by Dr. Julie Stepanek Shiflett
January 2005 -- The competitiveness of U.S. lamb and wool, relative to Australian and New Zealand lamb and wool, is partly a function of exchange rates. The weakening U.S. dollar can help boost exports, such as those of wool, by making them more competitive on world markets. However, it also can mean that imported products, such as those of lamb, become more expensive to U.S. consumers. For example, buyers of Australian lamb and wool, paying in U.S. dollars, had to pay an average US$0.73 for every Australian dollar in 2004 rather than an average US$0.64 in 2003.
The weaker U.S. dollar relative to the Australian dollar means demand for Australian goods may be dampened (therefore lowering Australian prices) and the higher prices in U.S. dollars may be passed onto consumers. It also means that if the U.S. dollar stays weak, it may help U.S. lamb to regain market share because imported lamb will be relatively more expensive than domestic product. Similarly for wool.
Beginning in early October, the U.S. dollar began to slip against currencies of its major trading partners. The USD/AUD averaged 0.74 USD/AUD in October and increased to 0.77 USD/AUD in November. On Nov. 25, the exchange rate hit 0.79 USD/AUD, and it is anticipated that the Australian dollar will hit at least 80 cents U.S. by the end of December.
The U.S. dollar has hit this level in the past, but this time there are real fears that the U.S. dollar will weaken further before rebounding. There appears to be a consensus that the U.S. dollar will continue to weaken, but what is unknown is whether the slide will be smooth -- or sharply downward. The weakened U.S. dollar is precipitated by fears that the U.S. federal and trade deficits are unsustainable. The perception that the U.S. dollar is losing value could potentially lead to a massive sell-off of the dollar, which would make the dollar weaken further.
The correlation between Australian lamb import volumes and the U.S./Australian exchange rate has been ?0.60 since 1991. This is what is expected: Import volumes will fall as the U.S. dollar gets weaker, because imports will become more expensive. However, if the correlation is measured in more recent years, since 1999, for example, the correlation coefficient becomes small, but positive. That is, the weakened exchange rate did not appear to slow imports in recent years.
Although import volumes haven?t slowed, it is likely that higher import costs are being passed onto U.S. consumers and that they are buying lamb at higher prices. Domestic lamb is typically more expensive than imported product, but between January and September 2004, some imported lamb was an average 12 cents/lbs. higher than domestic lamb.
The weakened U.S. dollar, increased imports, and higher retail prices reinforce the likelihood that lamb demand is expanding. Since 2001 there has been a positive correlation of 0.73 between Australian and New Zealand retail prices of lamb and the U.S./Australian exchange rate. As the U.S. dollar weakened (it takes more U.S. dollars to buy one Australian dollar), the price of imported retail lamb increased.
Given relatively strong demand for lamb and relatively high prices, it is assumed that increased domestic production of lamb wouldn?t necessarily mean lower prices. In November, weekly slaughter rates dropped from October levels, but because live weights increased on average by one pound, production was maintained at about 3.6 million lbs. a week. Slaughter rates were 54,381 head/week in October and fell to an average 51,508 head/week in November. In the nine weeks of October and November, production totaled 32.2 million lbs., down from 34.5 million lbs. in the corresponding weeks of 2003.
Slaughter-lamb prices inched up seasonally in November. As lambs put on weight price premiums of up to $10/cwt. were offered in late November for lighter lambs. By mid-November, live lamb prices in San Angelo for 90- to 125-lb. lambs ranged between $91/cwt. to $105/cwt.
Lighter-weight lambs priced on formulas also gained in November, while price trends of heavier lambs were mixed. The formula price for 55- to 65-lb. lambs rose from an average $174.11/cwt. in October to $175.51/cwt. in November. The formula price for 65- to 75-lb. lambs fell from $176.08/cwt. to $175.26/cwt., while the price of 75- to 85-lb. lambs increased slightly from $176.49/cwt to $176.91/cwt.
Carcass values gained in November. The gross carcass value rose from $221.05/cwt. in October to $226.52/cwt. in November, reflecting heightened seasonal demand. Year-to-year November prices also were up, from $209.44/cwt. Rack, loins and shoulder prices were down, while leg prices, as expected, gained and rose seasonally toward the end-of-year holidays. Loin prices fell seasonally.
The eight-rib rack, medium, fell from $475.36/cwt. in October to $465.28/cwt. in November, compared to $445.01/cwt. last November. Shoulder, square cut, was $166.70/cwt. in October and $163.48/cwt. in November, compared to $145.75/cwt. last November. The leg, trotter-off, was $209.33/cwt. in October, and rose to $235.79/cwt. in November. The leg gained year-to-year, from $210.45/cwt. last November. The loin, trimmed 4x4, was $436.64/cwt. in October, but fell to $428.44/cwt. in November, up from $412.66/cwt. last November.
Retail lamb prices continued their upward trend into September. The average feature-weighted lamb price rose from $5.37/lb. in August to $5.53/lb. in September. Domestic retail lamb prices gained, from $5.28/lb. to $5.54/lb., while imported prices fell during this period, from $5.61/lb. to $5.49/lb. The lower imported lamb price may be attributed to the increase from 7 to 11 percent in volume sold under price featuring. By comparison, the percent of domestic lamb that sold under featuring fell from 10 percent in August to 6 percent in September.
Between January and September, lamb and mutton imports from Australia and New Zealand totaled 44.5 million tons, up from 39.7 million tons during the same period in 2003. There is a lag in the reporting of import levels and retail prices, so it could not be determined whether the weakened U.S. dollar in October and November put upward pressure on retail prices and/or slowed imports. Because the holiday season was approaching, importers may have been willing to absorb the extra expense of imports rather than pass the cost onto consumers.
As long as demand for lamb remains strong in the United States, the U.S. will continue to attract supplies, even diverting lambs from other markets. Despite relatively tight supplies, Australian lamb imports to the United States continue to grow. Australia's sheep flock has been almost halved in the past 15 years. An Australian Bureau of Agricultural and Resource Economics (ABARE) report stated that the sheep flock is now estimated at 95 million, down from a 1990 peak of 173 million (Australian Broadcasting Corp. 11/23/2004). About half of Australia?s flock is now breeding sheep.
Despite losses due to a record cold and wet spring, New Zealand lamb numbers increased year-to-year. New Zealand?s export lamb availability for 2004/05 is estimated to increase by 9.3 percent to 25.1 million head, above 2003/04 levels and comparable to 2002/03 numbers (Meat & Livestock Australia 11/23/04). The birth rate rose to 123 lambs born per 100 ewes from 116 per 100 (Bloomberg News 11/18/04). The increase was because ewes were in better condition at mating and a higher percentage of lambs were from younger sheep (Meat & Wool, New Zealand's Economic Service).
The strong Australian and New Zealand dollar works against exports, but strong world demand for lamb and mutton helps to offset the exchange-rate effect. Strong Australian and New Zealand currencies make lamb, mutton, and wool exports relatively more expensive and therefore, less competitive on world markets. However, if demand is strong, higher prices of sheep meat will be passed onto consumers in importing countries such as the United States.
Weakened U.S. Dollar Affects Australian Wool PricesAs the Australian dollar strengthened and the U.S. dollar weakened, Australian wool prices fell in Australian dollars, but increased in U.S. dollars. The drop in Australian wool prices in Australian dollars is probably due to reduced demand for Australian wool by most of its key buyers that trade in U.S. dollars. The stronger Australian dollar put downward pressure on all micron categories except those for fine wool.
If the Australian and New Zealand dollars remain relatively strong against the U.S. dollar, then this is to the advantage of U.S. producers. U.S. wool will be more price competitive against Australian and New Zealand wool, and may entice more buyers into the U.S. market.
In November, imported Australian wool into the United States increased by between 1 and 6 percent in U.S. dollar terms, depending upon grade. Micron ranges 22-24 (roughly Grades 60s and 62s) gained the most. For example, micron 22 rose from $2.57/lbs., clean, in October to $2.70/lbs. in November.
In November, the U.S. wool markets remained seasonally quiet. Demand remained light, as did supplies. Grade 58s through 60s lost value between October and November as the season continued to slow down. For example, Grade 70s wool averaged $2.48/lb. in October and $2.40/lb. in November, lower than last November?s $2.45/lb. Some shearing activity occurred in November. Shearing began on alfalfa fields in the Imperial Valley of California and fall shearing in Idaho continued into November.
Editor?s Note: Julie is open to comments and questions and can be reached by e-mail at email@example.com by phone: 303-619-9975.