Supply and Demand Remain Main Influences on Sheep Trade

The basic law of economics regarding supply and demand remains the main factor influencing the sheep trade.

“The conclusion of the Muslim holy month of Ramadan typically provides a short term lift in demand for sheepmeat and support for the market price,” said Stuart Ashworth, Quality Meat Scotland’s Head of Economics Services.

In the week running up to the end of Ramadan, prime lamb prices lifted 6 – 10p/kg depending on location in the UK. However, this strength in the marketplace led to a big lift in the volume of prime lambs sold through the auctions in the early part of this week, particularly in Scotland. Accordingly, with the market satisfying its additional requirements, prices cooled again.

“In other words the market has proven to be sensitive to the supply and demand balance,” said Mr Ashworth. Nevertheless, market prices have remained well ahead of this time last year, averaging 18% higher in the week ending July 6. One of the main drivers of this change in conditions has been a slow start to the season.

Indeed, throughout June the supply of prime lambs to auction markets has been running some 8 – 10% lower than last year and this, he said, had contributed to market prices running some 7 – 9% higher.

Furthermore, this year the end of Ramadan coincided with the first ripples of Brexit hitting the currency markets.

“Compared to a fortnight ago sterling is currently 10% weaker and compared to a year ago 17%-18% weaker. This means that in euro terms the current lamb price is little different to last year whereas it is up by 17-18% in sterling, making exporting more profitable,” said Mr Ashworth.

With sterling also falling sharply against the New Zealand dollar, the cost of importing from there has increased, making home-produced lamb more competitive. At the same time a smaller New Zealand lamb crop last year and higher early season kill suggest that import availability will have tightened.

This combination of tight supplies and a boost in demand from the end of Ramadan, which has been two weeks earlier this year, and a weaker sterling have underpinned the market at a time when prices fell sharply in 2015.

Meanwhile in the UK’s main export market of France producers are currently getting around 3% less than 12 months ago for their lambs but in Ireland 1% more.  With UK prices flat in euro terms, this suggests that UK exports are competitively priced, while delivering a significantly higher return to the UK producer.

“However, sheepmeat consumption in France has been under pressure for a number of years and is expected to remain under pressure this year,” said Mr Ashworth

“In the UK, after a good performance through the winter months, sheepmeat consumption has fallen back since Easter, despite the retail price of some cuts being lower than 12 months ago.

“Intense competition between multiple retailers has led to falling retail prices for beef, poultry, pork and fish. In this scenario simply dropping the retail price does not necessarily lift sheepmeat demand.”

Looking forward, despite the slow arrival of prime lambs onto the UK market, the expectation remains one of a slightly larger 2016 lamb crop in the UK.  On the import side, volumes are expected to fall, given tight supplies in New Zealand, but exports should receive a boost from the significant decline in the value of sterling.

Producer returns will, however, also be affected by the quality of the lambs they produce, with significant variations in producer prices between grades of lamb observed Mr Ashworth.  “For example, during June the premium paid for lambs with an E2 or E3L grade, compared to baseline R3L grade, was around 3-4%, while U2 and U3L grading lambs averaged around 2-3% higher than the R3L grade.”