Markets -- The All-Powerful Demand for Lamb

The All-Powerful Demand for Lamb

Nov. 2003 -- Increasing the demand for lamb is often cited as the key to rebuilding the U.S. lamb industry (Purcell: 1998). Increased lamb demand is crucial in reversing downward trends in sheep and lamb inventory and the loss of lamb producers. Sounds simple, but what does it mean to increase demand for lamb?

First, let?s review what ?demand? means. If the price of lamb falls and the volume of lamb sold at the lower price increases, this does not mean that demand for lamb has increased. Rather, it means that the quantity demanded of lamb has increased. If the price remained the same, and more lamb was sold at that price, then lamb demand increased. Thus, to get lamb demand to increase, more lamb must be sold at current or higher prices. It is not accurate to observe an increase in the quantity of lamb sold and say that lamb demand increased. One must ask whether the increased sales of lamb were at lower prices.

The Australian lamb industry reported that it is succeeding in increasing lamb demand. ?Consumer spend (sic.) on lamb rose 17.4%. Demand is up 25% while the $2.4m marketing budget delivered a 70-fold return to the local lamb industry,? (B & T Marketing and Media, 9/17/03). Given that Australian lamb prices have remained high, it is possible that demand increased, but more information is needed. Tight supplies can also push prices up. Consumer spending on lamb increased, but it is unclear at what price. Demand is a function of volume and price.

Per capita lamb consumption was 1.17 pounds in 2002, and was expected to drop to 1.10 pounds in 2003 and forecasted to rise to 1.13 pounds in 2004 (Livestock Market Information Center). Per capita consumption is the total quantity of lamb sold divided by the population, so it is not a direct measure of the quantity sold. Per capita lamb consumption is not the same as demand, but the term is often used synonymously.

One tactic in encouraging consumers to try lamb -- and ultimately increase demand -- is to offer price specials (or discounts). Price discounts may entice consumers to buy lamb and develop a taste for it such that when prices are not discounted, consumers will still buy lamb. However, whether a percentage price discount is matched by, and equal increase in, quantity demanded is a function of the price elasticity of demand. Price elasticity measures responsiveness of quantity demanded to changes in price. In general, if lamb demand is inelastic rather than elastic, it means that a price special will not increase the quantity demanded as much as if demand were elastic.

From retail price data and production and import levels from 2001 to mid-2003, I calculated that if price decreased by 1 percent, per-capita consumption of lamb would increase by 1.04 percent (using a simple regression model). Another study using data from 1978 through 1999 found that if price decreased by 1 percent, then per-capita consumption of lamb would increase by 1.09 percent (Schroeder et. al. 2001:6). Thus, demand is elastic. (An elasticity measure greater than one means it is elastic.)

I found that the price elasticity of demand for domestic lamb is 1.16 (elastic), while the price elasticity of demand for imported lamb is 0.98 (inelastic). This means that for a given price discount, the quantity demanded for imported lamb will be greater than that for domestic lamb.

These elasticity measures mean that if the price of lamb rises, consumers may opt to switch their spending to pork or beef as opposed to buying lamb at higher prices. Developing consumer loyalty for lamb through industry-funded programs is a good way to make lamb demand more inelastic.

It was reported in older studies that the short-run price elasticity of lamb was relatively inelastic. That is, if price increased, then the quantity of lamb purchased would not decrease by much. One report found that the elasticity of lamb was 0.62 percent (Byrne et al. 1993), while yet another study found that elasticity was 0.51 percent (Purcell 1989).

The more recent findings of a more elastic demand may mean, ?lamb consumers are becoming more sensitive to price than has been suggested by previous research,? (Schroeder et. al. 2001:7). This may mean that lamb consumers are not as loyal. However, that could be good news for the industry as it means that one avenue for increasing demand for lamb is to offer price specials. It takes a much deeper price discount to move the same volume if demand is relatively inelastic compared to an elastic demand. Thus, relatively small price discounts may be able to entice people to buy lamb.

Thus, a key in promoting lamb demand is to renew interest in lamb. Increasing consumers? taste and preference for lamb will help increase demand. The Australian industry found that young parents were an untapped market. The lamb chop is a good finger food for kids with its ?built in handle? (B & T Marketing and Media, 9/17/03).

The Australian news media repeatedly reports of the strong and stable demand for lamb in the United States. The United States is a very valuable market for lamb. Total imports from January to July increased from 73.4 million pounds in 2002 to 77.2 million pounds in 2003. Lamb imports were a high of 14 million pounds to 15.8 million pounds in March and April, but then fell to 11.5 million pounds in May, and then further decreased to 10 million pounds in June and 8.7 million pounds in July. Imports are expected to increase in 2003 over the 2002 level, but the year-end rate of increase from previous years is thought to decline (USDA/ERS, 4/16/03).

Lamb imports from Australia increased 9 percent during August compared with the same time last year. ?This marginal increase is a remarkable result, given high prices paid for these lambs at the saleyard and the appreciation of the Australian dollar over the year. This result reflects the continued strong demand from this market? (Meat & Livestock Australia, 9/16/03).

The U.S. Dollar continued to weaken into September, which meant imports from Australia and New Zealand were relatively more expensive to importers. Reports from Australia indicated that the appreciating Australian Dollar reduced exports to price-sensitive markets such Mexico, South Africa, China and most South East Asian markets. Australian lamb exports to the United States, Canada and the United Kingdom all increased in September. If importers are passing on higher prices to consumers and demand is remaining strong, i.e., consumers are buying lamb at the higher prices, then this suggests that demand is inelastic.

The U.S. Dollar remained relatively strong in September. The U.S./Australian exchange rate was 0.66 USD/AUD in September, up from 0.65 USD/AUD in August. The U.S./New Zealand exchange rate was 0.65 USD/NZD in August and climbed to 0.66 USD/NZD in September. It has reportedly been forecasted that the U.S. Dollar could reach as high as 0.70 USD/AUD (Meat & Livestock Australia, 9/26/03).

The Australian Government (ABARE) forecasted that lamb prices may increase in the next year due to a combination of strong export demand for lamb and very tight domestic supplies (Meat & Livestock Australia, 9/26/03).

The U.S. sheep and lamb industries could continue their long-term decline in inventory unless market confidence or assistance from federal programs such as the ewe-lamb retention program or projected returns from resource-competing enterprises -- such as cattle -- change, and help reverse this trend. At the beginning of July 2003, the sheep and lamb inventory was 7.8 million head. The year-to-year decline was 4 percent, compared to a 2-percent decline during the previous two years (USDA/ERS, 8/18/03). The USDA Economic Research Service reported it expects the sheep and lamb industry to contract 8 percent in 2003 (4/16/03). Production was 14.8 million pounds in September, down from 17.7 million pounds in August and 16 million last September. Contracting supplies means that prices are likely to remain high and may even strengthen further. Again, higher retail prices in this instance don?t necessarily mean demand for lamb increased. However, given that lamb imports have remained strong, it is highly likely that lamb demand is stable and also supporting prices.

TIGHT SUPPLIES CONTINUE TO SUPPORT PRICES

Slaughter and feeder-lamb prices strengthened in September. Slaughter-lamb prices were 86.25 $/cwt. in August and 91.44 $/cwt. in September. Feeder-lamb prices were 102.80 $/cwt. in August and rose to 109.63 $/cwt. in September. September?s prices were an average 18 $/cwt. and 29 $/cwt. higher than slaughter- and feeder-lamb prices a year ago, respectively. Throughout 2003 live weights declined from about 135 pounds to 140 pounds during the first few months, then to 131 pounds in September. Live weights in September were about a half-pound lighter than a year ago. Year-to-year dressed weights were a pound lighter than last September -- 66.5 pounds compared to 65.3 pounds.

Rack and loins prices softened in September, but leg prices rebounded in September after slipping in August. The medium eight-rib rack was $6.31/pound in July, $5.61/pound in August and $5.48/pound in September. Loin prices, trimmed 4x4, were $4.71/pound in July, $4.39/pound in August and $4.36/pound in September. Leg prices, trotter off, were $1.99/pound in July, $1.83/pound in August and $1.85/pound in September. September rack prices were 10 cents higher than those of last September, while loin prices were 47 cents higher and leg prices 28 cents higher. Average carcass values in September were $2.15/pound -- 23 cents higher than a year ago.

Retail prices strengthened in July, surpassing the two-year high prices in June and July 2001. Lamb retail prices started at an average $4.44/pound in January, softened in February and April, but then rose steadily to $4.87/lbs. in July. The domestic retail price strengthened from $4.82/pound. to $4.93/pound between June and July -- up to 60 cents higher than last summer?s prices. Imported retail prices dropped from $4.79/pound to $4.74/pound between June and July (but still up to 92 cents higher than last summer).

During 2002 and up to July 2003, on average, the volume of domestic lamb fell below the average level sold in 2001. Conversely, the average volume of imported product sold during 2002 and 2003 was above volumes sold in 2001. During May through July, imported volumes sold began to fall below 2001?s average.

January to July lamb and mutton exports increased from 3.6 million pounds to 4.1 million pounds in 2003. After exporting close to 7,000 head of sheep in July, in mid-August sheep exports to Mexico fell to zero. The Mexican government closed the border due to concerns about scrapie requirements for slaughter sheep entering their country. By mid-September the border was reopened for wethers and slaughter ewes, but remained closed for rams.

WILL CURRENCY FLUCTUATIONS AND FALTERING DEMAND CATCH UP TO WOOL PRICES?

With the U.S. Dollar weakening and moderate wool demand, Australian government forecasters (ABARE) expect wool prices to soften during the rest of 2003 and into 2004 (Woolmark, 9/30/03). However, ABARE?s forecast is based on a lower level of projected Australian production than is currently being considered so its figures may be overstated.

The Australian wool market softened in mid-September, despite predictions that wool production is going to decline by 10 percent in 2003/04 (Australian Broadcasting Corp., 9/19/03). This means that wool prices are probably sensitive to other factors such as demand and exchange rates.

In September, a Chinese backlog put a damper on the wool market because the world wool market is very sensitive to Chinese demand. In September, China was relatively active, buying from Australia, the United Kingdom, Russia and other parts of Eastern Europe (Woolmark, 9/3/03). However, toward the end of the month, reports surfaced that there might be a backlog of processed wool and fabric in China. The reasoning cited was that demand for fabric in the United States and Europe is faltering. This is surprising, given that the cooler months are upon us.

?Processors of Chinese wool are reporting depressed demand for fabric from America and Europe. There has been a build up of stocks towards the fabric end of the chain so you can say that the fabric is probably where China is holding the most stock at the moment,? reported, John Roberts, BWK Elders marketing manager in Shanghai (9/2003).

Wool processing will increasingly be concentrated in countries such as China, India and Eastern Europe. Many U.S. wool-processing plants have shut down as have Michelle?s, Australia?s largest wool-processing plant, and more recently Australia?s second largest wool-combing facility in Geelong, Victoria.

The Australian Wool Processors Council President, Jim Robinson, said, ?the dream of value adding Australian wool has now turned into a nightmare. The costs of running the plant in Geelong in Australia are too high?? (Australian Broadcasting Corp., 10/2/03)

Another reason Chinese imports may be waning is due to the rise of the Australian Dollar. Australia is China?s primary supplier. Chinese demand for wool and wool demand, relative to competing fibers, are key influences in the world wool market. Reports from Australia indicate that wool prices may fall throughout the 2003/04 season in Australia as competition from other fibers remains strong (Meat & Livestock Australia 9/26/03). It is anticipated that depressed prices may entice farmers to shift to meat breeds. Australian wool prices were relatively high compared to previous years. In July through September 2003, wool prices were 18 percent higher than 2002 prices and 48 percent higher than 2001 prices (Woolmark, 9/30/03). Since 1997, Australian wool prices exhibited steady increases from January to the year?s end. However, in 2003 Australian wool prices showed a downward trend. Other factors, such as currency fluctuations and demand, may be overshadowing seasonal trends. Overall, wool prices are likely to remain relatively strong, but price volatility is likely to continue.

The U.S. wool market remained slow throughout September due to light supplies. Carryover supplies from the spring were light and demand was light. Wool prices remained relatively flat with some strengthening through the summer and early fall. By the end of September, wool prices, clean, delivered, were: Grade 70s (19.15-20.59 micron) $2.50/pound-$2.60/pound, Grade 64s (20.60-22.04 micron), $2.35/pound-$2.50/pound, Grade 62s (22.05-23.49 micron) $2.30/pound-$2.40/pound, and Grade 60s (23.50-24.94 micron), $2.00/pound-$2.30/pound.

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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