While many of Australia's agricultural producers have been hit by the global economic downturn, sheepmeat producers have defied the trend, experiencing some of their highest ever prices. Australian sheepmeat producers were sheltered from the downturn by falling flock numbers, both at home and overseas, according to a recently released report from Rabobank.

Report author Rabobank senior analyst Wendy Voss says the prices that sheepmeat producers are currently seeing are a result of some tough times for the industry over recent decades.

"Flock numbers have been falling in Australia since the early 1990s- when the wool price support scheme was removed. In recent years the rate of decline has accelerated, with the flock falling from 100 million head in 2005 to just 71.5 million head in mid-2009," she says.

One of the major contributors to this fall in numbers has been drought, which was particularly severe in the spring of 2006 and 2007, driving an increase in total sheep and lamb slaughter and a fall in prices as producers destocked in response to feed and water shortages.

On top of the already significant challenge of drought, sheep farmers faced surging input costs from 2006 with grain, fuel and fertiliser prices rising steeply. The higher grains prices also saw many producers expand their grains production, often at the expense of sheep numbers, shifting paddocks away from pasture to cropping.

Declining flocks offset impact of crisis

The report says the ongoing reduction in the flock resulted in falling sheep and lamb availability from 2008, supporting higher prices for producers. The decline in availability continued in 2009, which coincided with rapidly tightening supply in Australia and New Zealand.

"While not the biggest producers of sheepmeat in the world, together Australia and New Zealand provide over 90 per cent of the world's sheepmeat exports. The impact of plummeting flock numbers in both countries has impacted significantly on global trade," Ms Voss says.

"Adding to the tightening of the demand-supply chain has been the fact that many of Australia's sheepmeat markets are also facing falling local supply. The US sheep flock has decreased from 20 million head in 1970 to less than six million head at the beginning of 2009. In the EU it is a similar story with the production in the major sheepmeat countries falling by almost 20 per cent in the past decade."

China (the world's largest producer of sheepmeat) has also faced a number of challenges, which have resulted in production falling by two percent in 2008. Already a net importer of sheep and goat meat, the gap between production and consumption has widened over recent years, providing increased opportunities for Australian sheepmeat sales.

Prices to remain strong in the short term

For Australian sheepmeat producers the short-term outlook appears positive, with potential for improved meat demand (including sheepmeat) and continued restrictions on supplies expected to support prices at high levels.
However, while prices will remain strong, there are a number of factors which could keep a lid on prices rises, not the least of which is the Australian dollar.

"While the domestic market takes over half of all Australian lamb production, export markets are an increasingly important contributor to lamb sales." Ms Voss says.

"Since February the value of the Australian dollar has been rising, surging to over 90 US cents, and continuing to maintain pressure on sheepmeat exports and processors, to the point that many are cutting back on processing shifts."

Medium term outlook supported by growing demand and tight supply

Over the medium term populations and incomes around the world are expected to rise, providing support for increased meat demand, particularly in developing countries, the report says.

"For sheepmeat there are likely to be a wide range of opportunities for increasing demand. For example, while the US is one of our biggest export markets, its annual sheepmeat consumption per capita is only 0.5kg, compared with around 13.6kg in Australia. Market research from the US indicates there is plenty of opportunity to create greater familiarity and awareness of lamb with consumers, an endeavour that could be very profitable for the industry," Ms Voss says.

India could also offer opportunities; goat and sheepmeat are the preferred meat products and are sold at a considerable premium to other meats. With a population of nearly one billion people, domestic production has been unable to grow fast enough to satisfy local demand.

"The Indian market is currently inaccessible to Australian and New Zealand exporters due to access barriers, this is a situation that would require government negotiation to rectify," Ms Voss says.

"The sheepmeat industry still has some way to go to get the supply-demand balance right. With production of other meats rising relatively rapidly compared to lamb and mutton, the industry will need to work hard to keep lamb popular amongst producers, particularly given the possibility of further restrictions to supply, and the impact that will have on price.

"In regards to supply, the big question is how do we encourage producers to expand flocks in Australia, so that sheepmeat can increase-or at least maintain-its share of the ‘meat pie'. It is important to the industry that in the future it is improved demand rather than falling supply that is driving higher prices."