abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Sheep meat

Outlook to 2013-14

Tom Jackson

The focus of the Australian sheep industry has changed in the past 20 years. The relatively low profitability of wool compared with alternative enterprises has led to lower wool production and increased sheep meat production. In the short run, this trend is expected to continue, as high lamb prices and relatively low wool prices are expected to encourage producers to increase lamb slaughter, and to continue reducing the number of non-breeding sheep. In the medium term, wool prices are expected to increase and accordingly the shift from wool to meat production is likely to slow. Over the outlook period, total lamb slaughter is expected to increase as ewe numbers rise, and overall sheep numbers are also expected to recover.

The Australian weighted average saleyard price of lambs is forecast to fall slightly to an average of 400 cents a kilogram in 2009-10. This fall is from an estimated 402 cents a kilogram in 2008-09 and primarily reflects an expected increase in lamb supply. Lamb prices are forecast to remain high in 2009-10 because supply is expected to remain relatively tight, and the demand for lamb is expected to remain relatively strong. Over the medium term, lamb prices are expected to decline gradually (in 2008-09 dollars) as increases in supply outstrip demand growth.

The Australian weighted saleyard price of sheep is expected to increase by 3 per cent to 180 cents a kilogram in 2009-10, reflecting lower sheep slaughter and strong export demand for mutton. Over the medium term, mutton prices are projected to remain steady (in 2008-09 dollars), as supply tightens and the demand for mutton and sheep for breeding remains strong.

The projections for lamb and mutton are dependent on an improvement in seasonal conditions, particularly in south-eastern Australia. Relatively high lamb prices arising from strong demand for lamb in both the domestic and export markets also underpin the projections. Demand for Australian lamb is expected to be supported over the outlook period by the relatively low value of the Australian dollar, and assumed improvements in global economic conditions starting from 2010-11.

Sheep meat production to rise

Lamb slaughter is forecast to increase to 20.1 million head in 2009-10, from an estimated
20 million in 2008-09. This forecast reflects an expected increase in the number of lambs marked and higher lamb slaughter rates in 2009-10, as lamb prices remain high and wool prices decline. Over the medium term, lamb slaughter is projected to rise as ewe numbers increase and relatively high lamb slaughter rates are maintained.

Following a 6 per cent decline in 2008-09, lamb production is forecast to increase by 3 per cent to 418 000 tonnes in 2009-10. This increase is attributed to greater lamb slaughter and higher slaughter weights. Reflecting strong expected producer returns, lamb production over the outlook period is projected to increase steadily to 438 000 tonnes by 2013-14.

Sheep slaughter is forecast to fall by 10 per cent to 10.8 million head in 2009-10, assuming producers respond to high lamb prices by increasing breeding ewe numbers in order to increase lamb production. Lower slaughter will translate to a decline in mutton production, which is forecast to fall by 8 per cent to 231 000 tonnes. After reaching a low in 2011-12, sheep slaughter is projected to increase slightly out to 2013-14 as overall sheep numbers rise.

Wool or meat?

The purpose of the Australian sheep flock has been changing away from the production of wool toward meat production for the past 20 years, since the demise of the Wool Reserve Price Scheme. Between 1989-90 and 2007-08, the size of the Australian sheep flock more than halved, from 174 to 79 million sheep, and yet lamb production increased by 48 per cent. Despite this shift in production focus, the Australian sheep flock remains dominated by merino ewes, as they can be joined to merino rams to produce high-value apparel wool, or to other breeds of sheep to produce meat.

The increased focus on meat production is evident by the declining number of non-breeding adult sheep in the Australian flock. These sheep are used almost exclusively for wool production. Between 1989-90 and 2007-08, the number of non-breeding sheep in the Australian flock fell by 81 per cent, while the number of breeding ewes in the flock fell by only 36 per cent. As a proportion of the adult flock, ewes increased from 55 per
cent to 80 per cent over the period. While some of this change can be attributed to poor seasonal conditions in recent years, the main cause appears to have been the low profitability of wool production relative to alternative enterprises such as meat production or cropping.

There has been significant variation in the profitability of wool production. In particular, the production of fine and superfine wool (20.5 microns and less) has been relatively more profitable in recent years than the production of medium and strong wools (greater than 20.5 microns). Relatively low profitability has led many producers of the medium and strong wools to move into other enterprises.

The changing enterprise mix of the Australian sheep industry is reflected in the micron profile trends of the Australian wool clip. With meat breeds producing coarser wool than merinos, the proportion of coarse wool (greater than 26.5 microns) has increased as production has shifted toward meat production. At the same time, reflecting greater profitability, the proportion of fine wool in the clip has also increased as wool producers worked to reduce the diameter of the fibre they produced in order to benefit from higher prices and potentially higher profits. While seasonal conditions have also had some influence on the proportion of wool in each micron category, these long term trends are clear. According to the Australian Wool Testing Authority, between 1992-93 and 2007-08 the proportion of coarse wool in the clip (primarily from non-merino sheep) increased from 6.5 per cent to 10.6 per cent. Over the same period, the proportion of superfine wool (less than 19.6 microns) increased more than four-fold, from 7.6 per cent to 35 per cent of the clip. The proportion of wool in intermediate categories fell from 86 per cent to 56.2 per cent over the period.

In 2009-10, wool prices are forecast to fall, reflecting weak demand for woollen apparel and textiles, while lamb and mutton prices are forecast to remain strong. As a result, producers are expected to reduce further the number of non-breeding sheep in flocks and join a larger proportion of ewes to meat breed rams. Non-breeding sheep numbers are expected to stabilise beyond 2010-11, as the demand for wool recovers.

Sheep meat demand to remain strong

Over the past five years, an average of 55 per cent of lamb produced in Australia has been consumed domestically. In 2009-10, per person consumption of lamb is forecast to remain steady at 10.4 kilograms. While per person consumption declined over the past 20 years,
this trend stabilised in the early 2000s as lamb quality improved and marketing efforts increased. Over the outlook period, per person lamb consumption is expected to remain steady while total Australian lamb consumption is expected to increase at the rate of population growth.

In export markets, the demand for lamb is expected to increase in the medium term. Export demand will be supported over the outlook period by the relatively low value assumed for the Australian dollar, especially against the US dollar. Australia’s export markets for lamb are highly diverse, including the United States, the European Union, China and the Middle East. This diversity is expected to support overall export growth throughout the outlook period by reducing vulnerability to unfavourable economic conditions in any one particular market.

Australia and New Zealand are the two major exporters of sheep meat in the world. Unlike Australia, New Zealand’s lamb exports are destined principally for the European Union because of a relatively large import quota. Total exports from New Zealand are not expected to increase significantly in the coming years, as competition for agricultural land has been intensifying, limiting potential increases in lamb production. This limited competition in export markets other than the European Union is expected to strengthen demand for Australian lamb over the outlook period.

Export growth to resume

Following an estimated 13 per cent decline in 2008-09, lamb exports are forecast to increase by 10 per cent to 156 000 tonnes in 2009-10, as Australian lamb production increases. Lamb exports are projected to increase slightly over the remainder of the medium term to 164 000 tonnes in 2013-14. It is expected the major markets will include the United States, the Middle East, the European Union, China and Papua New Guinea.

The United States is Australia’s largest export market for lamb, accounting for an average of 28 per cent of total exports in the past five years. With US demand for lamb expected to be affected by the financial crisis, exports to the United States are forecast to fall in 2009-10. As economic conditions improve in the following year, exports should begin to increase. Underpinning this projection is an assumed decline of domestic US sheep meat production.

The demand for mutton in key export markets, particularly the Middle East, is assumed to remain strong throughout the outlook period, as the demand for low-cost sources of protein continues to increase. However, the expected decline in sheep slaughter in Australia will constrain available supplies. Sheep slaughter has been maintained in recent years by the reduction in non-breeding sheep numbers. As the proportion of these sheep in the flock declines, sheep slaughter will fall. Mutton exports are therefore projected to decline by 15 per cent over the medium term to 129 000 tonnes by 2013-14.

Live sheep trade to remain strong

Demand for live sheep in major export markets is expected to remain strong throughout the outlook period. This assumption is supported by ongoing increases in meat consumption and the limited reliability of other live animal suppliers to the Middle East. The low incidence of disease in Australian sheep and their consistent quality, are other factors expected to support demand over the outlook period.

Between 2008-09 and 2010-11 live sheep exports are projected to decline. The two principal reasons behind this decline are the lower total number of adult sheep, and the falling proportion of non-breeding sheep in the flock. From 2011-12 to 2013-14, live sheep exports are projected to increase gradually, in line with total sheep numbers, reaching approximately 3.7 million head by 2013-14.