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

2 2 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 74 083 938 416 AFSL / Australian Credit Licence 238042 makes no representation as to or accepts any responsibility for the accuracy or completeness of information contained in this report. Any opinions, estimates and projections in this report do not necessarily reflect the opinions of Rural Bank and are subject to change without notice.

Rural Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth therein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. The information contained in this report does not take into account your personal circumstances and should not be relied upon without consulting your legal, financial, tax or other appropriate professional.

Copyright Rural Bank Ltd ABN 74 083 938 416 and Bendigo and Adelaide Bank Ltd ABN 1 1 068 049 178 (RBL19085) (07/18) About the research The Australian Lamb and Sheep Meat Annual Review includes data and outlooks on factors affecting Australian and international sheep markets, such as production, seasonal conditions, prices and demand. Significant effort has been taken to secure the most recent data available. Where appropriate, Middle East and North African nations are referred to as the Middle East and North Africa (MENA). MENA includes: Algeria, Bahrain, Djibouti, Egypt, Gaza Strip, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Yemen.

About Rural Bank Rural Bank has been a wholly-owned subsidiary of Bendigo and Adelaide Bank Limited since 2010. It is the only Australian-owned and operated dedicated agribusiness bank, providing exceptional financial services, knowledge and leadership for Australian farmers to grow. About Ag Answers Ag Answers is a specialist insights division of Rural Bank. Recognising that good information is the key to making good business decisions, Rural Bank provides research and analysis into commodities, farmland values, farm business performance and topical agricultural issues to enable farmers to make informed decisions.

Australian Lamb and Sheep Meat Annual Review - Rural Bank

3 The Australian sheep industry continued its strong run in 2017 with a fifth consecutive year of growth in the average annual trade lamb price, and fourth consecutive year of growth in the mutton price. Lamb production in 2017 was 1.3 per cent lower than 2016, the first year of decline after five consecutive years of growth. Growth in both production and prices for a sustained period is a remarkable combination, and highlights the growing strength of demand over that time. Given that domestic consumption of sheep meat has remained steady, the growth in demand is almost exclusively from export markets, namely the US, China and Middle East.

The value of exports from the Australian sheep industry was $3.7 billion, equivalent to 7.4 per cent of Australia’s total agri-food exports. Sheep industry exports grew by $622 million in 2017, accounting for 10.5 per cent of the almost $6 billion growth of agri-food exports; a significant contribution to the sector’s growth. Positive sentiment has continued for sheep producers into 2018, but has been tempered slightly by poor seasonal conditions which have forced some producers to buy in more feed or consider turning-off stock when they would otherwise seek to increase flocks to take advantage of historically high prices.

This has seen slaughter rates trend higher, putting downwards pressure on sheep and lamb prices earlier in the year. However the strength of demand is such that prices only declined marginally under the weight of the extra supply. Tightening supplies in June have seen prices trend higher, with lamb entering record territory above 700c/kg.

The outlook for the industry remains very positive with global demand set to continue to outpace supply, meaning increased opportunities for Australian sheep meat exports and sustained support for prices. The low Australian flock is a limiting factor to supply, and producers will be looking for improved seasonal conditions to allow for flock expansion. This report provides analysis of historical trends of seasonal conditions, prices, production and demand, both domestically and from a global perspective. It also investigates the outlook for the Australian sheep industry and the likelihood of the current strength of the industry continuing.

Summary

Australian Lamb and Sheep Meat Annual Review - Rural Bank

4 Seasonal conditions Australian sheep producers have experienced mostly dry conditions in 2018. A good, albeit late, spring in 2017 provided most regions with a good feed base to get through summer. However, the early months of 2018 have been drier than average and have seen pasture conditions deteriorate in most sheep producing regions, except for western Victoria and Western Australia which are experiencing favourable lambing conditions. Autumn largely failed to provide much improvement in conditions, resulting in poor pasture conditions going into winter.

The extended period of dry conditions is reflected in soil moisture estimates. Most major sheep producing regions had below average root zone soil moisture during May. Soil moisture was average to above average in south eastern South Australia, south west Victoria and Tasmania. The effects of below average soil moisture are shown in the normalised difference vegetation index (NDVI) where vegetation in May was lower than the long term average for the month in many sheep producing areas. The exception to this was in southern New South Wales, the Mallee and Wimmera in Victoria and parts of South Australia where some areas were ‘greener’ than average.

Drier than average conditions are expected to continue through winter. The major sheep producing regions of New South Wales, northern Victoria and South Australia are unfortunately among the areas with the least likelihood of receiving median rainfall. Conditions are also expected to be warmer than average for most of Australia during winter.

Both the El Niño – Southern Oscillation and the Indian Ocean Dipole are forecast to hold their neutral state during winter and therefore have less influence on Australia’s climate, making local drivers more influential. The rainfall outlook for south eastern Australia is being influenced by below average pressure (warmer water) over the Tasman Sea, which is expected to reduce the rainfall making its way to Australia by weakening the westerlies. Longer range models are beginning to suggest an El Niño may develop in spring, with La Niña the least likely scenario later in the year.

4 Chance of above median rainfall outlook – Jul to Sep Recent rainfall deciles – Mar to May 2018 Relative root zone soil moisture – May 2018 Vegetation index anomaly – May 2018 Source: Bureau of Meteorology, 2018 Source: Bureau of Meteorology, 2018 Source: Bureau of Meteorology, 2018 Source: Bureau of Meteorology, 2018 Seasonal conditions Australian sheep producers have experienced mostly dry conditions in 2018.

A good, albeit late, spring in 2017 provided most regions with a good feed base to get through summer. However, the early months of 2018 have been drier than average and have seen pasture conditions deteriorate in most sheep producing regions, except for western Victoria and Western Australia which are experiencing favourable lambing conditions. Autumn largely failed to provide much improvement in conditions, resulting in poor pasture conditions going into winter.

The extended period of dry conditions is reflected in soil moisture estimates. Most major sheep producing regions had below average root zone soil moisture during May. Soil moisture was average to above average in south eastern South Australia, south west Victoria and Tasmania. The effects of below average soil moisture are shown in the normalised difference vegetation index (NDVI) where vegetation in May was lower than the long term average for the month in many sheep producing areas. The exception to this was in southern New South Wales, the Mallee and Wimmera in Victoria and parts of South Australia where some areas were ‘greener’ than average.

Drier than average conditions are expected to continue through winter. The major sheep producing regions of New South Wales, northern Victoria and South Australia are unfortunately among the areas with the least likelihood of receiving median rainfall. Conditions are also expected to be warmer than average for most of Australia during winter.

Both the El Niño – Southern Oscillation and the Indian Ocean Dipole are forecast to hold their neutral state during winter and therefore have less influence on Australia’s climate, making local drivers more influential. The rainfall outlook for south eastern Australia is being influenced by below average pressure (warmer water) over the Tasman Sea, which is expected to reduce the rainfall making its way to Australia by weakening the westerlies. Longer range models are beginning to suggest an El Niño may develop in spring, with La Niña the least likely scenario later in the year.

Rainfall Decile Ranges Root zone soil moisture Highest on record Very much above average Above average Average Below average Very much below average lowest on record Highest 1% Very much above average Above average Average Below average Very much below average lowest on record 5.0 3.0 2.0 1.5 1.0 0.6 0.2 -0.2 -0.6 -1.0 -1.5 -2.0 -3.0 -5.0 No Data 80 75 70 65 60 55 50 45 40 35 30 25 20 Chance of exceeding median rainfall (%) 10 8-9 4-7 2-3 1

Australian Lamb and Sheep Meat Annual Review - Rural Bank

5 Australian production Australian lamb slaughter fell 2.3 per cent in 2017, brought down by tighter supply in the first half of the year when seasonal conditions allowed for greater stock retention for flock expansion. Slaughter in the second half of 2017 was higher than 2016 as conditions began to deteriorate and forced some stock turn-off. The trend of increased slaughter has continued in early 2018 with year to date lamb slaughter trending 8.1 per cent higher than 2017 as dry conditions in NSW and Victoria have prompted increased stock turn off. Mutton production also experienced a year in two parts, with tight supplies in early 2017 and a significant rise in slaughter in the second half of the year leading to an annual increase of 10.9 per cent.

Mutton production has continued to grow in 2018 with year to date production trending 14.8 per cent above 2017 as producers reluctantly continue to turn-off older stock. Sheep and lamb slaughter in 2018 continues to exceed expectations as a result of poor seasonal conditions, and indicates that there will be tighter supplies during winter as most old season lambs will have already been sold and new season lambs are expected slightly later. Winter and spring rainfall will be a major factor in determining lambing percentages and overall production for the year.

The Australian sheep flock recovered 4.2 per cent to 70.2 million in 2017 after a dip in 2016. Producer intentions to continue expanding flocks to take advantage of strong returns for both sheep meat and wool were evident in early 2017, when seasonal conditions allowed for greater retention of stock for breeding and wool production. However, despite price incentives to expand flocks, the dry seasonal conditions later in the year and in early 2018 produced headwinds for flock expansion. The increased slaughter observed in 2018 will delay growth in the flock and subsequently limit production growth.

It is expected that producers will switch into flock expansion activities when seasonal conditions improve.

5 The Australian sheep flock was approximately 70.2 million after a 4.2 per cent increase in 2017 Australian production Australian lamb slaughter fell 2.3 per cent in 2017, brought down by tighter supply in the first half of the year when seasonal conditions allowed for greater stock retention for flock expansion. Slaughter in the second half of 2017 was higher than 2016 as conditions began to deteriorate and forced some stock turn-off. The trend of increased slaughter has continued in early 2018 with year to date lamb slaughter trending 8.1 per cent higher than 2017 as dry conditions in NSW and Victoria have prompted increased stock turn off.

Mutton production also experienced a year in two parts, with tight supplies in early 2017 and a significant rise in slaughter in the second half of the year leading to an annual increase of 10.9 per cent. Mutton production has continued to grow in 2018 with year to date production trending 14.8 per cent above 2017 as producers reluctantly continue to turn-off older stock. Sheep and lamb slaughter in 2018 continues to exceed expectations as a result of poor seasonal conditions, and indicates that there will be tighter supplies during winter as most old season lambs will have already been sold and new season lambs are expected slightly later.

Winter and spring rainfall will be a major factor in determining lambing percentages and overall production for the year.

The Australian sheep flock recovered 4.2 per cent to 70.2 million in 2017 after a dip in 2016. Producer intentions to continue expanding flocks to take advantage of strong returns for both sheep meat and wool were evident in early 2017, when seasonal conditions allowed for greater retention of stock for breeding and wool production. However, despite price incentives to expand flocks, the dry seasonal conditions later in the year and in early 2018 produced headwinds for flock expansion. The increased slaughter observed in 2018 will delay growth in the flock and subsequently limit production growth.

It is expected that producers will switch into flock expansion activities when seasonal conditions improve.

VIC SA TAS NSW WA QLD ‘000 tonnes cwt ‘000 tonnes cwt 25 0 30 10 35 20 40 45 50 55 30 40 50 60 70 80 90 100 Data: MLA 2000 million head million head slaughtered 50 0 60 70 80 90 5 100 10 1 10 15 20 120 130 25 2008 2016 2004 2012 2009 2005 2013 2002 2001 2010 2006 2014 2003 201 1 2017 2007 2015 Data: Meat and Livestock Australia (MLA), Australia Bureau of Statistics (ABS) Sheep flock (LHS) Lamb slaughter (RHS) Sheep slaughter (RHS) Jan-Apr 2016 Jan-Apr 2017 Jan-Apr 2018 Australian lamb production for January to April 2018 was 8 per cent higher than 2017 Australian lamb production for January to April 2018 was higher in Victoria and NSW Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug Data: MLA 5yr ave 2016 2017 2018

Australian Lamb and Sheep Meat Annual Review - Rural Bank

6 International production World sheep meat production is expected to continue its upward trajectory in 2018 and reach 15 million tonnes for the first time. This follows a 1.2 per cent increase in 2017. The growth in world production has been a long-term trend with a 29 per cent increase being recorded since 2000, driven by increases in China and Africa of 70 and 63 per cent, respectively. The expected growth in production in 2018 is largely from China. China has been a major contributor to the long-term growth in world sheep meat production and produced 32 per cent of the world’s sheep meat in 2017.

Chinese production is almost exclusively consumed domestically, but has been unable to keep up with growing domestic demand since the late 2000s, creating an opportunity for sheep meat imports. In 2017, imports accounted for only 4.3 per cent of consumption.

New Zealand lamb slaughter increased by 2.9 per cent in 2017 but is trending 3.8 per cent lower in 2018. The New Zealand sheep industry has been operating on a much smaller scale in the last nine years, with average annual lamb slaughter 20.6 per cent lower than the early 2000s. This is largely due to a shift towards expansion of dairy and beef production. New Zealand and Australia are the dominant exporters of sheep meat, each accounting for approximately 34 per cent of global exports. Declining capacity for growth in sheep meat exports from New Zealand has the potential to create more opportunities for Australian exports to meet growing demand.

This is particularly true in New Zealand’s key markets such as China and Europe, where Australia has lower market share.

US sheep meat production continued its steady decline in 2017, falling a further 3.3 per cent; 12 per cent lower than 2010. USDA forecasts expect this trend to continue in 2018 with a small decline in production of 0.7 per cent. While production has been trending lower, US consumption has been increasing. As a result, the percentage of consumption met by domestic production has declined from 52% in 2010 to 37% in 2017, increasing the dependence on imports to meet demand. 6 International production World sheep meat production is expected to continue its upward trajectory in 2018 and reach 15 million tonnes for the first time.

This follows a 1.2 per cent increase in 2017. The growth in world production has been a long-term trend with a 29 per cent increase being recorded since 2000, driven by increases in China and Africa of 70 and 63 per cent, respectively.

The expected growth in production in 2018 is largely from China. China has been a major contributor to the long-term growth in world sheep meat production and produced 32 per cent of the world’s sheep meat in 2017. Chinese production is almost exclusively consumed domestically, but has been unable to keep up with growing domestic demand since the late 2000s, creating an opportunity for sheep meat imports. In 2017, imports accounted for only 4.3 per cent of consumption. New Zealand lamb slaughter increased by 2.9 per cent in 2017 but is trending 3.8 per cent lower in 2018. The New Zealand sheep industry has been operating on a much smaller scale in the last nine years, with average annual lamb slaughter 20.6 per cent lower than the early 2000s.

This is largely due to a shift towards expansion of dairy and beef production. New Zealand and Australia are the dominant exporters of sheep meat, each accounting for approximately 34 per cent of global exports. Declining capacity for growth in sheep meat exports from New Zealand has the potential to create more opportunities for Australian exports to meet growing demand. This is particularly true in New Zealand’s key markets such as China and Europe, where Australia has lower market share.

US sheep meat production continued its steady decline in 2017, falling a further 3.3 per cent; 12 per cent lower than 2010. USDA forecasts expect this trend to continue in 2018 with a small decline in production of 0.7 per cent. While production has been trending lower, US consumption has been increasing. As a result, the percentage of consumption met by domestic production has declined from 52% in 2010 to 37% in 2017, increasing the dependence on imports to meet demand.

Australian Lamb and Sheep Meat Annual Review - Rural Bank

7 Production Production 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018f 2018f million tonnes ‘000 tonnes cwt 3.0 3.5 4.0 4.5 5.0 5.5 20 40 60 80 100 120 140 160 180 200 Data: OECD-FAO Data: United States Department of Agriculture (USDA) * Consumption estimated based on production and trade data Consumption Consumption* f= OECD forecast f= USDA forecast Chinese sheep meat production to increase by 3.1 per cent in 2018, consumption to increase 2.9 per cent New Zealand lamb slaughter is trending 3.8 per cent below 2017 US sheep meat production to decrease by 0.7 per cent in 2018, consumption to increase 0.3 per cent New Zealand lamb exports are trending 12.4 per cent lower in 2018 million head ‘000 tonnes swt 0 0 0.5 10 1.0 20 1.5 30 2.0 40 2.5 50 3.0 3.5 60 France Netherlands UK USA Germany China Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug Data: Statistics New Zealand Data: Statistics New Zealand 5yr ave 2016 2017 2018 Jan-Apr 2016 Jan-Apr 2017 Jan-Apr 2018 7 Production Production 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018f 2018f million tonnes ‘000 tonnes cwt 3.0 3.5 4.0 4.5 5.0 5.5 20 40 60 80 100 120 140 160 180 200 Data: OECD-FAO Data: United States Department of Agriculture (USDA) * Consumption estimated based on production and trade data Consumption Consumption* f= OECD forecast f= USDA forecast Chinese sheep meat production to increase by 3.1 per cent in 2018, consumption to increase 2.9 per cent New Zealand lamb slaughter is trending 3.8 per cent below 2017 US sheep meat production to decrease by 0.7 per cent in 2018, consumption to increase 0.3 per cent New Zealand lamb exports are trending 12.4 per cent lower in 2018 million head ‘000 tonnes swt 0 0 0.5 10 1.0 20 1.5 30 2.0 40 2.5 50 3.0 3.5 60 France Netherlands UK USA Germany China Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug Data: Statistics New Zealand Data: Statistics New Zealand 5yr ave 2016 2017 2018 Jan-Apr 2016 Jan-Apr 2017 Jan-Apr 2018

Australian Lamb and Sheep Meat Annual Review - Rural Bank

8 Demand and trade The growing strength of demand from export markets continues to provide strong support for high sheep and lamb prices, despite domestic consumption remaining the largest market for Australian sheep meat. Since 2010, domestic consumption of lamb has remained relatively steady, with the growth in production since then going almost entirely to export markets. As a result, the share of production exported increased from 40 per cent in 2010 to 51 per cent in 2017. Export demand is even more significant for mutton markets with export volumes equivalent to 87 per cent of production in 2017, up from 78 per cent in 2010.

Increased slaughter rates in 2018 have resulted in a five per cent increase in the volume of lamb exported between January and April compared to 2017. Exports in March set a new record high for monthly volume, up 21 per cent from February to 26,288 tonnes. The price of exported lamb has averaged $8/kg this year, five per cent higher than 2017, signalling that demand continues to exceed supply. The same can be said of mutton, with year to date export volumes up 15 per cent on 2017 and average price up 3.5 per cent. China overtook the US as Australia’s top lamb export market by volume in 2017, registering a 30 per cent increase in volume and 25 per cent increase in average price, combining for a remarkable 63 per cent jump in export value to $265 million.

Mutton exports also had a good year in China, returning to $206 million, just below the peak of 2014. Chinese sheep meat import demand can be volatile as it is dependent on the often variable domestic production which supplies approximately 95 per cent of consumption. Demand from China has 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 cent. Mutton exports have increased even further with volume up 43.5 per cent and price up 30.4 per cent. The value of mutton exports for January to April is $67 million, already exceeding the value of exports for the first eight months of 2017.

Australian exports to China have the potential to continue growing from increasing import demand. There are also opportunities arising from declining exports from New Zealand which holds a 55 per cent share of the Chinese sheep meat import market, but have experienced a 10 per cent decline in lamb export volume to China so far in 2018.

Lamb export volumes to the US for the year to April are 5.2 per cent below 2017, following an eight per cent decline in 2017. The average lamb export price to the US is averaging 4.8 per cent lower than 2017, but still at historically high levels. Lower volumes and prices suggest some price resistance for lamb, with other proteins experiencing price declines in the US. Despite an easing in volumes, demand fundamentals remain strong with lamb growing in popularity, particularly among millennials in the casual dining and fast food segments of the food service sector.

The Middle East and North Africa (MENA) region is also demonstrating strong demand with a 20 per cent increase in lamb export value for the year to date, building upon a 16 per cent increase in value recorded in 2017.

This growth is coming from both higher prices (+8.2 per cent) and higher volumes (+1 1.2 per cent). Mutton exports to MENA are trending lower in 2018 with volume down 9.6 per cent and value down 7.7 per cent. This comes after growth in value of 14 per cent in 2017. Lamb continues to increase in popularity in South Korea, albeit from a very low base. This was observed in a 63 per cent increase in export value in 2017. This trend has continued in early 2018 with year to date export value increasing by 18.6 per cent compared to the same time last year.

All factors considered, the outlook for demand and trade is very positive with combinations of growing volumes and prices pointing to very strong demand. The long term trend of declining production in New Zealand adds further optimism for the Australian sheep industry to capture an increased share of global demand. 8 Demand and trade The growing strength of demand from export markets continues to provide strong support for high sheep and lamb prices, despite domestic consumption remaining the largest market for Australian sheep meat. Since 2010, domestic consumption of lamb has remained relatively steady, with the growth in production since then going almost entirely to export markets.

As a result, the share of production exported increased from 40 per cent in 2010 to 51 per cent in 2017. Export demand is even more significant for mutton markets with export volumes equivalent to 87 per cent of production in 2017, up from 78 per cent in 2010.

Increased slaughter rates in 2018 have resulted in a five per cent increase in the volume of lamb exported between January and April compared to 2017. Exports in March set a new record high for monthly volume, up 21 per cent from February to 26,288 tonnes. The price of exported lamb has averaged $8/kg this year, five per cent higher than 2017, signalling that demand continues to exceed supply. The same can be said of mutton, with year to date export volumes up 15 per cent on 2017 and average price up 3.5 per cent. China overtook the US as Australia’s top lamb export market by volume in 2017, registering a 30 per cent increase in volume and 25 per cent increase in average price, combining for a remarkable 63 per cent jump in export value to $265 million.

Mutton exports also had a good year in China, returning to $206 million, just below the peak of 2014. Chinese sheep meat import demand can be volatile as it is dependent on the often variable domestic production which supplies approximately 95 per cent of consumption. Demand from China has 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 cent. Mutton exports have increased even further with volume up 43.5 per cent and price up 30.4 per cent. The value of mutton exports for January to April is $67 million, already exceeding the value of exports for the first eight months of 2017.

Australian exports to China have the potential to continue growing from increasing import demand. There are also opportunities arising from declining exports from New Zealand which holds a 55 per cent share of the Chinese sheep meat import market, but have experienced a 10 per cent decline in lamb export volume to China so far in 2018.

Lamb export volumes to the US for the year to April are 5.2 per cent below 2017, following an eight per cent decline in 2017. The average lamb export price to the US is averaging 4.8 per cent lower than 2017, but still at historically high levels. Lower volumes and prices suggest some price resistance for lamb, with other proteins experiencing price declines in the US. Despite an easing in volumes, demand fundamentals remain strong with lamb growing in popularity, particularly among millennials in the casual dining and fast food segments of the food service sector.

The Middle East and North Africa (MENA) region is also demonstrating strong demand with a 20 per cent increase in lamb export value for the year to date, building upon a 16 per cent increase in value recorded in 2017.

This growth is coming from both higher prices (+8.2 per cent) and higher volumes (+1 1.2 per cent). Mutton exports to MENA are trending lower in 2018 with volume down 9.6 per cent and value down 7.7 per cent. This comes after growth in value of 14 per cent in 2017. Lamb continues to increase in popularity in South Korea, albeit from a very low base. This was observed in a 63 per cent increase in export value in 2017. This trend has continued in early 2018 with year to date export value increasing by 18.6 per cent compared to the same time last year.

All factors considered, the outlook for demand and trade is very positive with combinations of growing volumes and prices pointing to very strong demand. The long term trend of declining production in New Zealand adds further optimism for the Australian sheep industry to capture an increased share of global demand. The volume of Australian lamb exports are trending 5 per cent higher than 2017 Lamb exports to China and MENA are trending higher in 2018 ‘000 tonnes swt ‘000 tonnes swt 5 10 15 20 25 10 12 14 16 18 20 22 26 24 28 South Korea MENA Japan USA China Data: GTIS Data: Global Trade Information Service (GTIS) 5yr ave 2016 2017 2018 Jan-Apr 2016 Jan-Apr 2017 Jan-Apr 2018 Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug

Australian Lamb and Sheep Meat Annual Review - Rural Bank

9 Export markets - country detail Destination Country 2015 2016 2017 YoY% Change 2017% Share Jan-Apr 2017 Jan-Apr 2018 YoY% 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 1 14 -41% 6% 35 26 -28% Oman 80 90 1 13 26% 6% 53 17 -68% Destination Country 2015 2016 2017 YoY% Change 2017% Share Jan-Apr 2017 Jan-Apr 2018 YoY% Change LAMB EXPORTS (A$ MILLIONS) World 1,774 1,799 2,1 14 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 1 18 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 1 1 16 55% 7% 8 2 -72% UAE 28 20 14 -32% 6% 4 3 -24% Data: GTIS SWT = shipped weight

Australian Lamb and Sheep Meat Annual Review - Rural Bank

10 Prices Australian lamb prices had a fantastic run in 2017 with the Eastern States Trade Lamb Indicator (ESTLI) averaging 626c/kg, an 1 1 per 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. Lamb prices steadily eased from January to March as more numbers came onto the market due to deteriorating seasonal conditions, but began to recover in late April. A tightening supply of lambs in recent weeks has accelerated the recovery in prices and seen the ESTLI 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 largest drop (down15 per cent) after being in strong demand this time 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 categories to record year on year increases in price are trade, heavy and Merino lambs in Western Australia where seasonal conditions were more ideal than in eastern states earlier in the year. 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. Domestic sheep prices are benefiting from the relatively low Australian dollar in 2018.

The dollar has averaged 77 US cents so far in 2018, but has been steadily declining from a high of 81 cents in late January to a low of 74 cents in June.

The Australian dollar is relatively low from a historic perspective, particularly compared to 201 1 when lamb prices were at similar levels to 2018. The ESTLI for year to date is only averaging 1.8 per cent higher than the same period in 201 1, however the ESTLI in US dollars is 23.7 per cent lower. This is good news for Australian sheep producers who are receiving historically high prices, while international buyers are paying closer to the historic average. 10 Prices Australian lamb prices had a fantastic run in 2017 with the Eastern States Trade Lamb Indicator (ESTLI) averaging 626c/kg, an 1 1 per 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. Lamb prices steadily eased from January to March as more numbers came onto the market due to deteriorating seasonal conditions, but began to recover in late April. A tightening supply of lambs in recent weeks has accelerated the recovery in prices and seen the ESTLI 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 largest drop (down15 per cent) after being in strong demand this time 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 categories to record year on year increases in price are trade, heavy and Merino lambs in Western Australia where seasonal conditions were more ideal than in eastern states earlier in the year. 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. Domestic sheep prices are benefiting from the relatively low Australian dollar in 2018.

The dollar has averaged 77 US cents so far in 2018, but has been steadily declining from a high of 81 cents in late January to a low of 74 cents in June.

The Australian dollar is relatively low from a historic perspective, particularly compared to 201 1 when lamb prices were at similar levels to 2018. The ESTLI for year to date is only averaging 1.8 per cent higher than the same period in 201 1, however the ESTLI in US dollars is 23.7 per cent lower. This is good news for Australian sheep producers who are receiving historically high prices, while international buyers are paying closer to the historic average. Data: MLA Data: Reserve Bank of Australia Eastern states trade lamb indicator increased 14 per cent from mid-April 2018 c/kg cwt 400 450 500 550 600 650 700 750 Prices are averaging below 2017 levels for all categories of Australian lamb Restocker Light Trade Heavy Merino Average price (c/kg cwt) 100 200 300 400 500 600 700 800 2016 YTD 2017 YTD 2018 YTD The Australian dollar has been trending lower after a high of 81c in January 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 AUD/USD 0.65 0.67 0.69 0.71 0.73 0.75 0.77 0.79 0.81 0.83 Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug Data: MLA 5yr ave 2016 2017 2018

1 1 Rural Bank modelling forecasts lamb prices to remain at existing high levels through winter before easing through spring and into summer. Seasonal conditions in winter and spring will play a significant role in the direction of prices within the model’s 68 per cent confidence interval range, which averages between 592-71 1c/kg. It is expected that prices will trend closer to the upper end of the range, particularly with expectations that lamb supply over winter will be tight, given that most old season lambs were sold earlier than usual and new season lambs are likely to be finished later than usual due to poor seasonal conditions.

This could mean a continuation of the upwards 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.

Over the longer term, Australian sheep and lamb prices are expected to remain above long term averages as demand continues to outpace supply. The outlook for continued growth in global sheep meat import demand means Australia will continue to have robust demand from major export markets of the US, China and the Middle East, as well as emerging markets such as South Korea. Supply is expected to continue to struggle to match the growth in demand due to a low Australian flock and the steadily declining industry in New Zealand. These factors all favour continued strength in sheep and lamb prices in Australia.

Australian mutton prices increased by an exceptional 25.7 per cent in 2017, the fourth consecutive year of growth in the average annual price. The average price of 439c/kg was the highest on record and 74 per cent higher than 2012. Prices have remained high in 2018, but have trended below the exceptional prices of 2017 since late March. The main cause of prices being lower than this time last year has been the relatively higher slaughter rates, however strong demand, particularly from China, has continued to force prices upwards despite the added supply. Mutton prices for the year to date are averaging lower in all states except Western Australia where they are sitting 1.4 per cent higher than 2017.

The outlook for mutton prices remains positive with demand strong and supply low from a historic perspective. Producers will be looking to retain older sheep, which means an improved seasonal outlook would allow producers to hold stock, tightening supply and boosting prices further. 1 1 Eastern States Trade Lamb Indicator Rural Bank modelling forecasts lamb prices to remain at existing high levels through winter before easing through spring and into summer. Seasonal conditions in winter and spring will play a significant role in the direction of prices within the model’s 68 per cent confidence interval range, which averages between 592-71 1c/kg.

It is expected that prices will trend closer to the upper end of the range, particularly with expectations that lamb supply over winter will be tight, given that most old season lambs were sold earlier than usual and new season lambs are likely to be finished later than usual due to poor seasonal conditions. This could mean a continuation of the upwards 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.

Over the longer term, Australian sheep and lamb prices are expected to remain above long term averages as demand continues to outpace supply. The outlook for continued growth in global sheep meat import demand means Australia will continue to have robust demand from major export markets of the US, China and the Middle East, as well as emerging markets such as South Korea. Supply is expected to continue to struggle to match the growth in demand due to a low Australian flock and the steadily declining industry in New Zealand. These factors all favour continued strength in sheep and lamb prices in Australia.

c/kg cwt 200 250 300 350 400 450 550 500 Data: MLA, Ag Answers forecast c/kg cwt 100 200 300 400 500 600 700 800 Australian mutton prices are averaging 6.8 per cent below 2017 Australian mutton prices increased by an exceptional 25.7 per cent in 2017, the fourth consecutive year of growth in the average annual price. The average price of 439c/kg was the highest on record and 74 per cent higher than 2012. Prices have remained high in 2018, but have trended below the exceptional prices of 2017 since late March. The main cause of prices being lower than this time last year has been the relatively higher slaughter rates, however strong demand, particularly from China, has continued to force prices upwards despite the added supply.

Mutton prices for the year to date are averaging lower in all states except Western Australia where they are sitting 1.4 per cent higher than 2017. The outlook for mutton prices remains positive with demand strong and supply low from a historic perspective. Producers will be looking to retain older sheep, which means an improved seasonal outlook would allow producers to hold stock, tightening supply and boosting prices further. Dec -13 Apr -17 Apr -12 Aug -15 May -14 Feb -18 Sep -12 Jan -16 Jun -1 1 Jan -1 1 Oct -14 Jul -18 Feb -13 Jun -16 Nov -1 1 Mar -15 Dec -18 Sep -17 Jul -13 Nov -16 95% confidence interval 68% confidence interval Jan Sep Nov Dec May Oct Jun Mar Feb Jul Apr Aug Data: MLA 5yr ave 2016 2017 2018

12 Sheep and lamb prices – state detail State Type Current Price 21st June June 2017 5 year average 80th percentile 20th percentile 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 41 1 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

13 Wool Wool prices have been setting record highs for most of 2018 with the Eastern Market Indicator reaching a record high of 2,073c/kg in June, adding further confidence to Australian sheep producers. The sustained rise in prices over the last 18 months has been observed to a greater extent for fine wool. The 18 micron price guide in the southern wool zone is averaging 16 per cent higher for the financial year to date compared to 2016/17. Medium and broad wools have also experienced significant rises in price recently with the southern price guides for 21 and 28 micron wool averaging 34 per cent and 24 per cent higher in the 2017/18 financial year to date, respectively.

Production has been relatively steady in the last few years, after a long term downwards trend. At the end of May, wool production for the financial year was 1.2% higher than 2016/17. Fewer sheep shorn and lower average cuts per head are likely to see wool production decline in 2018/19.

While production is marginally higher in 2017/18, demand for Australian wool is growing at a more rapid rate. The volume of Australian wool exports for the financial year to March are trending 5.5 per cent higher than 2016/17. Demand has exceeded supply to the extent that the average export price has increased 15.7 per cent for the financial year to date. Increases in both volume and price have led to a 22.5 per cent rise in the value of wool exports for the year to date, up to $2.9 billion. The outlook for wool prices remains favourable, with very low stocks of wool in the global pipeline and demand for woollen garments expected to continue growing as more people enter the Chinese middle class and a widening range of products are manufactured with wool.

Economic indicators also favour high wool prices, with high global consumer confidence ratings, and a lower Australian dollar at around 75 US cents.

13 Wool Wool prices have been setting record highs for most of 2018 with the Eastern Market Indicator reaching a record high of 2,073c/kg in June, adding further confidence to Australian sheep producers. The sustained rise in prices over the last 18 months has been observed to a greater extent for fine wool. The 18 micron price guide in the southern wool zone is averaging 16 per cent higher for the financial year to date compared to 2016/17. Medium and broad wools have also experienced significant rises in price recently with the southern price guides for 21 and 28 micron wool averaging 34 per cent and 24 per cent higher in the 2017/18 financial year to date, respectively.

Production has been relatively steady in the last few years, after a long term downwards trend. At the end of May, wool production for the financial year was 1.2% higher than 2016/17. Fewer sheep shorn and lower average cuts per head are likely to see wool production decline in 2018/19.

While production is marginally higher in 2017/18, demand for Australian wool is growing at a more rapid rate. The volume of Australian wool exports for the financial year to March are trending 5.5 per cent higher than 2016/17. Demand has exceeded supply to the extent that the average export price has increased 15.7 per cent for the financial year to date. Increases in both volume and price have led to a 22.5 per cent rise in the value of wool exports for the year to date, up to $2.9 billion. The outlook for wool prices remains favourable, with very low stocks of wool in the global pipeline and demand for woollen garments expected to continue growing as more people enter the Chinese middle class and a widening range of products are manufactured with wool.

Economic indicators also favour high wool prices, with high global consumer confidence ratings, and a lower Australian dollar at around 75 US cents.

000 tonnes greasy A$ millions Data: Australian Wool Testers Authority Data: Australian Wool Exchange (AWEX) Data: GTIS Australian wool production is 1.2 per cent higher than 2016/17 The eastern market indicator hit a record high of 2,027c/kg at the end of May Fine wool has experienced the best price gains, recently joined by medium wool The value of Australian wool exports is trending 18.9 per cent higher in 2017/18 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 c/kg clean c/kg clean 800 10 1,000 15 500 1,200 20 1,000 1,400 25 1,500 1,600 30 2,000 1,800 35 2,500 2,000 40 3,000 2,200 45 Jul Mar May Jun Nov Apr Dec Sep Aug Jan Oct Feb Jul Mar May Jun Nov Apr Dec Sep Aug Jan Oct Feb Data: AWEX 2015/16 2016/17 2017/18 17 micron 21 micron 28 micron 5yr ave 2015/16 2015/16 YTD 2016/17 2016/17 YTD 2017/18 2017/18 YTD China Italy India Czech Republic Rest of world 500 1,000 1,500 2,000 2,500

14 In the spotlight – live sheep exports Live sheep exports are a significant part of the Australian sheep industry, contributing $249 million, or 7.6 per cent to the combined sheep industry export value of $3 billion. Australia exported 1.95 million live sheep in 2017, representing only 6.1 per cent of Australian sheep and lamb offtake for the year. The vast majority of Australia’s live sheep exports leave from Western Australia with 1.7 million sheep exported in 2017. This accounted for 31 per cent of the state’s sheep and lamb offtake (slaughter plus live exports) for the year. As a result, the outcomes of current proposals to phase out the live sheep export trade would be most strongly felt in Western Australia rather than other exporting states of South Australia and Victoria, where live exports accounted for 5.3 and 0.1 per cent of these states’ respective offtake in 2017.

A loss of the live export trade would require approximately 1.7 million sheep to find alternative markets in Western Australia. Assuming they were to be processed locally, state sheep and lamb slaughter would reach 5.4 million, a 46 per cent increase from 2017. This growth in supply is not unprecedented, with a 47 per cent increase in slaughter recorded in 2013. This corresponded with a decline of 16 per cent in the annual weighted average trade lamb and mutton price. Current bills put to parliament propose a phase out of the trade over five years, meaning a gradual increase in slaughter requirement could occur.

History also provides an example of this with slaughter increasing for five years between 2003 and 2008 by 35 per cent, and a corresponding decline in the weighted average price of 21.7 per cent. There are many more factors to consider when assessing the effects of a phasing out of live sheep exports, but applying these percentage 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. 14 The number of live sheep exported per year from Australia has levelled out at approximately two million after declining from a peak of 6.8 million in 2001 In the spotlight – live sheep exports Live sheep exports are a significant part of the Australian sheep industry, contributing $249 million, or 7.6 per cent to the combined sheep industry export value of $3 billion.

Australia exported 1.95 million live sheep in 2017, representing only 6.1 per cent of Australian sheep and lamb offtake for the year. The vast majority of Australia’s live sheep exports leave from Western Australia with 1.7 million sheep exported in 2017. This accounted for 31 per cent of the state’s sheep and lamb offtake (slaughter plus live exports) for the year. As a result, the outcomes of current proposals to phase out the live sheep export trade would be most strongly felt in Western Australia rather than other exporting states of South Australia and Victoria, where live exports accounted for 5.3 and 0.1 per cent of these states’ respective offtake in 2017.

A loss of the live export trade would require approximately 1.7 million sheep to find alternative markets in Western Australia. Assuming they were to be processed locally, state sheep and lamb slaughter would reach 5.4 million, a 46 per cent increase from 2017. This growth in supply is not unprecedented, with a 47 per cent increase in slaughter recorded in 2013. This corresponded with a decline of 16 per cent in the annual weighted average trade lamb and mutton price. Current bills put to parliament propose a phase out of the trade over five years, meaning a gradual increase in slaughter requirement could occur.

History also provides an example of this with slaughter increasing for five years between 2003 and 2008 by 35 per cent, and a corresponding decline in the weighted average price of 21.7 per cent. There are many more factors to consider when assessing the effects of a phasing out of live sheep exports, but applying these percentage 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. million head Data: GTIS, MLA Data: GTIS Data: GTIS 2000 million head 2008 2008 2016 2016 2004 2004 NSW 0.2% VIC 0.7% WA 85.8% QLD 0.0 2012 2012 2009 2009 2005 2005 2013 2013 2002 2001 2010 2010 2006 2006 2014 2014 2003 201 1 201 1 2017 2017 2007 2007 2015 2015 Kuwait Oman Qatar Jordan Bahrain UAE Saudi Arabia Others Sheep & lamb slaughter Sheep exported Western Australia live sheep exports accounted for 31 per cent of the state’s sheep and lamb offtake in 2017 The majority of Australian live sheep exports came from WA in 2017 SA 13.3%

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