January 15, 2004
By Dr. Julie Stepanek Shiflett, Juniper Economic Consulting
The year 2004 may be a turning point for the U.S. sheep and lamb industries. It isn?t far fetched to say that the steady decline in inventory may be halted or reversed, and that lamb demand may increase. Evidence suggests that sheep and lamb inventories may be expanding: Slaughter-lamb supply is tight, demand for ewe lambs and breeding stock is strong, culled ewe exports are down and prices for replacements are strong.
Another influencing factor is that the lamb promotion being conducted via the checkoff program may come into effect as increased demand for lamb. The checkoff program began on July 1, 2002. As the program completes its second year, the benefits of advertising in gourmet food publications and consumer education on preparing, storing and handling lamb may be visible in the market.
Empirical studies have demonstrated that generic advertising programs are profitable and under-funded (Crespi, J. 2003). Although no lamb studies were available, the lamb industry can learn from other commodity checkoff programs. One study of beef found that there was a $6 return to producers for every $1 spent on promotion (Ward 1992 from Crespi 2003).
Another study found that the effects of beef promotion on substitute products such as lamb, pork and poultry may be negative (Alston et al. from Crespi 2003). Thus, it is possible that lamb promotion can entice meat consumers away from other products. A contradictory study found that there might be positive spillover effects on the demand for substitute products, particularly imports. For example, U.S. orange juice growers found that they faced lower prices from their generic advertising because the advertising increased the demand for imported orange juice as well. Imported orange juice may have undercut domestic prices, or increased supply may have led to reduced prices. This is referred to as the ?free rider? problem: Foreign imports free ride on domestic advertising.
The lamb industry may face the same situation if it does not continue to promote American Lamb as distinctly different and better than imported lamb. Indeed, the American Lamb Board reports that the number one reason given for those who prefer American Lamb is "better taste" (www.lambinfo.com). Other important factors are freshness, quality and a preference for American products. When country of origin labeling takes effect, it will help consumers distinguish between American and foreign product.
Promoting a new product and/or use for lamb -- perhaps as an appetizer or frozen entr?e -- is one avenue for increasing demand. The beef checkoff program recently funded the development and promotion of cheeseburger fries. ?In a line once dominated by poultry, beef has a unique opportunity to increase its presence and showcase its versatility on the appetizer menu,? reported Tracy Brunner, Chairman, Joint New Product and Culinary Initiatives Committee (High Plains Journal 11/24/03). Similarly, New Zealand exports mutton as an ingredient, as added value cuts and boneless product. ?Eighty-nine percent of mutton exports are value-added, whereas 10 years ago, only 77 percent were value-added, with 23 percent making up the lower-value whole carcass trade? (Meat News Daily 11/25/03).
Increased supply may be countered by increased demand in 2004, thereby supporting relatively high feeder- and slaughter-lamb prices. Slaughter-lamb prices softened in November, but feeder-lamb prices strengthened. Slaughter-lamb prices fell from 90.07 $/cwt. to 89.58 $/cwt., while feeder-lamb prices increased from 99.79 $/cwt. to 107.92 $/cwt.
While leg prices strengthened seasonally, rack and loins prices softened in November. Rack prices have not been able to hold onto their high of $7/lbs. in March, which is perhaps indicative of a lesser demand by foodservice or that the industry is no longer willing to support rack prices at a loss. Medium 8-rib racks were 445 $/cwt. in November, down from 493.95 $/cwt. in October, while legs, trotters off, were 412.66 $/cwt. in November, down from 422.46 $/cwt. in October. Leg prices strengthened seasonally: 210.45 $/cwt. in November, up from 193.30 $/cwt. in October.
Imported Australian carcass prices were $1.11/lbs. in 2002 and increased to an average $1.58/lbs. between January to September 2003. Australian leg prices ? fresh and bone-in -- averaged $1.51/lbs. in 2002 and $1.82/lbs. in the first nine months of 2003. Australian loin prices averaged $3.44/lbs. in 2002, and increased to $4.14/lbs. in the first nine months of 2003. By comparison, the New Zealand loin prices were $1.61/lbs. in 2002 and $1.80/lbs. in January through September 2003. New Zealand leg prices were $3.02/lbs. and increased to $3.18/lbs. the following nine months. In 2003, Australian loins and legs were more expensive than New Zealand product. (Note: Import values are Customs, Insurance and Freight (CIF) into U.S. ports, and are not wholesale values to retailers.)
In October and November 2003, slaughter-ewe prices were higher than prices in October and November 2002 and 2001. The year-to-year Good and Choice slaughter ewe price, San Angelo, averaged 37.50 $/cwt., up from 33.81 $/cwt. in 2002. Utility and Good slaughter ewes averaged 54.58 $/cwt. in November 2003, up from 46.75 $/cwt. in November 2002.
Retail data revealed that from January 2001 to September 2003, the volume of lamb sold trended downward -- reflecting tightened supplies and increased prices. Between August and September 2003, the price of retail domestic lamb fell from $4.95/lbs. to $4.90/lbs. The percent of lamb sold under featuring for domestic lamb increased from 6 percent to 7 percent, while the volume index of domestic lamb fell from 71 to 60 -- below the monthly average of 100 in 2001.
Between August and September 2003, the price of retail imported lamb fell from $4.87/lbs. to $4.78/lbs. The percent of lamb sold under featuring for imported lamb fell from 24 percent to 22 percent, while the volume index of imported lamb fell from 80 to 70.
November lamb production totaled 19.8 million pounds, down from 20.5 million pounds the previous November. Live weights in November were 149 pounds, up from 142.50 pounds the previous November. Dressed weights increased year-to-year, from 69.2 pounds in November 2002 to 70 pounds.
No. 1 pelt prices remained relatively steady throughout 2003, a couple dollars below 2002 levels during November, but still about $3 higher than the 1997-2001 average. In 2002, LDP pelt payments totaled $1 million; between January and September, these payments totaled $216,154.
Despite the weak U.S. dollar, the demand for lamb in the United States remains strong. The price of export lambs in Australia dropped 3.5 percent since the beginning of the season in mid-September as supply eased. However, the price of export lambs remained 12 percent above 2002 levels due in part to strong demand.
The. U.S. dollar weakened to $0.72 USD/AUD by mid-November, resulting in an average rate of $0.716 USD/AUD in November, up from $0.69 in October. Contributing factors included a rise in Australian interest rates and the release of poorer than expected U.S. trade figures for September. In addition, the U.S. dollar weakened further against the New Zealand dollar, from $0.60 USD/NZD in October to $0.63 USD/NZD in November.
In the 12 months September 2002 to September 2003, lamb imports trended upward at an average rate of 6 percent. Month-to-month imports were volatile in 2003. Between August and September 2003, lamb imports fell by 26 percent, but between February and March lamb imports jumped 81 percent. Lamb imports were 10 million pounds in June 2003, 8.7 million pounds in July, 12.5 million pounds in August and 9.2 million pounds in September. September year-to-year import levels were at least 2 million pounds higher than September import levels in the past six years.
From January through September, lamb imports were 98.9 million pounds in total, 53.2 million pounds from Australia and 45.5 million pounds from New Zealand. Mutton imports were 20.3 million pounds during this period.
The latest U.S. trade data showed that lamb imports slowed in September. However, Australian reports indicate that imports may have picked up again in October. Reports from Australia stated that Australian lamb exports reached a record high of 11,630 tons in October (Meat & Livestock Australia 11/14/03). Australian lamb exports to the United States in October increased 76 percent from October 2002 (Meat & Livestock Australia 11/14/03). Contributing factors included strong American demand and an ample supply of the heavier weights in Australia demanded by American consumers.
At press time, it was anticipated that some of Australia?s exports would be diverted to Britain during the December holidays if New Zealand could not fill its orders. In November, the New Zealand lamb industry faced excessive rains and cold resulting in a ?30 percent drop in pre-Christmas chilled lamb exports to Britain? (New Zealand Herald 11/24/03). According to New Zealand's Meat & Wool Innovation, Economic Service, a lower lamb supply is expected to reduce New Zealand?s export lamb availability by 5.3 percent in 2004 to 23.45 million lambs (Meat & Livestock Australia 12/1/03). Australia is also facing reduced supplies. Reportedly, its sheep flock is the lowest since the 1947 drought, or down by 7.3 percent year-to-year during the 2002/03 drought (Meat & Livestock Australia 12/1/03).
Imports in 2003 surpassed my expectations given drought conditions in both Australia and New Zealand. However, the drought may yet have an effect on slowing down imports in 2004. Overall, tight supplies and strong demand in 2004 will continue to support prices.
Lamb and mutton exports from January through September were a total of 4.9 million pounds. Between August and September, lamb and mutton exports increased from 376,000 pounds to 462,000 pounds.
World Wool Market Remains Relatively Quiet
The Australian Eastern Market Indicator (EMI) gained some strength in late November following a particularly dismal week during which the EMI fell to its lowest level in nearly two years. (Australian wool prices had been falling steadily since mid-January.)
In September, wool prices plummeted, rather than increase sharply, as they did in 2002. Weak wool prices were attributed to poor quality fleeces in Australia because of the prolonged drought and the slow recovery of the Chinese retail market from the SARS outbreak (Meat & Livestock Australia 11/14/03).
However, there may be cause for renewed optimism: the U.S. consumer confidence index reached a 14-month high in early December. In addition, Chinese wool textile and apparel exports increased marginally in October (Woolmark 12/1/03, 12/3/03).
Between October and November, U.S. fine wool prices strengthened slightly, but overall there was little movement in wool trading. At the end of November, wool prices, clean, delivered, were Grade 70s (19.15-20.59 micron) $2.40/lbs.-$2.50/lbs., Grade 64s (20.60-22.04 micron), $2.25/lbs.-$2.40/lbs., Grade 62s (22.05-23.49 micron) $2.00/lbs.-$2.25/lb., and Grade 60s (23.50-24.94 micron), $1.80/lbs.-$2.10/lbs. At the end of November the EMI was A$3.53/lbs. or US$2.55/lbs. clean (AWEX, Bloomberg, The Woolmark Co.).
Between 1978 and 2000, U.S. wool prices remained significantly lower than landed Australian wool prices, and the difference between the two has been increasing. U.S. wool prices as a percentage of Australian wool prices, clean, delivered basis, was a low ?17 percent in 1978 and a high of ?46 percent in 2000 (ASI). In 2003, the price difference appeared to be narrowing slightly, from -39 percent in January to -31 percent in September.
In September 2003, U.S. wool Grade 56s was $1.45/lbs., Grade 60s $2.15/lbs. and Grade 64s $2.43/lbs., with an average of $2.01/lbs. for these grades. By comparison, the price of Australian clean wool delivered to Charleston, S.C., warehouses was $2.66/lbs. for Grade 58s-56s, $2.97/pound for Grades 60-62s, $3.06/lbs. for Grade 64s and $2.90/lbs. for an average of these grades.
Unlike in Australia, U.S. wool producers are likely to reinvest in wool production, rather than switch to meat breeds. In 2002, LDP wool payments totaled $6.6 million and $4.2 million in the first nine months of 2003. The leading recipients of the LDP wool payment in 2003 were Texas (21 percent), Utah and Wyoming (12 percent each), California (10 percent) and Montana (8 percent).
Editor?s Note: Julie is open to comments and questions and can be reached by e-mail at or by phone: 303-619-9975.