December, 2004 -- As 2004 draws to a close, one cannot help but reflect on the strength of lamb prices this year and the possibility of expanding lamb demand. Feeder-lamb prices hit an annual high of $112/cwt. in direct trade in August; live slaughter-lambs hit $1/lb. twice in the year; boxed leg prices reached $2.78/lb.; and average retail prices surpassed $5/lb. Imports also continued their upward trend, reaching 50 percent of the U.S. lamb market on monthly comparisons so far this year. Import prices, typically lower than domestic prices, also were strong ? and even surpassed domestic prices occasionally.
Tight supplies undoubtedly contributed to the high prices. As test of whether demand is expanding is what happens to price levels when lamb production expands and imports increase. If prices fall, then demand is steady, not expanding. If prices hold their strength as supplies expand, then demand most likely is expanding.
Feeder-lamb prices in direct trade averaged $105.76/cwt. between January and October, compared to $98.25/cwt. during the same period in 2003, and an average $78.72/cwt. between 1999 and 2002. Continued weak corn prices due to a record harvest helped keep feeder-lamb prices high.
Slaughter-lamb prices typically begin to increase toward the November and December holidays after a seasonal lull. This year, prices began to rise seasonally in October, but lost momentum and fell during the last week of October. Average live slaughter-lamb prices, San Angelo, averaged $90.56/cwt. in September, but rose to $91.40/cwt. in October. The October 2003 average was $91.15/cwt. Formula prices on a carcass basis (75-85 lbs.) were $178.97/cwt. in September, but fell to $175.79/cwt.-- lower than the $176.95/cwt. seen last October.
By contrast, the gross carcass value started to strengthen in late August and has not lost momentum. The carcass value (cutout) has been volatile throughout 2004, but has generally trended upward. Packers and breakers may be taking larger margins as the live-to-carcass margin widens.
The gross carcass value rose from $216.81/cwt. in September to $221.05/cwt. in October. Year-to-year October prices also were up, from $211.30/cwt. Rack and shoulder prices were down, but loins and legs were up. Higher boxed lamb prices reflect possible strong demand at retail.
The eight-rib rack, medium, fell from $481/cwt. in September to $475.36/cwt. in October, compared to $493.95/cwt. last October. Shoulders, square cut, were $169.02/cwt. in September, 166.70/cwt. in October, compared to $152.95/cwt. last October. The leg, trotter-off, was $209.33/cwt. in October, up from $193.86/cwt. in September. The leg gained year-to-year from $193.30/cwt. last October. Loins, trimmed 4x4, were $433.32/cwt. in September and rose to $436.64/cwt. in October, compared to $422.27/cwt. last October.
A drop in mutton production may reflect increased retention of replacement ewes. In the third quarter of 2004, 2.56 million lbs. of mutton were produced, down from 2.60 million lbs. in the third quarter 2003. Domestic mutton production is not down due to increased exports of sheep and mutton. Live sheep exports to Mexico totaled 58,350 head in January through August 2004, compared to 130,828 head in the first eight months of 2003. During January through August 2004, lamb variety-meat exports to Mexico totaled 253 metric tons, down from 1,070 metric tons during the first eight months of 2003.
Indeed, producers have been retaining ewes. Replacement lambs increased 3 percent for 2004, the first increase in more than 5 years (USDA/ERS 10/18/04). Numbers probably would have been higher, but a persistent drought in the West has led to some continued culling of breeding ewes.
Mutton imports have been increasing, which may be an indicator that U.S. mutton demand is strong. Total mutton imports increased from 18.7 million lbs. in January through August 2003 to 28.6 million lbs. during the same period in 2004.
Increasing imports challenges the United States? market share of lamb. During January through August 2004, lamb imports averaged 43 percent of lamb availability (domestic production and imports), up from 39 percent during the same period in 2003. During April through June, this percentage averaged around 50 percent. January through August 2004 imports were 105.5 million lbs., up from 89.70 million lbs. during the same period in 2003.
Imports are likely to continue to offset production declines in early 2005, but U.S. production may get a boost from increased supplies. Australia is in good shape to export to the United States because its drought has eased and its lamb productivity is up. The USDA Economic Research Service anticipates that per capita lamb consumption will rise from 1.1 lbs. in 2003, to 1.2 lbs. in 2004 and 2005 (USDA/ERS 10/18/04). This does not necessarily mean that USDA believes lamb demand is expanding. Increased per capita lamb consumption can mean that more lamb may be sold at lower prices, not higher prices (which would be the case of expanding demand). Expanding demand is the key for the sheep and lamb industry to grow and to induce investment in the industry.
Retail prices held steady throughout the summer, but were a lot higher than a year ago. The January through August 2004 average feature-weighted retail price was $5.04/lbs., up year-to-year from $4.56/lbs. The average retail price in June 2004 was $5.37/lbs., $5.39/lbs. in July and $5.37/lbs. in August.
Domestic retail lamb prices softened from $5.33/lbs. in June, $5.29/lbs. in July and to $5.28/lbs. in August. The January through August 2004 domestic retail price averaged $5.01/lb., up from $4.57/lb. over the same period in 2003. (Recall that domestic prices may also include imported products that are not labeled as to the country of origin.)
Imported retail lamb prices increased from $5.45/lb. in June, to $5.73/lb. in July before falling to $5.61/lb. in August. The January through August 2004 imported retail price averaged $5.16/lb., up from $4.52/lb. over the same period in 2003.
The pelt market took a hit in October with prices falling 30 cents for Fall Clips and No. 1 pelts. Increased availability of skins and recent hot weather in Australia were thought to be contributing factors to the weakened market, as well as light international demand.
The USDA Packers and Stockyards Program recently released its annual statistical report, updated to 2002. One factor that caught my eye in the report is that the share of carcass-based purchases in total purchases by all packers had actually dropped instead of increased. Carcass-based purchases are lambs purchased on the basis of carcass grade, weight, yield, guaranteed yield, lean percent or some combination thereof.
In the late 1990s, about half of all purchases were bought on a carcass basis. That share rose to 70 percent in 2001, but fell to 60 percent in 2002. Whether this is the beginning of a trend or a symptom of increasingly short supplies and high prices is unknown. If supplies are short, packers may not be able to source all the lamb they want through negotiated contracts (and thus most likely carcass-basis purchases) and must search for lamb in auctions. However, this explanation doesn?t hold because the portion of purchases through auctions has also declined. The portion of sheep and lamb bought in public markets (auctions) continued to shrink from about 18.5 percent in 1990, to 10.9 percent in 2001, to 10.1 percent in 2002. As expected, the share of purchases though non-public markets rose to about 90 percent of all purchases in 2002.
Another explanation is that the value of live lamb exceeded the value of lamb computed from carcass-based formulas. Average prices in 2002 exceeded averages in 2001. Unfortunately, little is known about the details of the different formulas used to price lamb and the proportion of each method used. In the cattle industry, producers are more apt to sell on a live basis when prices are high because they don?t have to worry about quality (yield grades or quality grades) or possible penalties for condemned cattle. They also may prefer the immediacy of payment when prices are high.
Hopefully, the portion of carcass-based purchases is not a declining trend. Live purchases do not value lamb according to its quality. Live purchases also do not allow for information regarding quality of meat to be transmitted back to the producer and therefore challenges a marketing system that aims to be responsive to consumer needs.
October Wool Market HoldsOctober?s wool market remained strong (some called it ?resilient?), despite the relatively weak U.S. dollar in 2004 and the corresponding strength of the Australian and New Zealand dollars. The robustness of the market may also reflect the strength of China?s market, as well as strong demand for carpets and interior textiles.
New Zealand is the leading producer of carpet wool fiber and India is the leading exporter to wool floorcoverings with 28 percent of the market share (Woolmark 10/29/04). The United States, United Kingdom and Asian markets led the demand, followed by markets in China, Europe and the Middle East. The United States? imports of wool floorcoverings have increased annually since 1997.
Demand for wool from China continues to support the wool market. Higher-valued wool (or part wool) apparel led Chinese export growth. Australian raw and semi-processed wool exports to China increased 71 percent in August compared to the same time last year. China's retail sales grew 13 percent between January and September (Woolmark 10/29/04).
Australian exports between January and October were up by about 40 percent. Elders Wool Marketing Manager Maurie McNeil said there were several reasons for the rise: Increases in Chinese retail sales, the replenishment of very low stock levels in China and the preparation of the removal of United States and European Union textile quotas in January 2005 (Australian Broadcasting Corp. 10/18/2004).
The margin between U.S. and Australian wool continued to narrow in 2004 -- reflecting perhaps domestic and international competition for U.S. wool. In 2000, Grade 64s wools were 32.5 percent less than Australian wools, and Grade 56s were 48.6 percent less (ASI 10/29/04). However, by July 2004, 64s were only 4 percent less than similar Australian wools, and 56s were only 18.5 percent less.
In the United States the wool market remained seasonally slow during October. Grade 70s wool lost 10 cents in October at $2.40/lb. Grade 58s lost 12 cents/lb. at $1.63/lb. in October, while other grades lost around 4 cents/lb. Warehouse trading reported that 20-24 micron wool fell 15 cents/lbs. (clean) from mid- to late-October. Micron 28-33 fared better, increasing 20 cents/lb.
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