In the first two parts of this market series we saw that the supply of beef and sheep meat (mutton and lamb) decreased over the past few years. However, when considering the population growth, the total demand remained stable for sheep meat and increased for beef.
In this article we will investigate the trade indicators and price trends of mutton and lamb. Part 4 will focus on the trade indicators and price trends of beef.
South Africa does not operate in isolation and domestic sheep production forms part of the larger international market. Therefore, imports and exports should also be considered. Figure 1 illustrates the import and export quantities (ton) of mutton and lamb for South Africa from 2016 to 2019.
Figure 1: Mutton and lamb imports and exports from 2016 to 2019. (Source: Association of Meat and Poultry Importers South Africa [AMIE SA], 2020)
It is evident from Figure 1 that there is a large negative trade balance in terms of mutton and lamb quantities. These quantities include all sheep meat (chilled, frozen, whole and half carcasses, bone-in and deboned cuts) but excludes offal.
South Africa imported approximately 539 tons of lamb and mutton per month, while it exported 33 tons on average. The annual average import quantity was approximately 6 473 tons, while exports only added up to 390 tons per annum.
In terms of trade partners, most of the imported mutton and lamb originated from Namibia, Australia and New Zealand, while exports typically went to Lesotho, Mozambique, St Helena, Antarctica, Mauritius, Botswana and Ghana.
The interactive forces of supply and demand determine a product’s market price. Figure 2 presents both the nominal and real prices for mutton. The nominal price is the shelf price, which usually increases year on year. The real price (inflation-adjusted price), however, is more important – it indicates whether the market price, irrespective of inflation, actually increased over time.
Figure 2: Real and nominal prices for mutton in South Africa from 1975/76 to 2017/18. (Source: DAFF, 2019)
In terms of the nominal price it is expected that the price should increase year on year as it is driven by inflation. Yet, the price sometimes decreases from one year to next, as can be seen in Figure 2. However, when we adjust the price for inflation and work with the real price, it is evident that it is much more volatile than the nominal price and goes through deeper cycles.
Consequently, although the shelf price of mutton may increase from one year to the next, the real price can decrease in the same year. This puts financial pressure on the producer.
The annual average in Figure 2 paints a picture of mutton prices that were on an upward trend during the past few years. However, when one considers the weekly price of A2 lamb carcasses in South Africa, Figure 3 shows a different picture in terms of price trends.
The first thing that is evident from Figure 3, is that the A2 lamb carcass price is quite volatile and large differences can occur from week to week. The year’s price cycle also causes fluctuations, e.g. the price may differ by approximately R15/kg between the week in the year with the highest price and the week with the lowest price.
Figure 3: Weekly A2 lamb carcass prices from 2017 to 2020. (Source: RMAA, 2017 to 2020)
Considering the carcass prices of the past four years, relatively good prices were realised in 2017. However, the weekly nominal prices for 2018 were lower than the 2017 prices and the average annual nominal increase from 2017 to 2018 was positive (1%). Yet if one adjusts the prices for inflation, the real price was approximately 4% lower in 2018 than in 2017.
During 2019, carcass prices were lower than in 2018 and 2017. In nominal terms the price decreased by 9% from 2018 to 2019. In real terms it decreased by approximately 14%. These decreases placed an enormous financial strain on producers, as the cost of production inputs increased during the same time. Meanwhile the drought also forced production cost upwards.
During the first six months of this year, the carcass price of A2 lambs was higher than the 2017 price for the first time. Although sharp 2020 price increases from the low 2019 prices may create the impression that producers are now in a good place financially, the price drops during 2018 and 2019 must be considered. While a large year-on-year price increase may occur this year, it will not make up for the losses of the previous two years.
Although lamb carcass prices remain volatile, and even though the annual price cycle does not always follow the same trend, some generalisations can be made in respect of the annual price cycle (Figure 4).
Figure 4: The indexed annual price cycle for A2 lamb carcasses and store lambs from 2012 to 2019.
The indexed prices for A2 lamb carcasses in Figure 4 represent the annual price cycle over the past eight years. The highest price occurs in December, as the demand for lamb in South Africa is usually high over the December holidays. Similarly, the prices during January and February also tend to be high before the price drops sharply to reach a minimum in April. Due to lower supply during winter, the price increases again until supply starts to increase from September to November.
A closing thought
South Africa is a nett importer of sheep meat (mutton and lamb) with very limited exports. However, imports also declined drastically during 2019. This might be due to lower domestic prices. Price tendencies show that year-on-year price increases have been very limited since 2017 and was even negative in some years. This is the first year with a relatively good A2 carcass outlook since 2017. – Dr Frikkie Maré, Department of Agricultural Economics, University of the Free State