LAMB price indicators could reach record levels early this year, possibly above 700c/kg, according to the Rural Bank’s latest Ag Answers report.

In its Australian Agriculture Outlook 2018 report, Rural Bank’s specialist insights division, Ag Answers, said it exopected sheep meat demand to continue to outpace supply, driving a sixth consecutive year of higher average annual lamb prices, including a new record high price early in the year.

With the national trade lamb indicator closing at 661c/kg in 2017, the combination of increasing supply and steady to increasing prices point to strong demand, particularly export demand, the report said.

“Ag Answers modelling forecasts the upwards trend in the NTLI to continue in 2018, driven by ongoing growth in demand outpacing production which is expected to remain similar to the past two years.

“Slaughter levels for the start of 2018 are expected to tighten, continuing to follow the trend seen 12 months ago,” the report said.

“This should push prices higher, possibly above the Ag Answers 68 percent confidence range and into record territory above 700c/kg carcase weight.”

Ag Answers said supporting the likelihood of prices reaching an unprecedented mark of 700c/kg and potentially holding there for a short period of time is the exchange rate.

“The only other time lamb prices were in this current range was a brief peak of 650c/kg in 2011, a time when the Australian dollar was at parity with the US dollar.

“If the NTLI were to average 700c/kg over the course of 2018, at last year’s average exchange rate of 77c, the NTLI would average 539USc/kg,” the report said.

“This would be the second highest annual average on record, but still down 30USc/kg on 2011, so not beyond the realms of what has been paid before.

“Therefore, the effects of higher Australian lamb prices on international demand will be softened somewhat by a relatively low dollar.”

Ag Answers said the exchange rate, seasonal conditions and slightly higher production in New Zealand will be factors to watch in 2018, but the insight division expected 2018 to be another exceptional year for Australian sheep producers.

Wool prices expected to remain strong

Ag Answers also said the fundamentals of the wool market suggest it will remain strong, after the AWEX Eastern Market Indicator hit a new record level of 1765c/kg in mid-December 2017.

The Rural Bank report said there will be no supply shock to undermine the market, with demand strong in China and assisted by the Australian dollar.

“Wool stored on-farm is limited and Australian wool production has been in a 23-year period of decline.”

The report said the lagged and slow process of increasing the size of the flock and therefore wool production meant that building supply would take time.

“Unusually for the wool supply chain, there appears to be very little wool stockpiled at any point of the chain, removing the buffer effect of stocks from the market.”

The Ag Answers report said declining wool stocks in China have helped boost the Australian market, building on demand for woollen apparel associated with rising incomes.

“The Australian dollar has been trending lower since September and some commentators suggest that it will fall further, which would add support to Australian wool prices.

“Current bullish market factors suggest that wool prices are more likely to range in the upper half of our forecast range based on an auto regression model, perhaps between 1720 and 1850c/kg clean.

“If so, that could see the EMI average around 1800c/kg clean in the 2018 calendar year.”

Source: Rural Bank.