Over the course of 2020, we have seen the store market rise to new highs for both sheep and cattle. The combination of low supply and high demand created what is described as the ‘perfect storm’, resulting in record prices at the beginning of the year. For the cattle market, intense competition between restockers and processors has sustained the high prices.
However, for the sheep and lamb market, that competition has been volatile at various points throughout the year which correlates with prices easing in winter. Despite the lamb market gathering pace in recent weeks, the ebbs and flows of market has us asking why. Why is it that the sheep and lamb market has been more vulnerable to the external factors than the cattle market? The AMI team has delved into an analysis of the factors influencing the store market and how it differently impacts the two species.
The two most significant factors that have had an impact in swaying the store market in 2020 is the positive turnaround in seasonal conditions and the global COVID-19 pandemic.
Without the above average rainfall at the beginning of the year, restocking demand would not have been ignited and driven prices skywards. The tight supply, as a result of the last three years of drought, also compounded the competition between processors and restockers. Australian herd and flock numbers are sitting at their lowest numbers in years; MLA estimates that the national flock will reach 63.5 million head and the national herd will dip to 25 million in 2020. Attempting to rebuild numbers is no easy feat with the tight supply and increased demand creating the perfect storm for record prices.
Without the COVID-19 pandemic, uncertainty would not be one of the most common adjectives to describe the sheep and cattle markets. At a domestic level, border closures, restrictions at saleyards and social distancing at processing plants has had a serious impact on beef and sheepmeat processing. At an international level, the halt to the tourism industry, shutdown of the foodservice industry and impeding global recession has subdued overseas demand for Australian beef, lamb and mutton and created a logistical nightmare throughout the supply chain.
Capacity at processing plants has been reduced because of social distancing regulations limiting staff numbers. Facilities across Victoria, for example, have lowered processing capacity by almost a third; as the state that processes more than half of the country’s lambs, our national processing throughout production is heavily impacted.
The widespread impact of the pandemic cast a significant shadow of doubt for processors and their outlook of international exports. The ambiguity surrounding whether products could be exported because of disruptions to the supply chain, what levels of demand existed in international markets, dramatically reduced processor competition in the prime market, and as a knock on also the store market.
The international demand for lamb and mutton which drives domestic processors has been hit hard by the global pandemic. The closure of the foodservice industry has had a detrimental impact for lamb and mutton exports. Sheepmeat is not widely consumed around the world; according to MLA it accounts for only 5% of global consumption, whereas beef sits at 21%. It is a niche source of protein that is commonly served in high end restaurants and considered a premium meat in many countries. US Meat Exports estimates that in China 65% is consumed outside of the home due to a lack of familiarity and high prices. Taking the above into account, a fall in prices makes sense, the shutdown of those restaurants and as a result the demand for the protein has subdued, impacting prices.
If we compare this to beef exports, there are many similar factors at play. The industry has undoubtably been impacted by the halt to the foodservice sector, which accounts for approximately 50% of beef consumption according to the managing director of MLX Pty Ltd, Simon Quilty. Demand for the product has been sustained, however, through international protein shortages. In China, African Swine Flu has impacted their protein supply and increased their reliance on imports to meet demand. Beef is also consumed more widely around the world and people are generally more comfortable to cook it at home, in comparison to lamb and mutton. Thus, the closure of restaurants did not impact international demand for beef as greatly as it did for sheep and lamb.
Another sector to the sheep market is wool. Being a fashion item, wool has been heavily impacted by COVID-19. The pandemic is wreaking havoc on the Australian wool industry. Economic downturns have resulted in overseas demand falling to extreme lows and causing the wool market falling to levels last seen in 2002. This is just another thorn in the side of the sheep market which is causing further volatility.
Despite the uncertainty COVID-19 has caused the sheep and lamb market, which has resulted in some ebbs and flows in prices, the store market is in an extremely fortunate position. The beginning of Spring, a traditionally stronger selling period, saw domestic sheep and lamb prices bounce back. The strengthening of processor demand contributed to the boost in prices as January contracts have been released which has provided some certainty around returns. The easing of COVID-19 restrictions around the nation is also giving processors more confidence on being able to secure killspace in the upcoming months when lambs are finished. International demand will slowly strengthen as the safe, quality protein Australia is renowned for has not changed. The foundation factors of tight supply and strong demand will continue to buoy prices for many months as Australia undergoes it’s rebuilding stage.