Markets--Production Forecast to Rise in 2005

Production Forecast to Rise in 2005
September 2004 --The U. S. Department of Agriculture's Economic Research Service (ERS) expects to see production increases in 2005 from 194 million lbs. this year to 197 million lbs. in 2005. The numbers may be revised downward, given the recently released report that inventory is down. However, production gains still are likely.

As of July 1, year-to-year total sheep and lamb inventory is down almost 2 percent, from 7.8 million in mid-2003 to 7.65 million in mid-2004 (U.S. Department of Agriculture National Agricultural Statistics Service). However, the rate of decline in inventory is slowing: In the mid- to late-1990s, the year-to-year decline in inventory was roughly between 4 and 5 percent. Beginning in 2001, the average annual decline was 2.6 percent.

The numbers of ewe lambs that have been held back since the beginning of the USDA's ewe-lamb retention program added to those currently being held back means we should expect to see more lambs on the market beginning next spring. According to ERS, one indicator that producers are not selling stock is the sharp drop in production since Easter of this year - despite the fact that prices remained high. Although seasonal slow-down is expected, the significant production drop has led ERS to surmise that producers think higher prices will persist, and they are therefore holding back lambs.

Overall, the market is primed for inventory gains: feeder- and slaughter-lamb prices are high and demand is stable. Driven by strong demand and tight supplies, feeder- and slaughter-lamb prices remained high through July. San Angelo slaughter-lamb prices averaged $92.90/cwt. in May, $97.50/cwt. in June, and $100.13/cwt. in July. During the first-half of 2004, slaughter-lamb prices averaged $98.22/cwt., compared to $93.07/cwt. during the same period in 2003.

Year-to-year and seasonal feeder-lamb prices remained high in July. Between June and July, San Angelo feeder-lamb prices held steady, at $112/cwt., but above $97.93/cwt., the average price last July. After the spring holidays, feeder-lamb prices began to weaken seasonally, from close to $121/cwt. in April to $112/cwt. in July. Price pressure on feeder lambs may ease in the fall because corn prices weakened recently due to good to excellent growing conditions and forecasted record production. In July, Omaha corn fell from $2.33/bu to $2.17/bu.

Speculation of weakening pelt prices may put pressure on boxed lamb prices in the next couple of months. It is thought that pelt demand may slow because buyers are reluctant to pay current prices, although pelt prices remained strong in recent months (Meat & Livestock Australia 7/27/04).

Gross carcass value dropped between June and July, from $235.91/cwt. to $229.58/cwt. Boxed prices were mixed in response. The middle meats lost value, leg prices dropped and shoulders increased. The rack fell from $526.91 to $513.33/cwt., loins dropped from $460.95/cwt. to $456.42/cwt., legs dropped from $231.04/cwt. to $214.56/cwt., and shoulders rose from $167.27/cwt. to $171.35/cwt.

Between April and May, the average feature-weight price of lamb (domestic and imported) rose from $4.23/lbs. to $5.06/lbs. Between January and May, the average feature-weighted retail price was $4.84/lbs., up year-to-year from $4.37/lbs. The feature-weighted average price of domestic lamb was $4.83/lbs. between January to May, compared to $4.89/lbs. for imported lamb.

Domestic lamb prices increased from $4.56/lbs. in March, to $4.86/lbs. in April and to $4.98/lbs. in May. The five-month, January-to-May domestic retail price averaged $4.83/lbs., up from $4.38/lbs. over the same period in 2003. Imported lamb prices decreased from $4.87/lbs. in March, to $4.54/lbs. in April and to $5.01/lbs. in May. The five-month January-to-May 2004 imported retail price averaged $4.89/lbs., up from $4.35/lbs. over the same period in 2003.

Overall, the volume of sales sold under featuring dropped in 2004. The January-to-May featuring percentage for domestic lamb was 15 percent, down year-to-year from 17 percent. Similarly for imports, the percent featuring was 24 percent this year, down year-to-year from 37 percent. Featuring may be down because margins are tight: Recent exchange rate movements worked against imports.

In July, the U.S. dollar versus the Australian and New Zealand dollars began to work against imports, yet imports remained strong. The USD/AUD was 0.77 USD/AUD in January and February, but strengthened to 0.69 USD/AUD in June, before falling to 0.72 USD/AUD during the first three weeks of July. The USD/NZD was 0.68 USD/NZD in January and February, before falling to 0.62 USD/NZD in May and June, and then falling to 0.65 USD/NZD during the first three weeks of July.

Lamb imports in May were 13.7 million lbs., up year-to-year from 11.4 million lbs. New Zealand surpassed Australia in the quantity of imports in May at 6.89 million lbs., compared to 6.76 million lbs. for Australia.

Although import prices are rising, the import share of lamb in our market continues to rise. In 2003, lamb imports averaged 42.5 percent of total lamb availability (domestic production and imports) and 48.5 percent in January to May 2004.

Year-to-year live and meat exports to Mexico were down sharply. In the first half of 2004, a total of 36,474 sheep and lamb head were exported to Mexico -- down more than 50 percent from 90,112 during the same period in 2003. In May, more than 12,000 head were exported. However, that number dropped to 4,113 head in June and to about 1,500 head in July. Lamb variety meat exports to Mexico totaled $73,409 in January to May 2004, down from $693,026 in January to May 2003. During the same time period, year-to-year lamb variety meat exports to Mexico totaled 77 metric tons, down from 734 metric tons in 2003.

Preliminary research suggests that the demand for leg of lamb ('whole' sub-primal or retail-ready leg) may have increased in recent years. Price increases are accompanied by increased sales and reduced featuring. Leg of lamb prices increased 10 percent between 2002 and 2003 and then 3 percent between 2003 and the first five months of 2004. Volume of sales fell 7 percent between 2002 and 2003, but then rose 22 percent between 2003 and the first five months of 2004. Year-to-year volume of sales sold under featuring fell 36 percent between January through May 2004 (heightened demand months) and the previous year.

In Australia, lamb prices have risen sharply over the past three years. Strong export demand and the drought are helping to drive up prices. Sheepmeat Council Executive Director Bernie O'Sullivan reported, "there has been a 50 per cent jump in the price of lamb at the butcher/supermarket in the past three years" (The Daily Telegraph Australia 6/26/04).

By contrast, strong demand has meant New Zealand is finding it difficult to fill customers' orders. In fact, one reporter commented, "Some New Zealand companies are using Australian lamb to supplement supplies. It fills the gap but it's ironic to be using their lamb in our hard-won markets" (The New Zealand Herald 7/26/04). Recent inventory reductions and consequent tight supplies were attributed to adverse weather and competition from more other lucrative farming enterprises. However, a recent survey indicated that the sheep flock increased by 0.9 percent this year (Meat & Wool New Zealand 7/30/04).

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Australian Wool Prices at Historic Highs
Medium and broad range Australian wool hit record highs on international markets in July. Although wool prices in Australian dollars fell in its 2003/04 season, prices in U.S. dollars were relatively high due to exchange rate movements. The price of 21-micron wool has only been higher in three of the last 13 seasons (Woolmark 7/30/04). The price of 21-micron wool rose from 612 U.S. cents/kg (277.55 U.S. cents/lbs.) to 622 U.S. cents/kg (282.09 U.S. cents/lbs.) from mid- to late July.

Producers know they can capture price premiums on top of already high prices through improved management practices and wool presentation. In the United States, micron is the only routinely and widely recognized measure categorizing wool. However, there are a host of other factors important in the pricing wool as suggested by the broad range of prices reported for each grade in the USDA reports. For example, at the end of July the price of Grade 70s wool (19.15-20.59 microns) ranged from $2.30-$2.65/lbs. Differences in 35 cents per pound can be explained by the numerous not measured or non-measurable wool characteristics such as strength and presence of vegetable matter. Regional differences can also explain some of the price ranges.

Woolmark recently reported that in Australia, micron explains only half of price variation. Strength, staple measurement, length, style and color are also important factors in determining price. After micron, strength was most important in explaining price difference (15 percent) of 18.6-24.5 micron merino fleece wool (7/29/04).

If an internationally accepted systematic method of identifying and categorizing wool clips with non-measured characteristics is adopted in the United States, its market will expand. This is because wool could increasingly be sold by description only, without a visual inspection (Savage 7/29/04). In addition, producers will be accurately rewarded for their pelts. The AWEX-ID system, a system used in Australia to describe non-measured qualities of wool, does just that.

The AWEX-ID system is currently being introduced in the United States. However, research has already been conducted on the premiums that are received for certain wool characteristics other than diameter. For example, research revealed that producers do receive a price premium if their wool is labeled with length and strength measurements (Savage 7/29/04).

The U.S. wool market was very slow in July. Most warehouses had already depleted their spring inventories. By the end of July, wool prices, clean, delivered, averaged Grade 70s (19.15-20.59 micron) $2.30/lb.-$2.65/lb., Grade 64s (20.60-22.04 micron), $2.20/lb.-$2.50/lb., Grade 62s (22.05-23.49 micron) $2.00/lb.-$2.30/lb., and Grade 60s (23.50-24.94 micron), $1.70/lb.-$2.00/lb.

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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