Australian mutton exports are booming. Lamb exports are running above average levels too but are not as robust as mutton. At the domestic processing level there is a clear preference for mutton throughput over lamb, wherever abattoirs can favour sheep as the price differential between the two are making mutton margins healthier. The price difference between sheep and lamb is particularly evident when assessing long-term deflated price trends.
When explaining the importance of looking at deflated pricing, especially over a long period, a straightforward analogy can help clarify the concept for those unfamiliar with these economic terms.
Imagine comparing the price of a movie ticket from 1973, which was around $3 according to ABS data, to today's price of $23. At first glance, it seems like going to the movies has become significantly more expensive. However, this direct comparison doesn't account for inflation, the gradual increase in general price levels over time. Inflation is like air slowly filling a balloon—the amount of money needed to buy things increases, inflating the prices of everything, including movie tickets. Adjusting the $3 ticket from the 1970s to today’s dollar values equates to a movie ticket fee of around $35, so we are getting a bargain at $23.
Deflating the price of lamb and mutton using CPI data allows us to adjust the prices back to what they would have been in another time period, or we can express all of the historic prices in current dollar values. This adjusted view helps us see the real changes in prices over time by removing the distortion caused by price inflation.
The two charts below show the nominal and inflation adjusted prices through time for the National Trade Lamb and National Mutton sale yard indicators with prices beginning in the mid-1950s.
This approach is crucial because it provides a clearer and more accurate picture of actual price trends, beyond just the effects of inflation. It helps farmers, policy makers, and businesses make better decisions based on true cost trends and allows for more accurate economic analysis and research. By using deflated prices, we understand not just the nominal price changes but also how the value of goods like lamb and mutton has shifted in terms of purchasing power over decades.
Your grandparents may have stories of being able to buy lamb or mutton in the sale yard for less than 100 c/kg cwt in the “olden days”. However, adjusting these nominal prices from several decades ago shows that in current dollar values the prices they were paying back in the 1960s or 1970s were still similar to today’s levels when we assess their real value by adjusting for inflation.
Measuring the long-term average trade lamb price over the past 25 years in current dollar values shows that around 660c/kg cwt is the average price, as demonstrated by the black dotted line on the chart below.
Meanwhile the 70% range, grey shaded area, shows where the deflated lamb price has fluctuated for 70% of the time historically since the mid 1950s and this could be described as the “normal” range for lamb pricing. This shaded area ranges from a lower boundary of 450 c/kg cwt to an upper boundary of 880 c/kg cwt. Also included on the chart is an extreme pricing range, as price movements beyond this area have only occurred for 5% of the time historically. Trade lamb prices would be considered in the extreme range when under 235c/kg cwt or when above 1100 c/kg cwt.
Similarly, pricing ranges and long term averages can be calculated from the current dollar value measurements for the national mutton indicator. The 25-year average for mutton sits at 380 c/kg cwt and the normal range, as per the grey shaded 70% region is between 220 cents and 550 cents, on a carcass weight basis. Meanwhile, mutton prices would be considered extreme when trading below 55 c/kg cwt or when above 710 c/kg cwt.
The long-term deflated pricing of lamb and mutton in Australia highlights why mutton exports are booming and processors continue to favour mutton over lamb wherever they can presently. Current trade lamb pricing sits 20% above its long-term deflated average price of 660 cents whereas mutton pricing is about 17% below its long-term average price of 380 cents.
Matt Dalgleish is a director of Episode3.net and co-host of the Agwatchers podcast.
