Sheep meat demand has a rosy forecast, while wool is also showing optimism after a period of struggle. On the supply side, world sheep numbers from the major wool and meat producing countries since 1990 have fallen, with falls ranging from 67% in Uruguay to just 3% in South Africa.When looking at the market outlook for any commodity, but especially agricultural commodities; taking account of projected supply & demand and assessing price risk is a good starting point.
This then leaves the question of market risk.
"High prices correct high prices"
When commodity markets produce attractive returns, production (and supply) increases. A good example is in the grain industry. If world wheat prices were to rise to $400 per tonne, within 12 months farmers all around the world would have increased planted acres of wheat and the increased production would be weighing down on prices. There is a saying in commodity trading, “high prices correct high prices”.
When we apply this thinking to sheep and wool to assess market risk, we can see that the response to high prices is not so straight forward.
Any response to better sheep and wool returns (remember it needs to be compared against other options the producer has for land use), will result in reduced stock for sale in the short term. The only way to increase production of livestock is to breed more, which requires retaining of more females. This will further tighten supply.
Risk of supply impact on price is low for time being
The resulting increased production (after the decision to retain and join more ewes) takes some time to come forward. Any response to high prices is delayed because of the time required to breed the sheep and then get them to production.
Overlaying this is the low base numbers we are starting from. The only significant sheep meat exporters in the world are Australia & New Zealand, where the sheep flocks from 1990 to 2013 are down 54% in total, from 173 million to 75.5 million and 57.8 million to 30.8 million, respectively.
This will make any attempt to increase the flock slow. Therefore, the risk of supply increases impacting on the market outlook and price is low for the foreseeable future.
Roberto Cardellino puts all this into perspective in his Mecardo Analysis article, “Global sheep flock - what happened and where to now?”.
So the question now could be “Are we about to enter an unprecedented time for the humble sheep?”