Rabobank senior animal proteins analyst Angus Gidley-Baird.

AUSTRALIAN sheep meat prices are not expected to drop dramatically unless large numbers of processors close due to reduced margins or a COVID-19 outbreak, according to Rabobank analyst Angus Gidley-Baird.

Despite the COVID-19 pandemic already temporarily closing the Cedar Meats facility in Melbourne, the bank’s senior animals proteins analyst believed Australia’s small flock and sheep meat supply would limit any plant closure impacts, unless there was a large reduction in processing capacity.

“I think with our limited supply of sheep, I think we are OK.

“I think with the number of processors there are, and the sheep numbers that we’ve got, you would have to see a large number of processors actually close or go to reduced shifts as a result of lack of staffing or tighter margins,” he said.

“We would have to see quite a large reduction in processing capacity before we started to see it, in terms of any dramatic drops in prices.

“Obviously if a number of processors were to be affected you would expect sheep prices to come down a little bit, but I just think we’ve got such limited supplies at the moment.”

Mr Gidley Baird said despite the reported plant closures due to COVID-19 outbreaks overseas, he was confident that Australia’s meat processing sector was well prepared.

“We are in a pretty good position to be able to manage it and given our low availability of lamb and sheep numbers, you would have to see one of the majors and a number of small operators shut down plants before you started to see a real impact on prices, like what they have seen in the United States.”

In a recent webinar exploring the sheep and wool outlook, Mr Gidley-Baird said limited sheep numbers will support Australian farmgate prices through COVID-19 disruption. He said sheep meat prices – despite being much higher than expected early in the year – would remain strong through 2020.

With a growing exposure to exports, and product positioning in the premium red meat category, Mr Gidley-Baird said the Australian lamb industry was more exposed to COVID-19’s global economic downturn than some other meats, but he believed reduced domestic sheep numbers would counter the global market impact.

“We’ve got the lowest sheep inventory for over 75 years, and the reduced lamb and wool production we are seeing as a result will support prices for 2020,” he said.

The reduced slaughter numbers – lamb slaughter 12 percent down, year-to-date, and sheep slaughter down 26pc year-to-date – were indicative of producers holding and rebuilding flocks now the season had turned, Mr Gidley-Baird said.

He said the ”phenomenal” increases in lamb prices experienced earlier in the year – 35pc higher year-on-year (YOY) – were not unusual under a supply constraint scenario, but he expected these prices to soften as the year progressed.

Australia would benefit from its strong domestic sheep market, but with 65pc of lamb, and almost all mutton and wool, exported around the globe, he said global markets would play heavily on the industry.

COVID-19 impacts on the sheep meat industry

COVID-19 social restrictions have impacted foodservice and restaurant demand heavily, with foodservice traffic in China during the month of February down 80pc, although signs of recovery were now being seen.

“A large bulk of Australia’s product into the Chinese and US markets – 60 to 65pc – is eaten out of home, with Australian lamb sold into the US heavily focused on the higher end restaurant market, making it particularly vulnerable to the global economic slowdown,” Mr Gidley-Baird said.

As such, he said, the reduction in foodservice could have a larger impact on lamb over other proteins, as it was more exposed to the premium red meat markets.

Strong demand from consumers stripping supermarket aisles had fuelled prices in late March, but Mr Gidley-Baird said that demand had now dissipated, and lamb prices softened accordingly.

He forecast heavy lamb and mutton prices to follow a similar trajectory to last year, expecting prices to come off their highs from earlier in the year, before picking up again through May, June and July – albeit no higher than the mid-year peaks experienced in 2019.

“Given our supply situation I don’t expect prices to drop dramatically, unless we were in the very unfortunate situation where multiple processing facilities ended up closing due to reduced margins or a COVID-19 outbreak – reducing processing capacity on market.”

Wool price forecast is less bullish

Mr Gidley-Baird’s forecasts for the wool sector remain less bullish, with prices expected to soften, before strengthening again in late 2020.

Wool prices, in terms of the benchmark AWEX Eastern Market Indicator, were expected to continue to ease towards A1100c/kg through to the middle of the year, before picking up towards A1400c/kg in late 2020/21 as economic conditions improved.

He said a weaker Australia dollar, despite a recent rise above 60 cents, would support the local industry through slower global economic conditions.

Comparing the current situation to the global financial crisis of 2008/2009, he said the wool price plummeted 34pc, in $US terms, in the three months following the collapse of financial institutions in 2009, and 12pc in Australian dollar terms. Australian lamb prices dropped 24pc over those same three months during the Global Financial Crisis.

However, Mr Gidley-Baird said beyond this sharp sudden decline, the price movements across the year were less pronounced. In Australian dollar terms, wool dropped 6pc from the beginning to the end of 2008, 10pc through 2009 before increasing 14pc through 2010. Lamb prices actually increased throughout the period 2008 to 2010.

Mr Gidley-Baird said this historic data augured well for the current pandemic crisis, and predicted Australian wool prices would fall on the back of weaker demand, before recovering in late 2020.

This forecast, he said, was based on the assumption of decreased US and Chinese consumer sentiment, plus severe economic contraction over the next six months, before picking up late 2020 into early 2021.

Other global considerations included an assumed decline in cotton prices (before rising again) and a decrease in Australian wool production – assumed to be down two to three per cent YOY – and Chinese wool imports.

“Interestingly, last year China had one of the lowest volumes of wool imports in the past 10 years, so we expect stocks in China to be relatively low, driving stronger imports as factories start to open up again,” Mr Gidley-Baird said.