AUSTRALIA’S sheep and lamb processors could be closing earlier and for longer this year as margins are squeezed by higher prices driven by competition for lower supplies, underpinned by strong export demand.

Global AgriTrends analyst Simon Quilty is forecasting lamb prices to rise further in Australia this year on the back of strong demand in the United States; however, processors have told Sheep Central that export market price resistance has been building globally for months.

Even before the recent rises in the Australian-US dollar exchange rate added extra pressure, several plants moved to cut shifts or wind back to three-day kills, and further price pressure might exacerbate this.

South Australian-based processor Thomas Foods International was one of the first to move when it blamed lower sheep numbers for dropping a shift at its Lobethal plant in mid-2025.

However, Sheep Central has been told eastern states sheep meat processors are now discussing the need for usual May-June-July closures for maintenance to happen earlier.

“Some plants might have to do it as early as March,” one processor said.

Trade and heavy lamb indicators peaked above $12/kg in August last year and are around $11/kg currently, but market speculation is that prices could reach $12-$14 a kilogram because of the perceived winter shortfall.

“The predictions are not wrong, but they aren’t coming with the consequence, and that consequence might not be avoidable.

“I don’t think anyone is counting on the fact that that’s not a gap that processors can bridge, so processors will shut, either permanently because they won’t be able to make any money or they drop shifts,” the processor said.

Processors said last year competition for supply drove prices higher and meant they went into reserves to secure stock, and maintain labour forces and market share.

“This year just looks like massive structural change is on its way.”

One processor said larger processors who have developed expanded capacity positions while numbers justified are now faced with whether to turn second shifts off, shut for an extended period or use their balance sheets to outcompete smaller operators for supply.

“That’s the bottomline, there is not a single lamb plant in Australia that is making money at the moment.

“The stakes are getting higher and higher.”

Continuing to operate to maintain a labour force was an option last year, but plants are finding they can’t afford to operate on that basis this year.

“The consideration now is survival – no workforce permanently or shedding parts of the workforce and rebuilding it later.”

“It’s everyone’s worst nightmare but it is probably playing out,” the processor said.

“Anyone that shuts for three weeks is talking about shutting for 12 (weeks), anyone that usually doesn’t shut is talking about going back to four days for up to six months.”

Processors believes the situation has particular implications for restockers and feedlots, that are outcompeting Middle East air freight buyers, even now paying $5-$6 a kilogram live for lambs to turn-off at an expected $12-$13/kg.

“Yes, there is an opportunity to feed, but don’t get stuck without a contract because what could look like an absolute no-brainer to buy something and turn it off in winter at $13/kg – the volume of trade at that level will be extremely thin because nobody will be able to afford to do it.”

Another processor said no markets, including the United States, wanted to pay for Australian lamb at September-October 2025 prices “and they definitely don’t want to pay for it now.”

“The industry just has to consolidate a bit more, because the lambs are not out there and what they’re paying for them at the moment it is all red, and if anyone says they’re making money they are full of ….”

Some processors have already been forced to let workers go as slaughter shifts or days are dropped.

“Everyone is trying to hold out because they don’t want to let staff go, but inevitably they will have to be let go.”

One processor said there is little doubt among processors that there won’t be sufficient lamb or sheep supply in coming months to match current capacity.

The lifting of the Australian dollar against the US dollar has reduced exporters’ margins on top of high lamb prices and tariffs

“No doubt there will be a shortage of supply at some point and I don’t think anyone will walk away from that.”

But the processor said periods of high prices have historically been followed by price relief for processors.

“But with the lack of supply coming, there are two options, either lamb gets dearer again and will the global market accept that? Probably not.

“The only other real option is for processors to reduce shifts and days to alleviate that supply demand issue, because there is no point processing it if they are losing money or can’t sell it.”

Processors have been getting US market pushback for months, with buyers cutting back on volumes, and the recent currency changes has made lamb around 60 cents/kg dearer than last year, plus there is the 10pc US tariff.

“Processors have gone through a very difficult 12 months and as we have come into this fiscal year it’s just more of the same, for that reason I think there will be a shorter period of time in which they will want to trade in difficult conditions.

“I think it is critical that there is an early break this year, late March-early April – if we were to run into another winter break that could be the end,” he said.

The processors all noted the mismatch between the industry’s current sheep meat processing capacity and the declining flock.

“Nobody wants to see the retraction in competition, but at the end of the day there has got to be a certain volume (of supply), forget about price for a minute … you can’t kill what’s not there.

In previous periods of a higher flock processors could see that there would be some relief.

“But if you had a good look now going forward you would be very concerned around supply, and price is really a secondary consideration when you are making those decisions for the next 4-6 months.

“Skill (labour) has been very very hard to get and once you do drop shifts or days you do lose that skill that you don’t get back in a hurry – that’s been a primary consideration for the last year – but people have pushed through hoping the season would change and there would a rebuild and currency wouldn’t take off,” he said.

“But when you look back today, everything has gone the wrong way, it has stayed dry and we’re continuing to see the ewe flock killed and with the currency now going the wrong way.”

At this stage, value adding of lambs on eating quality attributes such as intramuscular fat is not making much difference to larger processors due to the size of the top-end consumer lamb market. The pastoral operations of the bigger processors have also offered little relief, often only providing up to a few days kill a year.

“But the feedlots are the ones that we want to continue,” one processor said.

“It has helped mitigate the supply issue around drought.

“I think it is very important that the industry has a consistent supply of lamb, I think it’s a really good model and hopefully it continues to grow.”

But the processor is concerned at the prices around $5.50/kg lwt some lotfeeders were paying for lambs when any forward contracts were offering less than $11/kg, when $11.50c/kg might be needed “to even get out.”

“It’s like buying shares at the top.

“It’s a reasonable risk, but we might be talking in three months’ time and if lambs are $13/kg and they’ve been able to pass that on globally and through lack of supply consumers have decided they can afford to pay it and they will pay it because they want it, but I can’t say we’ve seen that trend over the last 12 months,” he said.

“If fact, as lambs got up around $11/kg all we’ve seen is less and less volume being required, particularly in North America, relative to that livestock price.”

The processor said sheep meat on the buy and sell side is “fully-valued” and there will be a period of time when processors will try to maintain their position.

“But this year some of those decisions of what they do or don’t do might be made quicker than what they would have been historically.

“Even if you had an above-average season it is going to take 2-3 years for any significant change in the flock.”

Processor rationalisation to intensify in 2027

Mr Quilty said processors, beef or sheep, have traditionally dropped their capacity to around 70-75 percent during supply shortages or high price periods to retain valued staff. But he said the current Australian sheep meat supply-price situation highlighted the importance of the US market.

Mr Quilty sees the typical supply-price boom-bust cycle as potentially different, because he believes the flock will never rebuild to its former levels. The flock most recently peaked at 79 million in 2024, but is now estimated at about $74 million.

“The exodus from wool continues into next year and the year after and we will end up with a depleted flock

“I think we have managed to get around some of the issues with labour such as visas, and we are more efficient,” he said.

“So that boom-bust cycle that we’ve seen in the past will be very tempered, if not removed, because of the depletion of the flock.

He said the industry has gone from killing 35 million mutton and lambs two years ago to 25 million this year.

“And given that lower supply for this year and the next, what organisation keeps a third of their workforce on when there is nothing there?

“So what happens is then normally the tap turns on, the volume increases dramatically and there is not the workforce to manage it,” he said.

“That’s why the bust (in supply) happens and prices fall.”

“This time it will be different (after 2028-2030), there will be a correction, but nothing like in the past because of a lower flock size, with a new lamb price norm $9-$9.50/kg and after an initial downside of perhaps around $8-8.50/kg.”

Mr Quilty expects there will be rationalisation in the processing sector, with challenging seasonal conditions affecting the longer term availability of sheep and lambs, or testing the ability of processors to manage concentrated turnoffs.

But he doesn’t believe the turnoff of lambs will be as concentrated at certain periods because of the huge growth in the feedlotting of lambs spreading out supply.

“I would estimate that a third of Australia’s lambs, whether they go domestic or for export, are coming out of a feedlot or being lofted at some point.

“We will find that concentration of kill is spread out over three months instead of three weeks.”

Mr Quilty believes there will be more value adding of Merino and crossbred lambs around eating quality feeding into processor supply channels.

“So even though there will be a smaller flock think in some ways it becomes more specialised through value adding which in a way makes up for the lack of numbers.

“I think as supply gets tighter the market will move quickly to value adding.”

Mr Quilty said a trend toward high protein diets and general intergenerational demand for meat among consumers in Australia’s number one volume and quality lamb market – North America – were driving demand for lamb.

“What’s unique about America is that they take everything and they pay the highest prices.”

“I think America sets Australia’s domestic pricing for light, trade and heavy lambs, because there is a 99pc correlation between the price of light lambs and heavy lambs, with the only difference the cost of feed in the middle.”

He said his recent analysis showed that US domestic lamb demand remains strong, and the decline in supply in late 2025 was attributable not to falling demand, but to tight global supply.

“The sharp year-on-year price increase of 13.3pc is directly attributable to tight supply,” he said.

He said Australian lamb prices have a 91pc correlation with US Prime beef prices, so the higher Prime prices expected this year will likely result in higher heavy lamb prices.

“This price relationship highlights that Australian lamb is positioned as a high-end product in the US retail market.

“The fact that lamb retails in the US at $9.07 USD/lb compared with beef at $7.33 USD/lb, pork at $3.30, and chicken at $3.13 USD/lb speaks volumes about how lamb belongs in the elite end of the market,” he said.

“Bottom line: Lamb demand is likely to remain robust on the back of the tightness of Prime beef supply and the willingness of consumers to pay higher prices.

“The expected peak in chilled beef retail prices in 2027 applies equally to lamb as it does to beef,” Mr Quilty said.

The analyst is forecasting trade and heavy lamb prices to reach $13.50/kg in Australia in July/August, and he expects rising lamb prices in the US will postpone supposed early shutdown or rationalisation of processors in Australia.

“I think though that that eventually runs out of puff and that rationalisation or closures will be seen not in this July-August, but more in July-August 2026, and it will be far more severe.

“There might be some this year, but the bulk of it will be in 2027, on the back of running out of supply and global markets starting to peak next year.”

Eating quality-based production is the way forward

Episode 3 analyst Matt Dalgleish said a focus on value adding on eating quality was the way to go for the Australian industry, as the industry can consistently deliver the desired product for a “top level” consumer experience.

Mr Dalgleish said the recent exchange rate changes would not have had as big an impact if the supply and saleyard price conditions had not been as tough.

“Because it has been such a tight season since June-July last year, any additional stress – ie. a marginal increase in the exchange – is kind of like the straw that is breaking the camel’s back.

“Whereas in previous times when the margin was there, an increase of that level of exchange rate, would have had a minimal impact, and the prices have not backed off much during the spring flush,” he said.

“There has been no relief when you expect it and now we’ve got through summer and it won’t be long before the season starts to turn.

“If we get an average top better than average season, which I think we will get in the south, that’s going to pick the market up in terms of rebuild and prices could take off again,” he said.

“They could have another tough season competition wise.”

Mr Dalgleish said he is not as bullish on prices as some and said there is the risk that some export markets could turn away if prices rise.

“This kind of market pressure we are seeing (on processors) is real.”

With the underlying market fundamentals, Mr Dalgleish said he could see lamb prices going to $12-$13/kg, but he didn’t think production of value-added lamb is broad-based enough in Australia yet to allow volume product differentiation on eating quality in export markets.

“We’re heading that way, but it’s not going to help this year.

“I think prices are going to stay strong and in winter we will get to at least where we were last year, maybe slightly higher, but I’m not sure if $12-$13/kg is achievable just because when we start to get towards that we will start to see some pushback.”

See Episode 3’s latest update on sheep processor conditions here .