                              opportunities for Australian exports to meet growing demand. This
The expected growth in production in 2018 is largely from China.
                                                                              is particularly true in New Zealand’s key markets such as China and
China has been a major contributor to the long-term growth in world
                                                                              Europe, where Australia has lower market share.
sheep meat production and produced 32 per cent of the world’s sheep
meat in 2017. Chinese production is almost exclusively consumed               US sheep meat production continued its steady decline in 2017,
domestically, but has been unable to keep up with growing domestic            falling a further 3.3 per cent; 12 per cent lower than 2010. USDA
demand since the late 2000s, creating an opportunity for sheep                forecasts expect this trend to continue in 2018 with a small decline in
meat imports. In 2017, imports accounted for only 4.3 per cent of             production of 0.7 per cent. While production has been trending lower,
consumption.                                                                  US consumption has been increasing. As a result, the percentage of
                                                                              consumption met by domestic production has declined from 52%
New Zealand lamb slaughter increased by 2.9 per cent in 2017 but is
                                                                              in 2010 to 37% in 2017, increasing the dependence on imports to
trending 3.8 per cent lower in 2018. The New Zealand sheep industry
                                                                              meet demand.
has been operating on a much smaller scale in the last nine years,




                                                                          6
Australian Lamb and Sheep Meat Annual Review - Rural Bank
New Zealand lamb slaughter is trending                                                       New Zealand lamb exports are trending
                 3.5            3.8 per cent below 2017                                                                    12.4 per cent lower in 2018
                                                                                                                60

                 3.0                                                                                             50
                 2.5
                                                                                                                40




                                                                                              ‘000 tonnes swt
million head




                 2.0
                                                                                                                30
                 1.5
                                                                                                                 20
                 1.0

                 0.5                                                                                             10

                  0                                                                                               0
                       Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                                China        UK      Germany Netherlands       USA       France
                       5yr ave      2016      2017       2018                                                         Jan-Apr 2016        Jan-Apr 2017       Jan-Apr 2018
                                                           Data: Statistics New Zealand                                                                      Data: Statistics New Zealand



                       Chinese sheep meat production to increase                                                       US sheep meat production to decrease
                         by 3.1 per cent in 2018, consumption to                                                        by 0.7 per cent in 2018, consumption
                                  increase 2.9 per cent                                                                        to increase 0.3 per cent
                 5.5                                                                                            200
                                                                                                                180
                 5.0                                                                                            160
                                                                                                                140
                                                                                              ‘000 tonnes cwt
million tonnes




                 4.5                                                                                            120
                                                                                                                100
                 4.0                                                                                            80
                                                                                                                60
                 3.5                                                                                            40
                                                                                                                 20
                 3.0                                                                                              0
                       2012      2013      2014   2015     2016      2017      2018f                                  2012      2013      2014      2015      2016     2017      2018f
                       Production       Consumption f= OECD forecast                                                  Production        Consumption* f= USDA forecast
                                                                      Data: OECD-FAO                                                Data: United States Department of Agriculture (USDA)
                                                                                                                              * Consumption estimated based on production and trade data




                                                                                          7
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Demand and trade

  The growing strength of demand from export markets continues                              There are also opportunities arising from declining exports from
  to provide strong support for high sheep and lamb prices, despite                         New Zealand which holds a 55 per cent share of the Chinese sheep
  domestic consumption remaining the largest market for Australian                          meat import market, but have experienced a 10 per cent decline in
  sheep meat. Since 2010, domestic consumption of lamb has                                  lamb export volume to China so far in 2018.
  remained relatively steady, with the growth in production since then
                                                                                            Lamb export volumes to the US for the year to April are 5.2 per
  going almost entirely to export markets. As a result, the share of
                                                                                            cent below 2017, following an eight per cent decline in 2017.
  production exported increased from 40 per cent in 2010 to 51 per
                                                                                            The average lamb export price to the US is averaging 4.8 per cent
  cent in 2017. Export demand is even more significant for mutton
                                                                                            lower than 2017, but still at historically high levels. Lower volumes and
  markets with export volumes equivalent to 87 per cent of production
                                                                                            prices suggest some price resistance for lamb, with other proteins
  in 2017, up from 78 per cent in 2010.
                                                                                            experiencing price declines in the US. Despite an easing in volumes,
  Increased slaughter rates in 2018 have resulted in a five per cent                        demand fundamentals remain strong with lamb growing in popularity,
  increase in the volume of lamb exported between January and                               particularly among millennials in the casual dining and fast food
  April compared to 2017. Exports in March set a new record high for                        segments of the food service sector.
  monthly volume, up 21 per cent from February to 26,288 tonnes. The
                                                                                            The Middle East and North Africa (MENA) region is also
  price of exported lamb has averaged $8/kg this year, five per cent
                                                                                            demonstrating strong demand with a 20 per cent increase in lamb
  higher than 2017, signalling that demand continues to exceed supply.
                                                                                            export value for the year to date, building upon a 16 per cent increase
  The same can be said of mutton, with year to date export volumes up
                                                                                            in value recorded in 2017. This growth is coming from both higher
  15 per cent on 2017 and average price up 3.5 per cent.
                                                                                            prices (+8.2 per cent) and higher volumes (+11.2 per cent). Mutton
  China overtook the US as Australia’s top lamb export market by                            exports to MENA are trending lower in 2018 with volume down
  volume in 2017, registering a 30 per cent increase in volume and 25                       9.6 per cent and value down 7.7 per cent. This comes after growth in
  per cent increase in average price, combining for a remarkable 63 per                     value of 14 per cent in 2017.
  cent jump in export value to $265 million. Mutton exports also had
                                                                                            Lamb continues to increase in popularity in South Korea, albeit from a
  a good year in China, returning to $206 million, just below the peak
                                                                                            very low base. This was observed in a 63 per cent increase in export
  of 2014. Chinese sheep meat import demand can be volatile as it is
                                                                                            value in 2017. This trend has continued in early 2018 with year to date
  dependent on the often variable domestic production which supplies
                                                                                            export value increasing by 18.6 per cent compared to the same time
  approximately 95 per cent of consumption. Demand from China has
                                                                                            last year.
  continued to strengthen in 2018 with the volume of lamb exports
  trending 5.6 per cent higher than 2017 and average prices up 8.6 per                      All factors considered, the outlook for demand and trade is very
  cent. Mutton exports have increased even further with volume up 43.5                      positive with combinations of growing volumes and prices pointing to
  per cent and price up 30.4 per cent. The value of mutton exports for                      very strong demand. The long term trend of declining production in
  January to April is $67 million, already exceeding the value of exports                   New Zealand adds further optimism for the Australian sheep industry
  for the first eight months of 2017. Australian exports to China have                      to capture an increased share of global demand.
  the potential to continue growing from increasing import demand.




                          The volume of Australian lamb exports                                                        Lamb exports to China and MENA
                  28     are trending 5 per cent higher than 2017                                                         are trending higher in 2018
                                                                                                               25
                  26
                  24                                                                                           20
                  22
‘000 tonnes swt




                                                                                             ‘000 tonnes swt




                  20                                                                                           15

                  18
                                                                                                               10
                  16
                  14                                                                                            5
                  12
                  10                                                                                            0
                       Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec                                              China      MENA       USA     South Korea    Japan
                       5yr ave   2016    2017      2018                                                             Jan-Apr 2016   Jan-Apr 2017   Jan-Apr 2018
                                        Data: Global Trade Information Service (GTIS)                                                                            Data: GTIS

                                                                                        8
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Export markets - country detail

Destination                                     YoY%      2017%   Jan-Apr   Jan-Apr        YoY%
               2015      2016      2017
Country                                        Change     Share    2017      2018         Change
                        LAMB EXPORTS (‘000 TONNES SWT)
World          250        260        264         2%                 86        90              5%
China          38          47         62       30%        23%       21        22              6%
USA             58         59         54        -8%       21%       18        17             -5%
UAE             19         21         20        -7%        7%        7         7             -5%
Qatar           13         15         13       -14%       5%        4         4             -17%
South Korea     6           9         12       38%        5%        4         4              -4%
                       MUTTON EXPORTS (‘000 TONNES SWT)
World          161        142        162       15%                  50        57            15%
China          36          31         47       53%        29%       10        15           43%
Malaysia        16         16         15        -7%        9%        3         6            72%
USA             14         10         14       41%         9%        7         5           -25%
Saudi Arabia    17         12         14       19%         9%        6         6             6%
Singapore       10         10         10        2%        6%         3        4             14%
                         LIVE SHEEP EXPORTS (‘000 HEAD)
World          1,960     1,870      1,950       4%                 589       552            -6%
Kuwait          633       635        646        2%        33%      230       101           -56%
Qatar           387       561        640        14%       33%      189       164           -13%
Turkey            0         0        225                  12%                154
UAE             250       191        114       -41%        6%       35        26           -28%
Oman             80        90        113       26%        6%        53        17           -68%

Destination                                  YoY%         2017%   Jan-Apr   Jan-Apr        YoY%
               2015      2016      2017
Country                                     Change        Share    2017      2018         Change
                           LAMB EXPORTS (A$ MILLIONS)
World          1,774     1,799     2,114       18%                 648       714            10%
USA            598        610       651         7%        31%      209       190            -9%
China           141       163       265        63%        13%       84        97            15%
UAE             138       153       163         7%         8%       58        56            -3%
South Korea      42       65        106        63%         5%       33        39            19%
Qatar            93       102       106         4%         5%       30        32             6%
                         MUTTON EXPORTS (A$ MILLIONS)
World          751        641       929        45%                 277       329            19%
China          108         78       207       165%        22%      36         67           88%
USA             93        69        118        70%        13%      61        35            -42%
Malaysia        73         71        84        19%        9%        17       34             97%
Saudi Arabia    73         51        75        48%        8%       32        34             5%
Singapore       50        49         58        18%        6%        17       23            35%
                       LIVE SHEEP EXPORTS (A$ MILLIONS)
World          246        218       249        14%                  76        79            4%
Qatar           47        60         83        39%        34%       24        21           -10%
Kuwait          76        69         82        19%        33%       29        13           -54%
Turkey           0          0        25                   10%                 17
Oman             9         11        16        55%         7%       8          2           -72%
UAE             28        20         14       -32%        6%        4         3            -24%
                                                                                             Data: GTIS
                                                                                   SWT = shipped weight

                                           9
Australian Lamb and Sheep Meat Annual Review - Rural Bank
Prices

Australian lamb prices had a fantastic run in 2017 with the Eastern                                                Eastern states trade lamb indicator increased
States Trade Lamb Indicator (ESTLI) averaging 626c/kg, an 11 per
                                                                                                            750
                                                                                                                          14 per cent from mid-April 2018
cent increase on 2016. This was the fifth consecutive year of growth in
the annual price, and a 50 per cent increase on the 2012 average.                                           700

Lamb prices steadily eased from January to March as more numbers                                            650
came onto the market due to deteriorating seasonal conditions, but
                                                                                                            600



                                                                                 c/kg cwt
began to recover in late April. A tightening supply of lambs in recent
weeks has accelerated the recovery in prices and seen the ESTLI                                             550
reach a record high of 712c/kg. At a national level, indicators are all
averaging lower for the year to date, with restocker lambs showing the                                      500
largest drop (down15 per cent) after being in strong demand this time                                       450
last year. Merino lamb prices are only trending 1.9 per cent lower than
2017 with high wool prices providing a floor to demand. The only lamb                                       400
categories to record year on year increases in price are trade, heavy                                              Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
and Merino lambs in Western Australia where seasonal conditions                                                        5yr ave                    2016                    2017                      2018
were more ideal than in eastern states earlier in the year.                                                                                                                                                                                  Data: MLA

Despite prices trending lower than 2017 levels, they have still been
quite resilient to pressure of increased slaughter. This resilience has
been supported by strong demand, particularly from export markets.                                                 Prices are averaging below 2017 levels for all
                                                                                                            800
                                                                                                                           categories of Australian lamb
Domestic sheep prices are benefiting from the relatively low Australian
dollar in 2018. The dollar has averaged 77 US cents so far in 2018,                                         700
but has been steadily declining from a high of 81 cents in late January
                                                                                 Average price (c/kg cwt)




to a low of 74 cents in June.                                                                               600
                                                                                                            500
The Australian dollar is relatively low from a historic perspective,
particularly compared to 2011 when lamb prices were at similar                                              400
levels to 2018. The ESTLI for year to date is only averaging 1.8 per                                        300
cent higher than the same period in 2011, however the ESTLI in US
                                                                                                            200
dollars is 23.7 per cent lower. This is good news for Australian sheep
producers who are receiving historically high prices, while international                                   100
buyers are paying closer to the historic average.                                                             0
                                                                                                                     Restocker                         Light                       Trade                       Heavy                      Merino
                                                                                                                       2016 YTD                         2017 YTD                           2018 YTD
                                                                                                                                                                                                                                         Data: MLA




                                                                                                                   The Australian dollar has been trending lower
                                                                                                            0.83           after a high of 81c in January
                                                                                                            0.81
                                                                                                            0.79
                                                                                                            0.77
                                                                                 AUD/USD




                                                                                                            0.75
                                                                                                            0.73
                                                                                                            0.71
                                                                                                            0.69
                                                                                                            0.67
                                                                                                            0.65
                                                                                                                   Jan-16
                                                                                                                            Mar-16
                                                                                                                                     May-16
                                                                                                                                              Jul-16
                                                                                                                                                       Sep-16
                                                                                                                                                                Nov-16
                                                                                                                                                                         Jan-17
                                                                                                                                                                                  Mar-17
                                                                                                                                                                                           May-17
                                                                                                                                                                                                    Jul-17
                                                                                                                                                                                                             Sep-17
                                                                                                                                                                                                                      Nov-17
                                                                                                                                                                                                                               Jan-18
                                                                                                                                                                                                                                        Mar-18
                                                                                                                                                                                                                                                 May-18
                                                                                                                                                                                                                                                          Jul-18




                                                                                                                                                                                                    Data: Reserve Bank of Australia

                                                                            10
Rural Bank modelling forecasts lamb prices to remain at existing high                                                 Over the longer term, Australian sheep and lamb prices are expected
levels through winter before easing through spring and into summer.                                                   to remain above long term averages as demand continues to outpace
Seasonal conditions in winter and spring will play a significant role                                                 supply. The outlook for continued growth in global sheep meat import
in the direction of prices within the model’s 68 per cent confidence                                                  demand means Australia will continue to have robust demand from
interval range, which averages between 592-711c/kg. It is expected                                                    major export markets of the US, China and the Middle East, as well
that prices will trend closer to the upper end of the range, particularly                                             as emerging markets such as South Korea. Supply is expected to
with expectations that lamb supply over winter will be tight, given                                                   continue to struggle to match the growth in demand due to a low
that most old season lambs were sold earlier than usual and new                                                       Australian flock and the steadily declining industry in New Zealand.
season lambs are likely to be finished later than usual due to poor                                                   These factors all favour continued strength in sheep and lamb prices
seasonal conditions. This could mean a continuation of the upwards                                                    in Australia.
trend in prices observed since late April, before the usual easing of
prices in spring when new lambs come into markets. An improvement
in seasonal conditions from now to the end of the year would give
prices a further boost with producers looking to retain more lambs,
tightening supply, and restockers looking to compete with processors
in markets, strengthening demand.


                                                                                 Eastern States Trade Lamb Indicator
           800
           700
           600
           500
c/kg cwt




           400
           300
           200
                                                                                                                                                                                            95% confidence interval
           100
                                                                                                                                                                                            68% confidence interval
             0
                  Jan -11

                            Jun -11

                                       Nov -11

                                                 Apr -12

                                                            Sep -12

                                                                       Feb -13

                                                                                  Jul -13

                                                                                            Dec -13

                                                                                                      May -14

                                                                                                                Oct -14

                                                                                                                           Mar -15

                                                                                                                                     Aug -15

                                                                                                                                               Jan -16

                                                                                                                                                         Jun -16

                                                                                                                                                                   Nov -16

                                                                                                                                                                             Apr -17

                                                                                                                                                                                         Sep -17

                                                                                                                                                                                                   Feb -18

                                                                                                                                                                                                             Jul -18

                                                                                                                                                                                                                       Dec -18




                                                                                                                                                                                       Data: MLA, Ag Answers forecast




                       Australian mutton prices are averaging                                                             Australian mutton prices increased by an exceptional 25.7 per
                               6.8 per cent below 2017                                                                    cent in 2017, the fourth consecutive year of growth in the average
           550                                                                                                            annual price. The average price of 439c/kg was the highest on
                                                                                                                          record and 74 per cent higher than 2012.
           500
                                                                                                                          Prices have remained high in 2018, but have trended below the
           450                                                                                                            exceptional prices of 2017 since late March. The main cause of
                                                                                                                          prices being lower than this time last year has been the relatively
           400
c/kg cwt




                                                                                                                          higher slaughter rates, however strong demand, particularly from
           350                                                                                                            China, has continued to force prices upwards despite the added
                                                                                                                          supply. Mutton prices for the year to date are averaging lower in all
           300
                                                                                                                          states except Western Australia where they are sitting 1.4 per cent
           250                                                                                                            higher than 2017. The outlook for mutton prices remains positive
                                                                                                                          with demand strong and supply low from a historic perspective.
           200                                                                                                            Producers will be looking to retain older sheep, which means an
                 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
                                                                                                                          improved seasonal outlook would allow producers to hold stock,
                  5yr ave             2016           2017             2018                                                tightening supply and boosting prices further.
                                                                                                  Data: MLA

                                                                                                                11
Sheep and lamb prices – state detail

 State          Type                   Current Price      June 2017      5 year average   80th percentile   20th percentile
                                        21st June
                                        EASTERN STATES TRADE LAMB INDICATOR (C/KG CWT)
                ESTLI                      712               625               555             616               498
                                                   SALEYARD INDICATORS (C/KG CWT)
 Vic            Restocker 0-18kg           647               705               552             638               475
                Light 12-18kg              659               683               539             607               462
                Trade 18-22kg              661               681               558             621               492
                Heavy 22kg+                660               659               560             616               504
                Merino 16-22kg             620               649               493             567               411
                Mutton 18-24kg             518               523               368             430               302
 NSW            Restocker 0-18kg           539               673               561             654               481
                Light 12-18kg              630               645               526             603               446
                Trade 18-22kg              651               654               557             617               504
                Heavy 22kg+                656               631               563             622               506
                Merino 16-22kg             615               599               502             573               428
                Mutton 18-24kg             498               501               362             418               302
 SA             Restocker 0-18kg           659               490               572             656               485
                Light 12-18kg              644               559               517             589               452
                Trade 18-22kg              612               568               530             579               488
                Heavy 22kg+                661               607               540             592               489
                Merino 16-22kg             642               503               475             535               418
                Mutton 18-24kg             398               458               326             381               276
 WA             Restocker 0-18kg           505               534               465             538               406
                Light 12-18kg              608               592               499             572               450
                Trade 18-22kg              641               652               516             607               455
                Heavy 22kg+                657               628               509             593               450
                Merino 16-22kg             627               615               486             586               417
                Mutton 18-24kg             415               423               304             381               236
 Tas            Restocker 0-18kg           627               688               560             644               483
                Light 12-18kg              581               633               531             586               467
                Trade 18-22kg              591               625               546             595               500
                Heavy 22kg+                543               616               535             576               492
                Mutton 18-24kg             489               542               344             402               282
                                                         RETAIL PRICE ($/KG)
 Aus            Lamb                       15.01            14.50              13.83          14.85             12.67
                                                         AUSTRALIAN DOLLAR
                AUD/USD                    0.74              0.76              0.80            0.90              0.75

Data: MLA, Reserve Bank of Australia




                                                                    12
Wool

   Wool prices have been setting record highs for most of 2018 with                                             While production is marginally higher in 2017/18, demand for Australian
   the Eastern Market Indicator reaching a record high of 2,073c/kg                                             wool is growing at a more rapid rate. The volume of Australian wool
   in June, adding further confidence to Australian sheep producers.                                            exports for the financial year to March are trending 5.5 per cent higher
   The sustained rise in prices over the last 18 months has been observed                                       than 2016/17. Demand has exceeded supply to the extent that the
   to a greater extent for fine wool. The 18 micron price guide in the                                          average export price has increased 15.7 per cent for the financial year
   southern wool zone is averaging 16 per cent higher for the financial                                         to date. Increases in both volume and price have led to a 22.5 per cent
   year to date compared to 2016/17. Medium and broad wools have                                                rise in the value of wool exports for the year to date, up to $2.9 billion.
   also experienced significant rises in price recently with the southern
                                                                                                                The outlook for wool prices remains favourable, with very low stocks
   price guides for 21 and 28 micron wool averaging 34 per cent and
                                                                                                                of wool in the global pipeline and demand for woollen garments
   24 per cent higher in the 2017/18 financial year to date, respectively.
                                                                                                                expected to continue growing as more people enter the Chinese
   Production has been relatively steady in the last few years, after a long                                    middle class and a widening range of products are manufactured with
   term downwards trend. At the end of May, wool production for the                                             wool. Economic indicators also favour high wool prices, with high global
   financial year was 1.2% higher than 2016/17. Fewer sheep shorn and                                           consumer confidence ratings, and a lower Australian dollar at around
   lower average cuts per head are likely to see wool production decline                                        75 US cents.
   in 2018/19.



                               The eastern market indicator hit a record                                                             Fine wool has experienced the best price
                     2,200
                                 high of 2,027c/kg at the end of May                                                        3,000
                                                                                                                                      gains, recently joined by medium wool

                     2,000                                                                                                  2,500
                     1,800
                                                                                                                            2,000
c/kg clean




                                                                                                          c/kg clean




                     1,600
                                                                                                                            1,500
                     1,400
                                                                                                                            1,000
                     1,200
                                                                                                                             500
                     1,000

                      800                                                                                                       0
                                                                                                                                    Jan Apr     Jul     Oct Jan Apr       Jul    Oct Jan Apr     Jul
                             Jul

                                   Aug

                                         Sep

                                                 Oct

                                                       Nov

                                                             Dec

                                                                   Jan

                                                                         Feb

                                                                               Mar

                                                                                     Apr

                                                                                           May

                                                                                                 Jun




                                                                                                                                    16 16       16      16 17 17          17     17 18 18        18
                              2015/16           2016/17        2017/18                                                              17 micron         21 micron     28 micron
                                                             Data: Australian Wool Exchange (AWEX)                                                                                          Data: AWEX


                              Australian wool production is 1.2 per cent                                                             The value of Australian wool exports is
                                         higher than 2016/17                                                                         trending 18.9 per cent higher in 2017/18
                      45                                                                                                    2,500

                      40
                                                                                                                            2,000
                      35
‘000 tonnes greasy




                                                                                                                            1,500
                                                                                                              A$ millions




                      30

                      25                                                                                                    1,000
                      20
                                                                                                                             500
                       15

                       10                                                                                                      0
                                                                                                                                     China            Italy       India          Czech     Rest of
                             Jul

                                   Aug

                                         Sep

                                                Oct

                                                       Nov

                                                             Dec

                                                                   Jan

                                                                         Feb

                                                                               Mar

                                                                                     Apr

                                                                                           May

                                                                                                 Jun




                                                                                                                                                                                Republic    world
                              5yr ave          2015/16       2016/17       2017/18                                                  2015/16 YTD           2016/17 YTD      2017/18 YTD
                                                               Data: Australian Wool Testers Authority                                                                                       Data: GTIS

                                                                                                         13
In the spotlight – live sheep exports

  Live sheep exports are a significant part of the Australian sheep                            were to be processed locally, state sheep and lamb slaughter would
  industry, contributing $249 million, or 7.6 per cent to the combined                         reach 5.4 million, a 46 per cent increase from 2017. This growth in
  sheep industry export value of $3 billion. Australia exported 1.95                           supply is not unprecedented, with a 47 per cent increase in slaughter
  million live sheep in 2017, representing only 6.1 per cent of Australian                     recorded in 2013. This corresponded with a decline of 16 per cent in
  sheep and lamb offtake for the year. The vast majority of Australia’s                        the annual weighted average trade lamb and mutton price. Current
  live sheep exports leave from Western Australia with 1.7 million sheep                       bills put to parliament propose a phase out of the trade over five years,
  exported in 2017. This accounted for 31 per cent of the state’s sheep                        meaning a gradual increase in slaughter requirement could occur.
  and lamb offtake (slaughter plus live exports) for the year. As a result,                    History also provides an example of this with slaughter increasing
  the outcomes of current proposals to phase out the live sheep export                         for five years between 2003 and 2008 by 35 per cent, and a
  trade would be most strongly felt in Western Australia rather than other                     corresponding decline in the weighted average price of 21.7 per cent.
  exporting states of South Australia and Victoria, where live exports                         There are many more factors to consider when assessing the effects
  accounted for 5.3 and 0.1 per cent of these states’ respective offtake                       of a phasing out of live sheep exports, but applying these percentage
  in 2017.                                                                                     declines to the 2017 weighted average price of 535c/kg would bring
                                                                                               the price down to 419-449c/kg, still above the 80th percentile level.
  A loss of the live export trade would require approximately 1.7 million
  sheep to find alternative markets in Western Australia. Assuming they



                                       The number of live sheep exported per year from Australia has levelled out at
               8                        approximately two million after declining from a peak of 6.8 million in 2001
               7
               6
               5
million head




               4
               3
               2
               1
               0
                                                                                                                              2011
                                                                                                                   2010




                                                                                                                                                                                               2016
                    2000


                             2001




                                             2003


                                                    2004


                                                             2005


                                                                    2006


                                                                             2007


                                                                                        2008


                                                                                                   2009




                                                                                                                                            2012


                                                                                                                                                          2013


                                                                                                                                                                     2014


                                                                                                                                                                                  2015




                                                                                                                                                                                                              2017
                                      2002




                    Kuwait          Qatar     UAE          Oman     Jordan          Saudi Arabia               Bahrain              Others
                                                                                                                                                                                                             Data: GTIS



                      The majority of Australian live sheep                                                                Western Australia live sheep exports
                         exports came from WA in 2017                                                                     accounted for 31 per cent of the state’s
                                                                                                               6             sheep and lamb offtake in 2017
                           QLD
                                                                                                               5
                   NSW     0.0
                   0.2%
                                                                                                               4
                     VIC
                                                                                                million head




                    0.7%                                                                                       3

                              SA                                                                               2
                                                     WA
                             13.3%
                                                    85.8%
                                                                                                               1

                                                                                                               0
                                                                                                                                                                         2011
                                                                                                                                            2007




                                                                                                                                                                                                                     2017
                                                                                                                             2005




                                                                                                                                                   2008




                                                                                                                                                                                       2013


                                                                                                                                                                                                      2015
                                                                                                                                                           2009




                                                                                                                                                                                2012
                                                                                                                                     2006




                                                                                                                                                                  2010




                                                                                                                                                                                              2014
                                                                                                                      2004




                                                                                                                                                                                                              2016




                                                                                                                          Sheep & lamb slaughter                     Sheep exported
                                                                             Data: GTIS                                                                                                          Data: GTIS, MLA

                                                                                          14
Primary sources:
Australian Bureau of Statistics, 2018, Principal Agricultural Commodities 2016-17, accessed June 2018.
Australian Wool Exchange, 2018, Micron price guides, accessed June 2018.
Australian Wool Testers Authority, 2018, Key Test Data, accessed June 2018.
Bureau of Meteorology, 2018, Australian NDVI standardised anomaly map, accessed June 2018.
Bureau of Meteorology, 2018, Australian rainfall decile map, accessed June 2018.
Bureau of Meteorology, 2018, Australian rainfall outlook map, accessed June 2018.
Bureau of Meteorology, 2018, Australian relative soil moisture map, accessed June 2018.
Global Trade Information Service, 2018, Global Trade Atlas, accessed June 2018.
Meat and Livestock Australia, 2018, Statistics Database, accessed June 2018.
OECD-FAO, 2017, Agricultural Outlook 2017-2026, accessed June 2018.
Reserve Bank of Australia, 2018, Exchange Rates Historical Data, accessed June 2018.
Statistics New Zealand, 2018, Infoshare, accessed June 2018.
United States Department of Agriculture Economic Research Service, 2018, Livestock and Meat International Trade Data, accessed June 2018.

                                                                          15
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E ag.answers@ruralbank.com.au

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W ruralbank.com.au

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