abare.gov.au - Australian commodities – September quarter . volume 15 . number 3 2008

Sheep meat

Thomas Jackson

The Australian weighted average saleyard price of lambs is forecast to increase by 16 per cent in 2008-09, to an average of 390 cents a kilogram. In real terms, this is the highest annual price since 2004-05. The forecast price increase primarily reflects a tighter domestic supply conditions.

In 2008-09, the weighted average saleyard price of sheep is forecast to increase by 10 per cent to 175 cents a kilogram. This forecast is based on the assumption that improved seasonal conditions and high lamb prices are providing sheep producers with incentives to hold on to more female sheep for breeding in the year ahead.

The price forecasts for lamb and sheep are contingent on favourable seasonal conditions for the remainder of 2008-09. Should there be another poor season restricting pasture availability, producers will turn-off more sheep and lambs, which will put downward pressure on prices.

High prices as supply tightens

In the first two months of 2008-09, the average saleyard price of lambs is estimated to have been 452 cents a kilogram, the highest in real terms since 2004-05. While prices generally peak during the winter months as lamb slaughter drops, prices are currently higher than during any winter since 2004-05. Current high lamb prices reflect a significant reduction in domestic supply. After two years of very high lamb slaughter, there are now fewer lambs in the marketplace. Also, the high cost of feeding animals over winter brought forward the slaughter of some lambs in the second half of 2007-08, contributing to lower slaughterings so far in 2008-09. Prices are expected to ease in the coming months as new season lambs are turned off.

Lower domestic supplies of lambs at the start of 2008-09 also reflect the further decline in the size of the sheep flock in 2007-08. Lower ewe numbers meant lower matings and hence fewer lambs marked. High grain prices contributed to this decline in the size of the sheep flock, as mixed enterprise operators reduced sheep numbers to increase areas planted to crops.

Lamb slaughter has steadily increased over the past ten years, even as the number of sheep in Australia has fallen. This shift in the focus of the sheep industry toward meat production has led to a steady increase in the proportion of lambs being turned off, rather than being retained for breeding purposes. This suggests that either producers have not been replacing breeding stock at the same rate as in the past, or they have been reducing the proportion of non-breeding animals, such as wethers, in their flocks.

In 2008-09, lamb slaughter is forecast to decline by 4 per cent to 20.0 million head, and lamb production is forecast to fall by 6 per cent to 408 000 tonnes. These forecasts primarily reflect an expected decline in the number of lambs marked in 2008-09.

Sheep slaughter and mutton production are both forecast to decline by around 15 per cent in 2008-09, to 10.1 million head and 217 000 tonnes, respectively. These forecasts are based on lower sheep numbers in 2008-09 relative to 2007-08, and, assuming average seasonal conditions for the remainder of 2008-09, a decline in the number of sheep slaughtered.
The demand for lamb in the Australian market depends primarily on its retail price relative to that of substitutes, such as beef, pork and chicken. In the 12 months to June 2008, the price of lamb increased by less than the price of chicken and pork, as higher grain prices increased the costs of producing other meats. Over the same period, retail lamb prices increased more than beef prices.

Lower forecast domestic grain prices and lower availability of lamb in 2008-09 may result in an increase in the price of lamb relative to that of beef, chicken and pork. Should this occur, domestic demand for lamb may be weaker.

Size of the sheep flock declines

In 2007-08 the size of the Australian sheep flock is estimated to have declined by a further 7 per cent, to approximately 80 million head. This decline was a result of record lamb slaughter and relatively high sheep slaughter throughout 2007-08. There was also a fall in the number of lambs marked.

There are many reasons for this decline in the size of the sheep flock. Seasonal conditions in 2007-08 were poor in many regions, reducing pasture availability for sheep. High grain prices also contributed to increased turn-off of sheep and lambs during 2007-08 as producers prepared to increase cropping areas in 2008-09, and feeding animals became more costly.
High lamb prices and declining wool prices during the second half of 2007-08 also contributed this decline. Sheep farmers in Australia produce both wool and sheep meat, and as the price of wool declined relative to the price of sheep meat, a greater number of sheep and lambs which would otherwise have been retained for wool production were slaughtered.

Looking ahead, the effect of high sheep meat prices on the flock size will be two-fold. Current high prices represent an incentive for producers to increase slaughter to maximise short-term profits. However, the expectation of high prices in the future encourages producers to reduce slaughter rates in order to rebuild flocks, and therefore generate more income in the future.

In 2008-09, the size of the Australian sheep flock is forecast to decline by a further 4 per cent, to 77 million head. This mainly reflects the forecast decline in the number of lambs marked, which more than outweighs the expected decline in lamb and sheep slaughter.

Exports to decline

In July 2008, lamb exports from Australia were the lowest recorded for a single month since January 2005. This drop in exports primarily reflected relatively low lamb slaughter and production in June and July 2008, as well as some weakening in demand in key export markets. For the same reasons, mutton exports were also relatively low in July.

Reflecting lower expected slaughter and production in 2008-09, exports of lamb are forecast to decline by 2 per cent to 160 000 tonnes. Similarly, mutton exports are forecast to decline by 12 per cent to 139 000 tonnes.

The United States is Australia’s largest export market for lamb, accounting for approximately one-quarter of total lamb exports in 2007-08. While exports to the United States have steadily increased over the past 10 years, in 2008-09 they are forecast to fall by 5 per cent to 40 000 tonnes, as a consequence of lower lamb production in Australia and also some weakening in US demand.

Following a 1 per cent decline in total lamb and mutton imports in the first half of calendar year 2008, the United States Department of Agriculture has forecast that US imports in the second half of the year will be down 9 per cent relative to the same period in 2007. As Australia was the source of 70 per cent of US lamb imports in 2007-08, this implies that exports of lamb from Australia to the United States will fall in 2008-09.

Demand for Australian lamb and mutton in other major export markets is expected to remain steady in 2008-09. These markets include the Middle East, the European Union and China.

Sheep meat outlook

2006-07

2007-08

2008-09

% change

Slaughterings

Sheep

’000

13 271

11 929

10 100

– 15.3

Lamb

’000

20 158

20 899

20 000

– 4.3

Production

Mutton

271

258

217

– 15.9

Lamb

413

435

408

– 6.2

Exports (shipped weight)

Mutton

162

158

139

– 12.0

Lamb

150

163

160

– 1.8

– to United States

– 4.8

Total sheep meat

– value

1 206

1 246

1 240

– 0.5

Live sheep

’000

4 138

4 069

3 700

– 9.1

Saleyard prices

Mutton

Ac/kg

136

159

175

10.1

Lamb

Ac/kg

326

335

390

16.4

f ABARE forecast. s ABARE estimate.

Live sheep exports to fall

Live sheep exports in 2008-09 are forecast to decline by 9 per cent to 3.7 million head. This decline reflects the lower number of sheep available for export arising from relatively high sheep and lamb slaughter during the past two years. Demand for live sheep is expected to remain steady.

Between 2000 and 2007, Western Australia accounted for an average of 75 per cent of live sheep exports from Australia. In 2007-08, the number of sheep slaughtered in Western Australia was the highest since 2000-01, as producers responding to high grain prices turned off sheep to increase the area planted to crops. Lower sheep numbers arising from this high slaughter are expected to constrain the availability of sheep suitable for live export from Western Australia in 2008-09.

New Zealand

Australia’s major competitor in the international sheep meat market is New Zealand. The size of New Zealand’s sheep flock has fallen substantially in the past 20 years, and yet production of lamb has increased. In both countries, this has been achieved by increasing the focus of the industry on meat, rather than wool production. This changing focus is demonstrated by the increasing percentage of lambs marked relative to the total sheep flock. From 1982-83 to 2006-07, the proportion increased from 72 per cent to 84 per cent in New Zealand, and from 34 per cent to 40 per cent in Australia.

The larger proportion of lambs in the national flock in New Zealand reflects the traditionally stronger overall focus of the New Zealand sheep industry on meat production. Although Australia has approximately twice as many sheep as New Zealand, total sheep meat production is only 18 per cent higher in Australia.

This different focus is also demonstrated by the higher proportion of non-breeding animals in the Australian sheep flock. In 2006-07 the proportion of wethers and rams in the Australian flock was approximately 19 per cent, while in New Zealand it was around
2 per cent.

From this profile, it can be inferred that if the Australian sheep industry continues to shift away from wool toward meat production, further declines in the size of the flock are likely, particularly of non-breeding stock. It can also be inferred that the capacity of the New Zealand sheep industry to increase lamb production without increasing the overall size of the sheep flock is limited relative to Australia.