Markets -- Imports and High Lamb Prices Pressure Industry

The Advertising-and-Lamb-Demand Relationship
The sheep and lamb industries have been challenged to move all lamb cuts in balance and thus not be ?forced? to inflate the price of some cuts in order to move others. Advertising can help in this regard.

The intent of the current advertising strategy by the American Lamb Board (ALB) is to encourage consumers to seek out American Lamb and consume it more often (ALB 3/2004). One method of trying to increase lamb demand is to encourage consumers to eat lamb not just on holidays and not just in fine restaurants. A study commissioned by the ALB found that lamb consumers who were exposed to lamb advertising ate lamb on a more regular basis and in their homes. The objective of the study was to provide baseline measures of lamb consumption and advertising awareness.  ALB conducted a study of lamb consumption patterns among ?Emerging Epicureans? -- households between 45 and 60 years old and whose annual incomes exceeded $60,000. Reportedly, recent ads for American Lamb reached 11 percent of subscribers at the time of the study.

Does Lamb Consumption Increase with Incomes?
The ALB study focused on higher-income households, but the lamb consumption patterns among lower-income households and the affect on lamb demand when household?s incomes rise are also important questions. Little research has been conducted on lamb demand by lower-income households, but anecdotal evidence suggests that lamb is an important item in the diet of ethnic households?Moslem, Hispanic and Mediterranean -- regardless of income. Little research has addressed the relationship between income and lamb demand.

I estimated a simple statistical model and found that lamb demand is positively correlated with incomes. That is, more people will eat lamb as incomes rise. In addition, more people dine out as incomes rise. Both factors are good news for the lamb industry. The U.S. Department of Agriculture?s (USDA) Economic Research Service (ERS) found that by 2020, Americans would increase their spending by about 18 percent per person at full-service restaurants and about 6 percent per person at fast-food establishments. A large portion of lamb consumption is in fine-dining establishments. Thus, the foodservice portion of lamb consumption in total lamb consumption is likely to increase in the next decade.

USDA to Release Import Prices
The ALB found that ?Emerging Epicureans? are more favorable toward American Lamb than imported lamb. Keeping domestic lamb competitive is thus crucial to maintaining and expanding demand. However, the industry has been challenged.  As of this writing, prices of import cuts had not published. Beginning Nov. 1, 2004, USDA revisions on reporting imported product will take effect. The amended Mandatory Price Reporting (MPR) legislation calls for a reduced threshold of imports for reporting, from 5,000 MT to 2,500 MT for a 5-year average, so more product will be reported. In addition, import prices for wholesale cuts similar to those reported for domestic product will be reported. We will now be able to compare imported prices to domestic prices. Import prices will be reported at the primary point of storage within the United States. Given that a lot of lamb is sold on the East and West Coasts, they will be the point of storage.

Wholesale Market Strengthens
Carcass price hikes have likely put increased pressure on packers and breakers, who must increase their sale prices to cover costs and risk great resistance from retailers, particularly those likely to switch to imports.

The gross carcass value gained year-to-year during the third quarter of 2003: $222/cwt., up from $220.21/cwt. in the third quarter of 2003. In September, the average carcass value was $216.81/cwt., up from $215.09/cwt. last September.

Reportedly, the quantities ordered for the upcoming holidays were less than those of last year. This may be a reflection of reduced quantity demand (given high prices) or that retailers are turning to imports.

Year-to-year prices of legs increased while prices of other cuts fell. Given that carcass prices increased year-to-year, the drop in prices of cuts other than legs may be an indicator that prices were reduced in order to move product.

The eight-rib rack, medium, was lower year-to-year. In September its average price was $481/cwt., down from $549.32/cwt. the previous September. Third quarter values also were lower: $497.66/cwt., compared to $578.86/cwt. in 2003.

The 4x4 trimmed loins also lost year-to-year value, coming in at $433.32/cwt. in September, down year-to-year from $437.53/cwt. The third-quarter values also fell year-to-year: $439.68/cwt., down from $448.25/cwt. in 2003. The loins will likely lose value seasonally in the last quarter of 2004. In addition, the average loin price may not stay above $4/lbs. as it did for most of the fourth-quarter of 2003.

The value of the leg in the third quarter of 2004 was higher: $201.68/cwt., up from $188.35/cwt. in the third quarter of 2003. In September the average value of the leg was $193.86/cwt., up from $184.59/cwt. last September. It is anticipated that the leg could reach $2.75-$3.00 during the upcoming holidays.

In general, the rack and leg sell well, but loins and shoulders do not sell in equal proportions. This means that the rack and leg may have to carry some of the value of lesser-value cuts in order for packers to meet the total cost of a carcass. This may be an explanation of why the leg (?whole? sub-primal or retail-ready) was higher priced in the first-half of 2004 than in the previous three years. However, the price spread between racks and loins fell from an average of $1.68/lb. in 2002 and 2003 to $0.56/lb. in the first nine months of 2004. This is an indicator that perhaps demand for loins is expanding.

However, contrary to other cuts, the retail volume of legs sold during the last three years actually increased. If 100 is the monthly average of legs sold in 2001, the volume index in 2002 was 128, 119 in 2003 and 121 in the first seven months of 2004. It is thus possible that the demand for retail legs increased. Due to a lack of data, however, the dynamics of the foodservice market are less clear. 
 

Retail Volumes Continue to Fall, Prices High
The price of retail lamb gained some strength in July, from $5.37/lb. in June up to $5.39/lb. The gain was primarily from the price increase for imported lamb. The price of domestic retail lamb softened, from $5.33/lb. to $5.29/lbs. However, the price for imported lamb increased from $5.45/lb. in June to $5.73/lb. in July. Only 4 percent of imported lamb was sold on a price special -- the lowest level in three and a half years.

The stronger U.S. dollar made it more difficult for importers to undersell domestic lamb. The United States/Australian exchange rate weakened slightly in September, but remained above 2003 levels. The USD/AUD averaged 0.72 in July, 0.71 in August and 0.70 in September. The USD/NZD averaged 0.65 in July, 0.66 in August and 0.66 in September. Between June and July lamb roasts increased from $8.69/lb. to $8.80/lb. Lamb chops also increased in value, from $6.17/lb. to $6.35/lb. The price of the lamb loin fell from $8.58/lb. to $7.90/lb. in July. The price of lamb shoulders increased from $3.88/lb. to $4.04/lb. Leg of lamb fell from $4.08/lb. to $3.82/lb.

Trade Volumes Rise
Between January and July 2004, 96.2 million lbs. of lamb were imported, up from 77.1 million lbs. during the same time period in 2003. During this period, year-to-year Australian imports increased 16 percent and New Zealand imports 36 percent. There are no signs that import volumes will slow in coming months. However, there were reports this summer of difficulty in filling import accounts.

As Australia begins to rebuild its flock, the 2004/05 season will see reduced sheep slaughter, as producers withhold adult sheep from slaughter but increase lamb slaughter.  Australia?s lamb slaughter is forecast to rise 4.8 percent in the coming year, to 17.3 million head, while production is expected to increase by 7.3 percent. ?Export demand for 2004/05 is forecast to remain strong, with lamb exports to the US forecast to increase 9 percent, to 36,000 tons,? (Meat & Livestock Australia 9/24/2004).

In mid-September a cold snap in New Zealand killed thousands of newborn lambs. However, this season saw excellent lambing percentages so the losses may not necessarily impact absolute numbers. ?The biggest impact would be the poor grass growth, which could result in ewes producing less milk for suckling lambs and slower growth,? (Stuff New Zealand 9/21/04). 

Year-to-year mutton imports also increased, from 17 million lbs. to 26.4 million lbs. between January and July. During this period Australian imports increased 41 percent and New Zealand imports 190 percent.

Pelt Prices Remain Steady
In late September, the prices of sorted green salted pelts in the United States held steady. USDA reported, ?demand and offerings were light to moderate for slow to moderate trade.? In Australia, the new season lambs were in high demand due to their fresh, cleaner skins, and as a result continue to out-price old lambs. ?Although the supply of young lambs steadily increased over the past few weeks, it has yet to reach high enough levels to significantly influence prices? (Meat & Livestock Australia 9/14/2004).

Reports out of both Australia and the United States noted little interest from overseas buyers due to high prices. However, there appeared to be sufficient interest to keep prices steady in September. Australia reported the most inquiries from China.

Prospects for Wool Uncertain
At the end of September, the Australian wool market fell to its lowest level in three years -- 747 Acents/kg, clean. Low demand from China and Europe and the strong U.S. dollar were thought to blame (Australian Broadcasting Corp. 9/30/04).  Forecasters expect the price of wool to rebound by year?s end. However, prospects for wool remain largely uncertain and will be a function of supplies relative to demand. Demand, in turn, will be a function of the price of wool, the price of its substitutes, consumer incomes and consumers? preferences for wool.

Wool production increases in Australia were attributed to the easing of the drought and the rebuilding of the flock. Since the early 1990s, there has been a downward trend in wool production in Australia, but recent reversals are evident: The Australian wool clip is expected to increase in 2004/05. The national increase, the first in eight years, follows the historically low 2003-04 production level of 480 million kilograms. Dr. James, Chairman of Australian Wool Innovation, said the committee did not support the general view that there was a shift to prime lamb production at the expense of wool. "Producers are entering a rebuilding phase for their flocks," (The Age Australia 9/15/2004).

Since mid-2003 world wool prices have been on a decline. As an example, U.S. Grade 60s wool averaged $1.85/lb. in August 2004, down year-to-year from $2.15/lbs. Australian Grade 60s, landed in South Carolina, was $2.35/lb. this August, down year-to-year from $3.01/lb.

Year-to-year third quarter U.S. wool prices softened for the finer and medium grade wools during the third quarter, with the finer wool holding most ground. Grade 70s (19.15-20.59 micron) average price, clean, delivered, was $2.51, down from $2.54/lb., Grade 64s (20.60-22.04 micron) was $2.36/lb., down from $2.41/lb., Grade 62s (22.05-23.49 micron) was $2.15/lb., down from $2.33/lb., and Grade 60s (23.50-24.94 micron) was $1.85/lb., down from $2.14/lb., and Grade 58s (24.95-26.3 micron) was $1.75/lb., down from $1.85/lb.

Given supply increases, improved demand for wool is crucial if prices are to strengthen. Reportedly, wool was very well received at Premiere Vision, the main European fabric show (The Wool Record Weekly 9/24/04). Some suppliers saw more customers, particularly from North America and Japan, than they ever had. Fine suits and woolen jackets were a highlight.

Another crucial factor influencing demand for wool is the price of its substitutes, namely cotton and synthetic fibers. The price of cotton has been depressed recently, which may hurt sales of wool. In 2003/04, the price of cotton hit a six-year, which encouraged increased plantings. As a consequence ample supplies are on the market, driving cotton prices down. Cotton was 70 U.S. cents/lb. in February, but fell to about 55 U.S. cents/lb. in August. It is anticipated that the wool-to-cotton ratio will remain steady throughout the remainder of the 2004/05 Australian season (Woolmark 9/17/04).

By contrast, wool is more competitive against synthetics because the price of synthetics recently increased. The price of acrylics is tied to the price of oil, and the price of oil is likely to remain relatively high given the uncertain political climate in the Middle East. Buyers in price-sensitive markets such as China and India may switch to wool as the price of synthetics increases relative to the price of wool. However, the relative prices between wool and cotton may cause buyers to switch to cotton (Woolmark 9/17/04).

Part of the difficulty in forecasting wool prices is that there exists distinct wool markets by grade and by use of the wool. A simple sum total of all the wool available does not shed light on whether supplies of super fine wool, for example, will be tight. The Australian Wool Innovation Ltd. commissioned a study to improve forecasting of wool supplies -- and thus prices. The study will determine not only the number of sheep available for shearing, it also will differentiate the sheep by breed, and therefore grade of wool, to some extent. This would significantly improve the ability of forecasters to estimate the price of wool of different grades.

In the United States, the current training of the Australian Wool Exchange (AWEX) ID system will also help define wool by type and use. Wool appraisers will assist the U.S. wool industry by assigning an internationally recognized description of the non-measured wool characteristics. This description better describes wool and translates the description into an easy-to-read formula. In addition, this description system may be used for wool market reporting and will provide more information to growers to assist them in making better informed wool marketing decisions (ASI 9/17/04).