Sheep meat: March quarter 2021
2021–22 price outlook more favourable than for medium term
The average saleyard price for lamb is forecast to remain high in 2021–22, falling by 2% to 736 cents per kilogram. The average saleyard price for sheep will also remain high, falling by 5% to 561 cents per kilogram. Drought-induced supply shortages and strong global demand driven by African swine fever are expected to begin to abate, leading to price falls.
In the medium term to 2025–26, lamb and mutton prices are unlikely to remain at the high levels of 2019–20 and 2020–21. By 2025–26 lamb saleyard prices are forecast to fall by 10% to 673 cents per kilogram and the saleyard price for sheep is forecast to fall by 19% to 479 cents per kilogram. Global meat supply is increasing in response to high prices caused by Chinese import demand following the African swine fever (ASF) outbreak. This increased supply is expected to place downward pressure on Australian sheep prices over the medium term to 2025–26. Restocking efforts in the short term will increase the supply of lambs available in the medium term and reduce upward pressure on prices out to 2025–26.
2020–21 saleyard prices revised up from the December forecast
Average saleyard prices in 2020–21 for both lamb and sheep have been revised up from the December forecast, amidst stronger competition between producers and processors at saleyards. The saleyard price for lamb is forecast to average 751 cents per kilogram in 2020–21, down 7% from 807 cents in 2019–20. The saleyard price for sheep is forecast to average 590 cents per kilogram, up slightly from an average of 584 cents per kilogram in 2019–20. Limited supply of mutton and large-scale restocking are amplifying competition between processors and producers, leading to a sharper rise in mutton prices than lamb prices.
Medium-term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian sheep meat are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat–sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of around deciles 3 to 4. For a more detailed explanation see the Agricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.
Forecast saleyard prices will be influenced by the timing of dry years
Lamb saleyard prices are forecast to fall between 4% and 10% by 2025–26, and the saleyard price for sheep is forecast to fall between 18% and 23%. More favourable seasonal conditions early in the outlook period will assist a more rapid increase in the supply of sheep meat. This will result in prices being towards the lower end of the forecast range. Less favourable conditions early in the outlook period will limit flock growth and result in prices in the upper end of the forecast range.
Export demand for Australian mutton remains strong in the short term
The export volume of sheep meat in 2020–21 was forecast to fall by 33% in December. However, stronger than anticipated mutton exports have reduced this anticipated fall to 23%. Restocking activity and a smaller national flock have reduced the volume of mutton exports since 2019–20. Producers face the competing incentives of restocking versus selling due to national sheep prices being 35% above the 5-year average.
Higher protein production will reduce demand for sheep meat
China is the largest consumer of Australian lamb and mutton, by volume. However, compared with other markets, Australia's lamb exports to China are a lower value commodity, making it sensitive to competition from cheaper substitutes. The average export unit price of lamb to China between July and December 2020 was $5.50 per kilogram, 37% less than the average export unit price to the world of $8.73 per kilogram.
Competition from lower priced substitutes in China is expected to place downward pressure on prices over the medium term. An anticipated full recovery of the Chinese pig herd by the end of the outlook period is expected to reduce the demand for Australian sheep meat. At the same time, an increased supply of lower priced substitutes, such as domestically produced poultry and imported beef from Brazil, is likely to lower the willingness of Chinese consumers to pay for higher priced Australian lamb.
Seasonal conditions assisting fast rebuilding of the national flock
The national flock is forecast to reach 67.5 million head in 2021–22. In the medium term to 2025–26 the national flock is forecast to grow by 10% to 72 million head. Growth in the national flock could vary between 7% and 12% over the outlook period. Faster growth is likely if favourable seasonal conditions occur early in the outlook period when prices are still high, boosting the incentive to restock. Slower growth will occur if drier seasonal conditions take place earlier in the outlook period and restocking occurs later when prices are lower, and when the incentive to restock is also lower.
Favourable seasonal conditions for most areas of the eastern states have allowed producers to commence restocking in the latter half of 2020–21. This restocking activity has led to a diversion in lamb prices, with the price of restocker lambs 9% above trade lambs between July 2020 and January 2021. Over the medium term, producer demand for restocker lambs will fall as flocks increase through breeding. This will in turn reduce competition between processors and producers, which will lower prices over the outlook period.
Feed production and storage in 2020–21, made possible by favourable seasonal conditions, has placed producers in a better position to reduce flock turn-off and maintain animal condition in case of a dry year in the medium term to 2025–26. Because no consecutive dry years have been assumed in the outlook period, sufficient feed availability will mean that destocking during a dry season is unlikely to be as severe as it was in 2018 and 2019. It will also mean that, in dry years, restocking will only be slowed temporarily.
Larger flock will boost production and slaughter in medium term
Sheep meat production is forecast to reach 647,000 tonnes in 2021–22, slightly down from 649,000 tonnes in 2020–21. This fall is associated with lower lamb production, as a result of producers retaining female lambs for flock rebuilding. In the medium term to 2025–26, the larger flock and higher carcase weights (from improved genetics) are assumed to increase the supply of sheep meat.
In 2021–22 sheep and lamb slaughter are both forecast to fall as rebuilding takes priority, before increasing over the outlook period in line with the growing national flock.
2020–21 sheep meat production and slaughter revisions from the December forecast
Production of mutton in 2020–21 has been revised up from the December quarter from 145,000 tonnes to 168,000 tonnes because steady demand has been met with supply despite many producers shifting their focus to restocking. Likewise, sheep slaughter has been revised up by 16% to 6.7 million head. The production of lamb has been slightly revised down from the December quarter and is forecast to reach 480,000 tonnes in 2020–21. Slaughter has been revised down by 4% to 20.1 million head.
Live sheep exports lower after Western Australian destocking
Live sheep exports are forecast to fall in 2021–22 to around 802,000 head, a downward revision from the December forecast. Several factors are anticipated to weaken the demand for Australian live sheep exports in 2020–21 and 2021–22. Reduced supply of sheep available for live export, growing competition with Romania and South Africa for market share in the Middle East, and Qatar's removal of subsidies for Australian lamb imports at the end of 2020 will all affect demand.
Over the medium term to 2025–26, live sheep exports are assumed to track with the rate of growth of Western Australia's flock and return to numbers similar to those in 2019–20. Continued strong competition from cropping and consumer substitution towards processed meats in the Middle East are expected to limit recovery in live exports to around 2019–20 volumes. Assuming growth in the flock, the larger supply of sheep available over the outlook period is expected to weaken the price of Australian sheep in international markets and assist Australia's competitiveness. Western Australia has been experiencing less favourable seasonal conditions than the eastern states in 2020–21, and sheep producers are still in a destocking phase. An estimated 1.8 million head of sheep were transferred from Western Australia to the eastern states by December 2020. Without a seasonal break, the WA sheep flock could further contract, resulting in fewer stock available for live export over the outlook period.
Uncertain environment influences flock dynamics
Improved circumstances increase trade-off between sheep meat and wool production
In the upside scenario, high meat prices are likely to persist longer in 2021–22 than in the forecast, as a result of the opening of economies and the food service industry increasing global demand. However, prices would remain lower than recent highs given weakening demand from China, as its pig herd recovers from ASF. Recovering global demand for wool as economic activity recovers would provide producers with a greater incentive to increase wool production under this scenario. This is discussed further in Natural fibres.
Favourable prices for sheep meat and wool, and persistence of favourable seasonal conditions in 2021–22, would create stronger momentum for flock rebuilding relative to the forecast. Substantial pasture growth and grain production over this period is assumed to provide a solid base for producers to maintain flock numbers and animal condition during the dry year assumed for 2022–23. Reduced restocking intensity in 2022–23 will ease the competition between producers and processors in saleyards, leading to lower prices.
Production outcomes consistent with decile 3 to 4 rainfall would persist between 2023–24 and 2025–26. The larger supply of sheep meat from faster flock rebuilding (relative to the forecast) would place downward pressure on prices. This would be additional to the effect on prices of an expected fall in global demand as Chinese pork supply recovers and likely exceeds previous levels, as a result of productivity gains achieved from industrialisation of the industry.
Lower sheep meat prices towards the end of the outlook period and production outcomes consistent with decile 3 to 4 rainfall would reduce incentives for producers to expand flocks. However, the rapid flock rebuilding early in the outlook period means that the national flock would likely finish the outlook period at a higher level than in the baseline forecast.
Sources: ABARES; Australian Bureau of Statistics
Sheep meat production a better alternative than wool under less favourable circumstances
In the downside scenario, prices are expected to be similar to the forecast. Slower flock growth would reduce the supply of sheep meat, and relatively weaker economic activity would lower demand. The opposing influence on sheep meat prices from these factors would limit major price falls.
Ongoing low wool demand would keep wool prices low, causing producers to emphasise sheep meat production given the relative price of sheep meat to wool. Throughout the projection period, producers' joining decisions for improved sheep meat production would increase marking rates and carcase weights compared with the forecast and upside scenarios. These other scenarios have a greater emphasis on wool production given the assumed resurgence in economic activity.
Favourable seasonal conditions for pasture and grain production in 2020–21 are expected to assist producers to manage the adverse seasonal conditions assumed for 2021–22. Flock rebuilding would likely be delayed under this scenario. Producers would instead be expected to prioritise flock maintenance when seasonal conditions are poor.
Production outcomes consistent with decile 3 to 4 rainfall are assumed to persist from 2022–23 to 2024–25, which would allow producers to recommence flock rebuilding. Seasonal conditions would restrict the speed of rebuilding but improved marking rates compared with the upside scenario and forecast will counteract this effect. Increased competition between producers and processors would improve prices for lamb and sheep in 2022–23. A full recovery and possible post-African swine fever productivity boost to China's pork supply would reduce demand for Australian sheep meat. However, delayed restocking would slow supply increases and buffer against major price falls.
Under the downside scenario, another dry year is assumed for 2025–26. A general trend towards flock rebuilding under this scenario is anticipated to be counteracted by higher turn-off in poor seasons, leaving flock numbers in 2025–26 similar to those of 2020–21. The downside scenario has a greater impact on flock numbers than the upside scenario due to the greater deviations in seasonal conditions.
Sources: ABARES; Australian Bureau of Statistics
Opportunities and challenges
New Zealand and China upgrade their free trade agreement
New Zealand and Australia are in direct competition when it comes to satisfying China's demand for sheep meat. In January 2021 China and New Zealand upgraded their free trade agreement, which entered into force in 2008. Improved relations between Australia's biggest sheep meat competitor and consumer could make New Zealand more competitive in the Chinese market. However, market access for sheep meat remains unchanged in the upgraded agreement.
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