Markets -- Inventory Expansion? Ewe Bet!

Dr. Julie Stepanek Shiflett

Dec. 2003 -- The sheep and lamb industry may be expanding: Flock re-building may be occurring because there is a strong demand for ewe lambs, reduced exports of culled ewes, strong prices for replacements and a tight supply of slaughter lambs.

According to industry sources, says Paul Rodgers, American Sheep Industry Association deputy director of policy, there is anecdotal evidence that there are very few whiteface maternal lambs on feed. In addition, some exporters reported that they haven?t seen any quality ewes on the market since last spring. This evidence suggests that high quality ewes are being held back and that culling of breeding ewes may be slowing. Indeed, the demand for breeding ewes has been very strong, reports U.S. Department of Agriculture Market News reporter Ron Cole, who anticipates that herd expansion is occurring in the Rocky Mountain region.

Export numbers appear to support this evidence, as the numbers of exported ewes dropped dramatically in 2003. In the ten months, January through October 2003, 89,130 head were exported -- down from 216,309 head in the same period in 2001 and down 267,427 head in the same period in 2002. In October 2003, 2,084 ewes were exported, down from 5,796 ewes in October 2002.

Lamb and mutton exports fell steadily from a 12-month high of 998,000 pounds in December 2002 to 376,000 pounds by August 2003. However, lamb and mutton exports increased by 87,000 pounds between January through August 2002 and January through August 2003. In the eight months, January to August 2003, 4.5 million pounds of lamb were imported -- up from 4.3 million pounds in the same period in 2002. In 2001, 6.5 million pounds of lamb and mutton were exported while in 2002 7.1 million pounds were exported.
,br>The relatively high price of replacements means there is a short supply on the market and that producers are optimistic. Year-to-year prices of mixed age, replacement ewes increased about 16 percent. In October mixed age ewes were an average $56/cwt. for 90 to 150 pounds, compared to an average $48.25/cwt. the previous October. Whiteface ewe lamb prices also gained strength: from January to October whiteface ewe lamb prices increased about 5 percent. In October whiteface ewe lambs were $121/cwt. for an average 73 pounds. In January 2003, whiteface ewe lambs were $113/cwt. to $117/cwt. for an average 75 pounds.

Continued tight supplies also suggests that producers may be holding back breeding ewes and rams. Average live slaughter-lamb prices rose from $83.77/cwt. in August to $88.41/cwt. in September and $90.14/cwt. in October. Slaughter-lamb prices averaged $91.60/cwt. in January through October -- considerably higher than the average of $65.50/cwt. in 2001 and $71.90/cwt. in 2002.

Slaughter-lamb prices typically strengthen toward the December holiday season, but usually not as early as August. They may have begun to strengthen early this year because the Moslem holiday Ramadan began on Oct. 27. Or perhaps prices are high because producers are holding ewes and rams back for breeding.

Feeder-lamb prices also strengthened through late summer and into the fall. Average feeder-lamb prices were $97.58/cwt. in August, $100.41/cwt. in September and $105.91/cwt. in October. Feeder-lamb prices are likely to remain strong -- supported in part by low corn prices throughout the remainder of 2003.

Lower production levels are testament of reduced supplies. Total production, January through October 2003, was 159.9 million pounds -- down from 170.7 million pounds during the same period in 2002. Year-to-year production in October fell from 4 million pounds in 2002 to 3.74 million pounds in 2003. In October 2003, average weekly slaughter was 55,119 head compared to 61,391 head in October 2002. Average October live weights increased from 133.25 pounds to 133.6 pounds in 2003, while dressed weights increased from 66.75 pounds to 68 pounds in October 2003.

Rack prices fell seasonally, but are likely to strengthen as December holidays approach. The monthly average price of medium eight-rib rack fell from $5.61/lbs. in August to $5.49/lbs. in September and then to $4.94/lbs. in October. Year-to-year medium eight-rib rack prices fell from $5.31/lbs. in October 2002. Reduced restaurant demand due to high rack prices may explain some price loss. (Recall that medium eight-rib rack prices reached a 12-month high of $7.00/lbs. at the end of March.)

Loin prices fell seasonally as summer cooled into fall. The monthly average price of trimmed loins fell from $4.39/lbs. in August to $4.38/lbs. in September, then to $4.22/lbs. in October. Year-to-year loin prices increased from $3.70/lbs. in October 2002.

As expected, leg prices strengthened as the winter holidays and Ramadan approached. The monthly average price of trotter-off leg increased seasonally from $1.83/lbs. in August, to $1.85/lbs. in September, to $1.93/lbs. in October. Year-to-year leg prices increased from $1.64/lbs. in October 2002.

Retail prices strengthened with boxed lamb prices during the summer. The average feature-weighted retail price of lamb (domestic and imported) increased from $4.87/lbs. to $4.92/lbs. from July to August. By comparison, the price of retail lamb was $4.29/lbs. in October 2002. The percentage of volume sold that was offered under price specials fell from 16 percent to 12 percent. The volume index of retail lamb sold increased from 16 to 21 between July and August. The average monthly volume sold in 2001 is indexed at 100, so the volumes sold in July and August were less than the average monthly volume sold in 2001.

The price of domestic retail lamb increased from $4.93/lbs. to $4.95/lbs. between July and August. The year-to-year price increase was $0.32/lbs. The price of domestic lamb was $4.61/lbs. in August 2002. The percent of lamb sold in price specials fell from 8 percent to 6 percent between July and August. Between July and August the index of volume of domestic lamb sold increased from 57 to 71.

The price of imported retail lamb increased from $4.74/lbs. to $4.87/lbs. between July and August. The year-to-year price increase was $0.19/lbs. The price of imported lamb was $4.61/lbs. in August 2002. The percent of lamb sold in price specials fell from 32 percent to 24 percent between July and August. Between July and August the index of volume of imported lamb sold increased from 70 to 80.

In the eight months, January to August 2002, 82.9 million pounds of lamb were imported. In the same period in 2003, 89.7 million pounds were imported, for a year-to-year increase of 6.7 million pounds. In 2001, 108.2 million pounds of lamb were imported and in 2002 117 million pounds.

While Australian imports began to slow, New Zealand imports increased. Lamb imports from Australia hit a 12-month high of 9 million pounds in April 2003, but then fell by half to 4.4 million pounds in August. New Zealand exceeded its typically seasonal high volume in April of 6.7 million pounds and imported 8 million pounds in August.

The forecast for imports is uncertain: Supplies are tight in both Australia and New Zealand, and the respective exchange rates are unfavorable. However, offsetting these factors is strong demand for lamb in the United States, which is diverting away lamb from other Australian and New Zealand markets. Current lambing in both New Zealand and Australia should ease supply pressures. However, Australia is still facing a severe drought, which means quality is down and supplies are relatively low.

High retail prices may be evidence of tight supply in Australia. ?Treasurer Peter Costello said last week lamb and mutton prices had jumped by nearly 18 percent this year,? (Sydney Morning Herald, 10/28/03). However, Australian retail prices could be high because the available supply is exported. Australian producer lamb prices softened in October, so tight supplies may be easing.

In New Zealand year-to-year lamb inventory is down 6 percent (Meat & Livestock Australia, 10/28/03). New Zealand exports may slow given its continued drought, colder temperatures during lambing, and thus relatively short supplies.

The relative weakening of the U.S. dollar means U.S. imports are relatively more expensive. For the first time since November 1997, the U.S. dollar/Australian dollar exchange rate hit $0.70 by late October (Meat & Livestock Australia, 10/24/03). The exchange rate averaged $0.70 during the last two weeks of October and was $0.7081 on October 31, 2003. Some forecasters expect the exchange rate to reach the mid-0.70s (Meat & Livestock Australia, 10/24/03). The average U.S./Australian exchange rate weakened from 0.65 USD/AUD in August, 0.66 USD/AUD in September, to 0.69 USD/AUD in October. The average U.S./New Zealand exchange rate held steady at 0.58 USD/NZD in August and September, then weakened to 0.60 USD/NZD in October. A year ago, October, the exchange rates were 0.55 USD/AUD and 0.48 USD/NZD.

World Wool Market Slows?
The U.S. wool market remained relatively quiet during October with little demand and little inventory. There is reportedly not enough inventory to sell (Cole, R., 2003). At the end of October, 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) $2.15/lbs.-$2.35/lb., and Grade 60s (23.50-24.94 micron), $1.90/lb.-$2.20/lbs.

There are mixed feelings about world wool demand in coming months. In September and October, there was lackluster demand for wool, but toward the end of October there were some signs of renewed interest.

By the end of October, Australian raw wool prices had fallen for the eighth straight week (Woolmark, 10/31/03). Contributing factors included the strong Australian dollar and weak global demand for wool. Average wool prices in Australia dropped more than 30 percent since January (Australian Broadcasting Corporation, 10/31/03).

However, by the last week of October, the tone of buying activity was much improved. "There were reports of greater breadth in the buying activity this week," reported Woolmark (Emerging Textiles, France, 10/31/03). Support for the ?better styled and stronger fine wools? was reinforced. ?Skirtings were reported to be in demand for Italy and carding types generally received good support," the Wool Industries Secretariat added (Emerging Textiles, France, 10/31/03).

Another reason wool demand is likely to increase is the high prices of one of its competitors: cotton. The price of cotton hit a six-year high in October due to lower production forecasts and strong Chinese demand (Woolmark, 10/31/03). High cotton prices and relatively weak wool prices make wool more competitive in the world fiber market.

The largest wool broker, Elders, was not as optimistic. It reported that Chinese wool demand is at a standstill until apparel stocks can be moved out. "Chinese wool processing has been reduced to allow these stocks to be cleared," said Elders in its weekly report (Emerging Textiles, France, 10/31/03).

Although cotton and wool can be substitutes, man-made fibers also are an important substitute for cotton. The world man-made fiber market grew by 5.4 percent compounded annually since 1990 (Woolmark, 10/31/03). Given increased competition from cheaper man-made fibers, it is increasingly important for wool producers to carve out niche markets, which would allow them to capture a portion of the market. Consumers will place a value on the organic production process that translates to a price premium, and thus are less price-sensitive. Organic wool production may be a growth niche market for U.S. wool producers. The first survey of organic wool production in the United States was conducted in 2002 in order to monitor its progress. Organic wool is currently used in blankets, sweaters, socks and throws (just style.com, 10/28/03).

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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