Markets -- The Big ?If?

Oct. 2003 -- Many researchers, myself included, often discuss the future of slaughter-lamb prices with something like: ?If lamb imports continue to increase, slaughter-lamb prices may weaken.? Why is this? And why can?t researchers be more certain?

Economic theory tells us that if supply increases because imports increase, then prices must fall if demand remains constant. Indeed, many question whether lamb imports compete against domestic lamb production and depress domestic prices. But is this necessarily so?

Economic theory also tells us that if supply contracts, then prices rise. The U.S. sheep inventory is shrinking -- contracting 4 percent year-to-year in July -- and slaughter-lamb prices are the highest they?ve been for a number of years. Thus, there are two opposite forces acting upon slaughter-lamb prices: Reduced supply will increase prices, but increased imports will reduce slaughter-lamb prices. The question researchers should be asking is, ?which is the greater influence??

I don?t know the answer definitively, but I will say that reduced domestic inventory has and will likely continue to have a greater effect on slaughter-lamb prices than imports at current levels.

For the past two-and-a-half years, domestic production has fallen, imports have increased and total lamb availability has fallen. It is the net effect -- that of total availability -- that is important in determining slaughter-lamb prices. Year-to-year January through June 2003 total lamb availability (production plus imports) fell 6.6 million pounds to 164 million pounds. Within this period, imports increased 5.5 million pounds to 68.5 million pounds. Although imports increased, total supplies are ?tight.?

In the last five years, U.S. lamb production has fallen nearly 14 percent, from 240.80 million pounds in 1998 to 207.50 million pounds in 2002. Between 2001 and 2002 domestic production fell 4.4 percent. In 2003, first-half year-to-year production fell 11.7 million pounds to 95.6 million pounds. January-August total lamb slaughter was 1.86 million head, down 175,482 head year-to-year. In the same period, live weights fell a pound, from 136 pounds to 135 pounds.

Increased imports in recent years coincided with strengthening slaughter-lamb prices. Year-to-year slaughter-lamb prices are $1.50/lb. to $3.00/lb. higher than prices in recent years. Imports are an important portion of total availability, but domestic slaughter-lamb supply is also important. In the first six months of 2003, imports were 71 percent of domestic production -- compared to 60 percent in 2002.

Year-to-year January through June total imports increased from 63.3 million tons to 68.5 million tons. Within this period, both Australia and New Zealand increased imports: Australia increased imports from 37.9 million pounds to 39.4 million pounds and New Zealand 25.2 million pounds to 39.4 million pounds.

More certainty regarding import levels is difficult because of two important variables: the supply of Australia?s and New Zealand?s lamb (a function of the weather) and exchange rates. One certainty is that demand for lamb in the United States remains strong.

The future supply of Australia?s heavy export lambs is not certain primarily because of the weather. Tight supply and high prices characterize the Australian heavy export lamb market. Imports of lamb from Australia were adversely impacted by the Australian drought, with supplies of heavy export lambs suitable for the U.S. market expected to tighten further. There has been a drought-induced shortage of heavy export lambs suitable for the U.S. market, but United States? demand has remained strong (Meat & Livestock Australia 8/20/03). Until mid-2003, Australian imports to the United States remained solid and strong despite some unfavorable conditions.

Australian lamb imports began to slow in July. Australian lamb exports during July 2003 were down 22 percent compared with July 2002 -- their lowest July level since 1998. ?The tight supply of lamb in Australia, particularly quality heavy export lambs, combined with record-high domestic lamb prices and an appreciating Australian dollar have combined to reduce exports and slow export demand? (Meat & Livestock Australia, 8/20/03).

New Zealand?s share of imports increased in early 2003 to reach a high of 49 percent in February 2003. However, New Zealand?s share of imports declined through the summer and fell to 35 percent by August. The share of New Zealand imports in total imports was an average 42 percent in 2002.

U.S. sheep and lamb exports need to be figured into the equation of the domestic supply situation, but the numbers are relatively small. Total lamb and mutton exports in January through June were 3.5 million pounds, up from 3.3 million pounds in 2002. Lamb and mutton exports increased year-to-year from 6.5 million pounds in 2001 to 7.1 million pounds in 2002

The U.S. Department of Agriculture?s Economic Research Service reported that drought conditions in Australia might result in continued tight total supply for the United States (Outlook, August 18, 2003). I?m skeptical. My outlook for lamb imports is that imports are likely to remain strong or strengthen in coming months -- particularly as the December holidays approach.

Recent favorable rainfall in Australia means prices are expected to soften and some quality lambs will come onto the market. Even with reports of severe drought in Australia and an unfavorable USD/AUD exchange rate for Australian exporters, Australian lamb imports were very strong and even increased year-to-year in the first half of 2003. Even if supply is down, what is crucial is that the demand for lamb imports remains strong. ?Export lambs continue to be offered in small numbers and attract strong competition from those processors active in the market? (Meat & Livestock Australia, 8/29/03).

An important reason imports may increase in coming months is due to the recent strengthening of the U.S. Dollar, making imports relatively cheaper. The average U.S./Australian Exchange Rate in June was 67 cents per Australian Dollar; it fell to 66 USD/AUD in July, and then again in August to 65 AUD/USD. The USD/AUD exchange rate dipped to 64 in the last week of August. As the U.S. Dollar strengthens, it is relatively less expensive for U.S. importers to import Australian lamb. The New Zealand Dollar was less volatile, but also weakened in August. The average U.S./New Zealand Exchange Rate in July was 59 USD/NZD and fell to 58 USD/NZD in August.

The Livestock Market Information Center (LMIC) reported: ?A key factor influencing slaughter lamb prices in 2004 will be imports? (Livestock Monitor, 7/25/03). I would tone down the statement: Perhaps say one factor, not a key factor. Tight domestic supplies are likely to keep prices high.

Feeder- and slaughter-lamb prices during the summer were higher than they have been for years. San Angelo average feeder-lamb prices fell from $106.60/cwt. in June, to $98.17/cwt. in July, and up to $102/cwt. in the first three weeks of August. Prices were an average $31/cwt. higher in the first-half of 2003 compared to the same period in 2002: $98.66/cwt. compared to $67.30/cwt.

Slaughter-lamb prices remain strong, yet they weakened, seasonally, during the summer. Persistent drought in the West and Great Plains contributed to tight supplies as the culling of breeding ewes continued. USDA Economic Research Service (ERS) reported, ?short supplies have kept strong slaughter lamb prices throughout the first half and prices are expected to remain fairly strong for the second half of the year? (Outlook, July 2003).

Year-to-year slaughter-lamb prices in August were 22.03 $/cwt. higher, 97.50 $/cwt. Slaughter-lamb prices were 88.38 $/cwt. in July and 86.25 $/cwt. in June. Year-to-year feeder-lamb prices in August were 26.85 $/cwt. higher, 106.60 $/cwt. Feeder-lamb prices were 98.17 $/cwt. in July and 102.80 $/cwt. in June. Slaughter- and feeder-lamb prices are likely to weaken somewhat before strengthening as the December holiday season approaches.

Strong U.S. lamb prices may be supported in part by strong pelt prices. In the United States the packer-sorted green, salted pelts market remained slow throughout the summer with moderate demand and light offerings. Pelt prices strengthened in August. No. 3 and No. 4 pelts gained 25 cents throughout the summer (June-August) and No. 1 and No. 2 pelts lost 25-50 cents. Fall clips remained steady. Some of the price gain in the domestic market may be attributed with the higher quality of the New Crop Spring lamb pelts (USDA/AMS 8/29/03). World price gains in pelts may be attributed to supply shortages. Worldwide, ?skin rates are expected to remain at similar levels in the coming weeks, or even improve if demand remains strong? (Meat & Livestock Australia 8/15/03).

After a strong summer, boxed lamb prices softened seasonally in August. Carcass value was an average 213.69 $/cwt. in August, falling from 233.66 $/cwt. in July, and 245.65 $/cwt. in June. In August, eight-rib rack prices were an average 561.15 $/cwt., falling from 630.55 $/cwt. in July and 652.31 $/cwt. in June. Loins prices, trimmed 4*4, were an average 438.58 $/cwt. in August, falling from 471.07$/cwt. in July and 482.82 $/cwt. in June. Leg prices were an average 182.77 $/cwt., falling from 199.09 $/cwt. in July and 225.23 $/cwt. in June.

All boxed lamb prices are expected to stay relatively strong because slaughter-lamb prices are likely to remain high. Rack and leg prices are likely to remain stable and then strengthen as December holidays approach. Loins prices are expected to fall seasonally through the remainder of 2003 as summer cools into fall.

January through May 2003 average retail (domestic and imported) price was $4.37/lbs., up year-to-year from $4.13/lbs. Retail prices in May 2003 were $4.74/lbs.

The feature-weighted average price of domestic lamb was $4.73/lbs. in May, compared to $4.77/lbs. for imported lamb. Domestic lamb prices increased from $3.94/pound in April to $4.73/pound in May. January through May 2003 retail price was $4.38/lbs., up from $4.30/lbs. in 2002. Domestic lamb prices in May 2002 increased from $4.40/lbs. to $4.73/lbs. year-to-year.

Imported retail lamb prices increased from $3.86/pound in April to $4.77/pound in May. January through May 2003 imported retail prices were $4.35/lbs., up from $3.89/lbs. in 2002. Imported lamb prices in May 2002 increased from $3.86/lbs. to $4.77/lbs. year-to-year.

In sum, slaughter-lamb prices and domestic and imported retail prices are currently very strong. It is questionable whether imported lamb prices are high because of the relative shortage of lamb on the domestic market or because of tight supplies in Australia. Both factors may drive up imported lamb prices. We do know for certain that United States? lamb demand is strong because supplies are tight.

Chinese Presence Brightens Wool Market

The U.S. wool market remained relatively flat during August with light carryover stock. In August, wool prices, clean, delivered, were Grade 70s (19.15-20.59 micron) $2.50/lbs.-$2.60/lbs., Grade 64s (20.60-22.04 micron), $2.35/lbs.-$2.50/lbs., Grade 62s (22.05-23.49 micron) $2.30/lbs.-$2.40/lb., and Grade 60s (23.50-24.94 micron), $2.00/lb.-$2.30/lbs. Year-to-year August prices were 30-52 cents/lbs. higher. During the summer, wool prices remained strong and stable, with some grades strengthening 14 cents/lbs.

In a world where wool processors are in a ?hand-to-mouth? mode, Chinese mills are expecting wool processing to increase in coming months (Woolmark, August 2003). The prospect for growth lies primarily in the knitting yarn, and less so for worsted weaving yarn spinners. By mid-August, increased Chinese demand in the Australian raw wool auction markets was already visible.

Uncertain consumer confidence, tight supplies and high wool prices may mean lower wool imports to the United States in the remainder of 2003 (Woolmark, August 29, 2003). Total wool imports to the United States declined during the summer 2003 compared to previous years. Italy, China and Mexico are important wool exporters to the United States. These countries increased their year-to-year volume exported to the United States during the summer of 2003. However, imports from other wool exporters to the United States declined year-to-year, leaving total wool imports low as the key wool retail season approaches in the autumn.

Sustained presence of China in the world wool market may make up for the lackluster demand from the United States and many European countries. Wool prices may yet be able to hold their strength -- although some weakening is probably likely. The Australian Wool Testing Authority (AWTA) statistics reported a 23-percent decline in total bales in July 2003 compared to July 2002 (Woolmark, August15, 2003), which may be why relatively low demand has seen high prices as supplies are tight.

Editor?s Note: Julie is open to comments and questions and can be reached by e-mail at juniper_economists@tds.net or by phone: 303-619-9975.

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