June 15, 2004
Are Tight Supplies Boosting Live Sales?
June 2004 -- The percentage of auction sales in total slaughter increased as supplies contracted. This contradicted my expectations. I anticipated that the portion of auction sales would decline in an industry promoting more quality-based or 'formula' pricing mechanisms. I also interpreted the rise in the number of lamb cooperatives as an indicator of producers' desire for more quality-based pricing methods. Perhaps I was too quick in drawing my conclusions. The time-frame for observation may be too short or there may be other factors responsible for the rising portion of auction sales.
The portion of formula-based sales in total slaughter revealed a downward trend since 2001. Formula sales were slightly more than 50 percent of total during the last third of 2001 and 2002, before falling to 37 percent in 2003 and rising to 39 percent in the first third of 2004. In late 2003 and into 2004, negotiated sales in total slaughter declined. By contrast, the rise in the portion of slaughter that was purchased from auctions rose steadily from 34 percent in 2002 to 44 percent in the first third of 2004.
There may be multiple reasons for the rise in the portion of auction sales. Tight supplies and relatively high live prices may have meant producers were less likely to enter long-term contracts and more willing to gamble on live prices (Cole, AMS Market News Reporter 4/30/04). In order to secure supplies, packers may have been forced to increase auction purchases. Another possibility is that if packers were facing tight margins, possibly due to less profitable imports and tighter meat margins, they may have thought they received relatively lower prices through auctions than through formulas.
A rising ethnic demand may also explain why the share of auction sales increased. The ethnic demand comprises up to 50 to 60 percent of auction sales in San Angelo (Cole, AMS Market News Reporter, 4/30/04). A similar trend is occurring at other auctions across the United States.
Weekly production levels reached 78,161 head during the first week of March, but then tapered off after the Easter holidays. By the end of March, slaughter levels were down to 46,000 head/week. Production increased year-to-year in January through April to 66 million lbs., compared to 65.50 million lbs. during the same period in 2003. Production increased, although slaughter numbers were down because dressed weights averaged 71 lbs. in comparison to last year's 68.2 lbs.
Average live slaughter-lamb prices were $92.90/cwt. -- a year-to-year increase from $88.63/cwt. Slaughter-lamb prices began their seasonal downturn, falling from $102.50/cwt. in March. Strong and stable demand and tight supplies are likely to support slaughter-lamb prices, given seasonal downturns.
Feeder-lamb prices also fell between March and April, from $127.88/cwt. to $120.80/cwt. Year-to-year April feeder-lamb prices were 20 percent higher than those of last April. Feeder-lamb prices will continue to largely be a function of corn prices. If corn prices reach a possible $5/bu this coming season, lambs may be put on wheat pasture, sugar beets or other crop residues, before being finished in a feedlot for only a few weeks.
Although corn production was good this season, high usage led to a decline in ending corn stocks for the third year in a row (USDA/ERS 4/23/04). Farmers were expected to increase acreage planted in the 2004/05 season, but if production doesn't meet current levels prices will be pressured.
Boxed lamb prices weakened year-to-year: The gross carcass value was an average $2.43 last April, but fell 6 percent to $2.28/lb. in 2004. Gross carcass value weakened slightly in April, from $2.30/lb. in March to $2.28/lb. in April. The eight-rib rack, medium, fell from $4.55/lb. in March to $4.37/lb. in April, down from $6.53/lb. last April. The rack may see some support from Mother's Day, although it may not reach the seasonal high experienced during the Easter holiday. The average April trimmed loins price held steady from last year, at $3.92/lb., down from $3.96/lb. in March. Loin prices will likely gain strength as the grilling season approaches. The leg, trotter off, strengthened between March and April, from $2.60/lb. to $2.71/lb. In April, legs were an average $2.54/lb. As summer temperatures rise, prices for legs are expected to soften. The square cut shoulder was $1.62/lb. in March but fell to $1.52/lb. in April -- down from $1.57/lb. in comparison to last April.
Lamb imports totaled 26.4 million in January and February, up from 17.2 million lbs. last January and February. Australian imports were 13.1 million lbs. in January and February, up from 9.6 million during the first two months of 2003. New Zealand lamb imports were 13.1 million lbs. in January and February, up from 7.6 million lbs. in 2003. Despite reduced import profitability given the weak U.S. dollar, importers may continue to import volume for fear of losing valuable U.S. market shares.
Although import data is available only through February, it is suspected that Australian imports in March may have fallen short of orders for the Easter holiday -- although New Zealand imports may have increased to cover some of the difference. Reduced first-quarter Australian exports and relatively high slaughter-lamb prices suggest tight March imports. Australian lamb exports in the first quarter of 2004 fell 31 percent in comparison to the first quarter of 2003 (Meat & Livestock Australia 4/27/04). Reduced exports of lamb carcasses in 2004 were "offset by strong demand for chilled lamb cuts from the developing retail and foodservice sectors -- lamb cuts increased 32 percent in first quarter compared with the first quarter 2003" (Meat & Livestock Australia 4/27/04).
Retail prices remain at three-year highs. The price of retail lamb increased from $4.90/lb. to $4.99/lb. between January and February. Imported retail lamb prices reached $5.03/lb. -- the highest price on record since ERS started collecting retail prices in January 2001. The imported price increased to $5.03/lb. in February from $5/lb. in January. During these two months the volume index increased from 77 to 84 (100 being the monthly average sold in 2001).
The percentage sold under price featuring for imported lamb remained steady at 23 percent between January and February. A much lower-than-average volume of imported lamb was sold under featuring, which suggests imported margins were tight. It could also suggest that offering price discounts is not as effective in moving product because lamb consumers are becoming less sensitive to price. Between 2001 and 2003, an average 34 percent of imported lamb was sold under featuring. In some months, particularly around Easter, up to 54 percent of imported lamb was sold under featuring (compared to about 30 percent for domestic lamb during Easter).
The featured weighted price of domestic lamb increased from $4.86/lb. in January to $4.98/lb. in February. The volume index rose from 73 to 76 between these months, and the percentage sold under price featuring fell from 11 percent to 10 percent.
The price of retail domestic lamb loin and leg fell between January and February, while prices for shoulders, roasts and chops strengthened. The price of domestic lamb loin fell from $7.57/lb. to $7.55/lb. between January and February. Lamb leg (leg of lamb, chops, roasts, cutlets, leg center slice) prices fell from $4.17/lb. to $4.10/lb. in February. Leg of lamb ("whole" sub primal, retail ready) price fell from $4.04/lb. to $3.88/lb. The price for retail lamb shoulder increased from $3.49/lb. to $3.73/lb. during this time, as did retail prices for lamb roasts (likely sirloin, boneless leg roasts, and top rounds), which rose from $9.17/lb. to $9.29/lb. Lamb chop (primarily from loins, but also could be from shoulder) prices also strengthened, from $5.77/lb. to $5.97/lb.
Shifting Exchange Rates Lift Wool Market
After a two-week Australian Easter recess, the wool markets opened in late April on a very positive note. The combination of the strengthening U.S. dollar and China's presence in the market boosted wool sales.
China had a strong presence in the market, as did topmakers. In late April, the Chinese were reportedly buying 18.5 to 19.5 micron levels for immediate delivery (Wool Record Weekly Market Report 4/30/04).
The U.S. dollar strengthened against the Australian and New Zealand dollars in April. The USD/AUD was 0.73, down from 0.75 in March. The New Zealand dollar was 0.63 USD/NZD during the last week of April, compared to 0.66 USD/NZD in March.
In late April, the Eastern Market Indicator was 19 percent lower than a year ago, but 1.4 percent higher than February's levels when the Australian dollar hit a 15-year high of 80 cents U.S. (Wool Record Weekly Market Report 4/30/04). The Australian Eastern Market Indicator increased steadily through April landing at 778 Acents/kg clean on April 29. By comparison, the 2003/04 EMI season high was 927 Acents/kg clean.
In April, the price spread between U.S. and Australian wool was the lowest in seven years, evidence of the relatively weak U.S. dollar as well as aggressive U.S. export promotion. During the first quarter of 2004, U.S. wool prices were 73 percent of Australian wool prices (clean, delivered, average of Grades 56, 60 and 64), in comparison to a low of 56 percent of Australian wool prices in 2000. The narrowing of the spread could also be because Australian wool prices weakened in late 2003 and early 2004.
A recent report by the Economic Intelligence Unit (January-February 2004) delineates estimates of a slowdown in wool consumption in 2003/04. While Chinese imports are expected to increase this season, they do not offset the decline in wool consumption in the United States and Western Europe. The price outlook for the 2004/05 season is that although there may be some price strengthening up to early 2005, prices in 2005 will be relatively flat. Stiff competition from man-made fibers will continue to affect wool demand as will an uncertain global economic outlook.
Demand during the U.S. wool season was considered moderate to good. Snow and rain interrupted shearing in some western states. By the end of April, wool prices, clean, delivered, were Grade 70s (19.15-20.59 micron) $2.40/lb.-$2.65/lb., Grade 64s (20.60-22.04 micron), $2.30/lb.-$2.50/lb., Grade 62s (22.05-23.49 micron) $2.20/lb.-$2.40/lb. and Grade 60s (23.50-24.94 micron), $1.95/lb.-$2.00/lb.
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