It’s all relative

Livestock | 22nd March 2021 | By Matt Dalgleish

The Snapshot

  • NSW Merino Lamb prices tend to follow the direction of the ESTLI with a correlation co-efficient on monthly price changes of 0.6944.
  • Since 2000 the monthly NSW Merino Lamb spread has spent 70% of the time between a 42c and 92c discount to the ESTLI.
  • A 67 cent discount spread on a lamb worth 350c/kg cwt in the mid 2000s isn’t the same, in relative terms, to a 67 cent discount spread to a lamb worth 700c/kg cwt in 2020.

The Detail

A northern sheep/wool producer got in touch with TEM with a query on historic Merino lamb price performance compared to the Eastern States Trade Lamb Indicator (ESTLI). Always happy to oblige, we ran some numbers on the last two decades of prices and spreads for NSW Merino Lambs.

The price movement for NSW Merino has broadly followed the trend set by the ESTLI, with the NSW Merino Lamb running at a discount spread to the ESTLI. Analysis of the monthly price change for each category of lamb shows that there is a moderately strong price relationship with the directional price movement of the NSW Merino Lamb following the direction of the ESTLI. The correlation co-efficient of 0.6944 is reflective of markets that tend to follow each other relatively closely.

Taking a look at the price spread (in cents per kg on a carcass weight basis) between the NSW Merino Lamb and the ESTLI shows that the long-term average spread has achieved a 67c/kg discount. Since 2000 the monthly NSW Merino Lamb spread has spent 70% of the time between a 42c and 92c discount to the ESTLI and 95% of the time between a 17c to 117c discount.

Movements in spread within the 70% range are considered to be relatively normal fluctuations, meanwhile movements beyond the 95% range would be considered extreme.

It is often useful, when looking at price spread behaviour over a long time frame, to consider the percentage spread rather than the absolute spread in cents per kg terms.

Using the percentage spread we can see that in relative terms the NSW Merino Lamb to ESTLI has narrowed significantly over the last two decades. The discount spread in c/kg terms hasn’t kept up with the increase in the price of lambs.

A 67 cent discount spread on a lamb worth 350c/kg cwt in the mid 2000s isn’t the same, in relative terms, to a 67 cent discount spread to a lamb worth 700c/kg cwt in 2020. Lamb prices have doubled over this timeframe but the discount spread in cents per kilograms has mostly been contained to a 42c-92c range throughout the entire timeframe.

This has meant that since about 2015 the NSW Merino spread to the ESTLI has narrowed to range between a 5% to 15% discount. However, back during the 2000s the percentage spread was ranging between a 15% to 40% discount.

Tags

  • Lamb
  • Sheep
  • Spreads
  • Merino
  • Wool
  • Fibre