Markets -- Research Reinforces Urgency of COOL

By Dr. Julie Stepanek Shiflett, Juniper Economic Consulting

May 2004 -- Recent research revealed that if demand for lamb increased in the United States, the demand for American Lamb would increase less in proportion to the demand for Australian and New Zealand lamb. It was found that a 1-percent increase in the U.S. demand for lamb would result in a 0.96-percent increase in the quantity demanded of U.S. lamb and mutton, a 1.12-percent increase in the demand in Australian product and 1.15-percent increase in New Zealand lamb and mutton (Jones, K. et al. 2003).

The research also found that if prices were increased for lamb, then U.S., Australian and New Zealand lamb producers would likely see an increase in revenue. This affirms that lamb consumers are loyal. It was found that consumer loyalty was the greatest for New Zealand lamb relative to Australian and U.S. lamb. Developing a positive association with quality lamb and the country of origin is important. Consumer loyalty means consumers are relatively insensitive to changes in prices. It means producer revenues can increase from lamb production if lamb prices rise.

These findings reinforce the urgency of COOL. Legislators recently pushed for the reversal of a two-year delay on the implementation of country-of-origin labeling (COOL). With legislative support, COOL could be implemented as early as September 30, 2004. The data used in the analysis above was import quantities and expenditures and not data collected at the retail level. Therefore, consumers may not even know that their lamb expenditures reflect the research findings. At the retail level, in the grocery store or restaurant, consumers may not know where the lamb they are eating comes from. They cannot make an informed choice because, as we know, imported lamb is often sold as domestic product. Without being able to identify and differentiate American lamb from Australian and New Zealand lamb, American lamb is clearly at a marketing disadvantage.

Slaughter-lamb prices increased sharply leading up to the Easter season. Some in the industry reported that prices may have been bid up too high and too fast, and are wary that in the coming months, prices will fall sharply as demand falls and lambs become over-finished. San Angelo slaughter-lamb prices averaged $102.50/cwt., 6 percent higher than the level last March. At $96.25/cwt. feeder-lamb prices also were correspondingly higher. Prices were high because supplies were tight, however high prices may also be reflective of the strong demand during the Easter holiday.

Producers reportedly held onto lambs waiting for prices to rise toward Easter, but in the mean time lambs gained weight. Although heavier lambs raise the risk of increasing fat and raising trimming costs, packers do not necessarily seem to penalize heavier lambs. The genetics of American sheep allow many lambs to yield very large carcasses and still be relatively lean. Discounts were not given in some cases and some packers reportedly offered the same price regardless of weight. Depending upon the genetics of the lamb, the internal fat in the chuck can make that cut less valuable.

Commercial slaughter fell nearly 7 percent year-to-year, from 695,655 head in the first quarter of 2003 to 651,369 head in 2004. However, production increased (48 million pounds, up from 47.9 million pounds) because live weights increased. Average live weight during the first quarter of 2004 was 142 lbs. compared to 137 lbs. in the first quarter of 2003 - or 3.7 percent higher. First quarter 2004 dressed weights were 71.25 pounds compared to 68.69 pounds in 2003.

As slaughter-lamb prices gained strength, so did boxed-lamb prices. From January to March, the medium eight-rib rack increased about 30 cents to $4.54/lbs. Shoulders gained 20 cents to $1.61/lbs.; trimmed loins gained 20 cents to $3.98/lbs.; and legs rose 33 cents to $2.59/lbs.

Despite supplies being tight and January through March slaughter-lamb, boxed-lamb, and retail prices rising, year-to-year boxed-lamb prices lost value. First quarter gross carcass value was $223/cwt. in 2003 and fell to $215/cwt. in 2004. Year-to-year rack prices were down, but leg and loins were up. Medium eight-rib rack was $683/cwt. during the first quarter of 2003, but fell to $440/cwt. in the first quarter of 2004. Trimmed loins rose from $355/cwt. to $386/cwt. during this period and leg (trotter off) rose from $201/cwt. to $235/cwt. One explanation for the weakening in gross carcass value is that the high-priced rack of a year ago may have turned off many customers and those customers have not reentered the market aggressively. Another possibility is that suppliers of American lamb lowered the price of racks to make them more competitive with imported racks. Reportedly, some restaurants took racks off their menus.

Short supplies translate into higher retail prices. Retail prices remained high into January, but there is some concern that the high retail prices for both imported and domestic lamb may be turning consumers away. One packer reported that his ham sales were surpassing lamb sales for the Easter holiday because lamb was thought to be too expensive.

Between December and January the average price of feature-weighted retail lamb strengthened from $4.60/lbs. to $4.90/lbs. The volume index fell during this period from 86 to 75 (100 is the average monthly volume sold in 2001) and the percent of volume sold under price featuring fell from 27 percent to 14 percent. The combined tonnage of domestic and imported lamb is lower than 2001 levels. Supplies of imported lamb have been tight and expensive overall.

The price of feature-weighted domestic lamb increased from $4.56/lbs. to $4.86/lbs. between December and January as the volume index fell from 89 to 72. The percentage of domestic volume sold under featuring fell from 22 percent to 11 percent between December and January.

Between December and January, retail lamb roasts prices strengthened from $8.88/lbs. to $9.17/lbs. Lamb loins prices fell from $8.22/lbs. to $7.57/lbs. The price of lamb chops fell from $5.99 to $5.77/lbs. Lamb shoulders fell seasonally from $3.60/lbs. to $3.49/lbs. Leg of lamb prices began to increase seasonally for the Easter holidays from $3.71/lbs. to $4.04/lbs. Lamb leg prices increased from $3.78/lbs. to $4.17/lbs.

Average imported lamb prices reached $5.00/lbs. in January -- the highest price recorded since January 2001. This price gain gives American lamb an advantage, because otherwise the rising domestic retail prices could be up to 80 cents higher than imported lamb, as has been the case in the past. The average price of imported lamb increased from $4.70/lbs. to $5/lbs. between December and January. Its volume index fell from 78 to 77 and the portion of volume sold under featuring fell from 40 percent to 23 percent. The price spread between domestic and imported retail lamb narrowed considerably in 2003 and into 2004. Recall that the domestic price series may not be purely domestic product for imported product is counted as domestic product unless it is clearly labeled in the grocery store.

High import prices may be partly attributed to the weak U.S. dollar, but could also be an indicator of strong U.S. demand. United States demand for imported lamb in March appeared to be stronger than a year earlier despite the weakening U.S. dollar. The U.S. dollar appreciated slightly in mid-March, but then lost value toward the end of March. The USD/AUD was 0.78 in March, but then fell to 0.75 in March. A similar pattern occurred with the New Zealand dollar: 0.69 USD/NZD in February and 0.66 USD/NZD in March.

The U.S. Department of Agriculture has forecast that imports will rise in 2004 to 170 million pounds -- up from 167 million pounds in 2003, 162 million pounds in 2002 and 146 million pounds in 2001. Lamb imports from Australia and New Zealand were 12.4 million pounds in December and rose to 14 million pounds in January. New Zealand lamb exports increased 29 percent year-to-year in February 2004 (Meat & Livestock Australia 3/26/04). Lamb and mutton exports were relatively low last fall, rising from 687 million pounds in November, but then falling to 604 million pounds in January.

World pelt prices gained strength in the first quarter of 2004. Strong pelt prices can have the effect of taking the edge off competitive bidding, thus easing slaughter-lamb prices. No. 1 pelt prices were an average $1.50 higher in 2003 than the 1998-2002 average, but started out slightly lower in 2004 than in 2003. Fall clips averaged $13.50 in March 2003, but fell by $0.25 in March 2004. Year-to-year No. 1 pelts remained steady in March at $11.50 after falling to $11.25 in mid-2003. Pelt prices worldwide are supported by strong demand for Australian pelts. "Major export clients, Turkey, Russia and China, are competing strongly for premium quality Australian product and this is helping keep prices buoyant" (Meat & Livestock Australia 3/19/04).


Wool Market Recovery Uncertain
Although world wool stocks have been in decline, an unexpectedly larger wool clip in Australia this season and uncertain demand may continue to dampen prices. Shorn wool production is forecast to fall to an all-time low in 2004, although the year-to-year rate of decline is falling.

Reports indicate significant economic recovery in the United States and Japan, although demand may remain lackluster in Europe. Consumer confidence in the United States is strong and disposable income remains high, but job growth is mediocre and terrorism concerns remain alive. The stock market trend in the remainder of 2004 remains very uncertain. Despite reports of improved demand in the United States and Japan, Chinese demand remains uncertain. Reportedly, "mills in China remain cautious and price sensitive, despite reportedly low stocks of raw wool and top..." (Woolmark 3/12/04).

Another factor putting a damper on wool prices is that the U.S. dollar is predicted to remain weak, thus making wool more expensive for those countries that trade in U.S. dollars (e.g., China, a major wool importer). Although the U.S. dollar appreciated in March, the Consensus Forecasts predicted the U.S. dollar will weaken to 78.90 Acents by the end of June (Woolmark 3/19/04). The weak U.S. dollar gives U.S. wool exports a competitive edge in wool markets. In addition, the weak U.S. dollar means it is relatively cheap for foreign visitors to visit the United States, so expectations are this season will see increased interest in U.S. wool by foreign buyers. ASI has many commitments from international guests to visit the United States and expectations are that competition for U.S. wool this season should be strong.

As the United States wool season approached, prices strengthened from late-2003 levels. By the end of March, wool prices, clean, delivered, were Grade 70s (19.15-20.59 micron) $2.40/lbs.-$2.60/lbs., Grade 64s (20.60-22.04 micron), $2.30/lbs.-$2.50/lbs., Grade 62s (22.05-23.49 micron) $2.20/lbs.-$2.40/lb., and Grade 60s (23.50-24.94 micron), $2.00/lbs.-$2.20/lbs.

Wet and muddy weather meant a slow start to shearing in Texas and Midwestern states, but excellent shearing conditions led to busy shearing in the western United States -- even ahead of schedule (USDA/AMS 3/19/04). Early reports indicated that this year's wool crop is higher in yield and quality than that of last year.

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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