Markets -- It?s All About Marketing!

February 2005 -- Now is a good time to think about marketing strategies. The Easter holiday, the busiest time for lamb, is just around the corner, and the voting period determining whether to continue the American Lamb Checkoff Program is drawing to an end. The Checkoff Program aims to increase consumer demand, expand market share of American Lamb and ?foster an opportunity for prosperity for all its contributors.? U.S. producers are encouraged to place more resources into lamb production in order to build lasting competitiveness and viability. Although the checkoff is crucial for industry prosperity, it primarily focuses its advertising dollars at the retail level. Marketing efforts at the producer level could also increase producer returns. 

An increasing number of farmers and ranchers have found that directly marketing their product to the consumer can lead to increased returns in comparison to traditional commodity marketing. Between 1950 and 2000, the value added by farmers and ranchers of consumers? food expenditures fell from 22.8 percent to 7.9 percent (University of Arizona, Western Extension Marketing Committee, 2003). Agreeably, a lot of the value added is in the form of further processing to meet consumers? needs for convenience, but there is no reason producers can?t also cater directly to the consumer.

Direct marketing can be a challenge, requiring a unique set of management skills. Preserving the identity of farmers? products and developing a loyal customer base is key to direct sales (University of Arizona, Western Extension Marketing Committee, 2003).

A small sheep producer in Oregon found that if he agreed to also sell lamb from a neighboring producer he could increase the volume and availability of lamb for sale. He sells fresh, dry-aged lamb to local restaurants and provides specific cuts according to each customer?s desire. He shares a refrigerator truck for deliveries with another neighbor, a pastured poultry producer. The greatest concern to the sheep producer is the proximity and livelihood of the slaughterhouse he uses. If the slaughterhouse were to go out of business his costs would substantially increase.

The Rocky Mountain Beef Cooperative faced a somewhat similar concern. The cooperative developed a ?natural? beef product, grown without hormones or feed additives. One challenge it encountered was that the processing cost in small plants was three times that which the largest packers charged. By pooling producers? cattle and increasing slaughter volumes, producers found they could get the local slaughterhouse to reduce slaughter costs.

Collective marketing is not new to the lamb industry. The Mountain States Lamb Cooperative (MSLC), formed in 1999, is an example of how lamb producers organized to market lamb collectively. MSLC allied with B. Rosen & Sons, Inc., a leading lamb supplier with fabricating, distribution, and marketing facilities. A key characteristic of the alliance is value-based pricing, in which producers are rewarded for quality lambs.

The current strong slaughter-lamb prices may not give producers an incentive to seek out alternative marketing options. However, given the increased price of lamb at retail, individual customers as well as grocers and restaurant owners, may be more willing to cut out the middleman and buy lamb directly from producers if the combination of price and product is more desirable.

Producers? plans for expanded flocks and innovative marketing strategies must go hand in hand. By the end of January, the U.S. Department of Agriculture will have released January 1 inventory numbers for the sheep industry. The Livestock Marketing Information Center (LMIC) is anticipating modest flock rebuilding, given strong prices and improved pasture and range conditions. It was predicted that the 2004 breeding inventory increased and that ewe lambs held for replacements increased 3 to 4 percent year-to-year (LMIC).

Increased market lambs in coming years will undoubtedly compete with increased imports. It is difficult to determine, but current import levels may be tempered by the weak U.S. dollar. As the U.S. dollar strengthens, import levels could expand, increasing the necessity of U.S. lamb to be competitive. ?Australian exporters are being warned the dollar could be even stronger in the middle of next year, tipping out as high as U.S. 82 cents,? (Australian Broadcasting Corp. 12/20/04), but will likely weaken again within a year.

The U.S. dollar was quite volatile against the Australian dollar between November and December. After a brief period of strengthening, the U.S. dollar weakened further against the Australian dollar between November and December. The average exchange rate between the United States and Australia was 0.74 USD/AUD in 2004 compared to 0.65 USD/AUD in 2003. The average exchange rate between the United States and New Zealand was 0.66 USD/AUD in 2004 compared to 0.58 USD/AUD in 2003.

The USDA Economic Research Service estimated that lamb and mutton imports would continue to climb in 2005. Lamb imports from January through October totaled 120.80 million lbs., up from 109.90 million lbs. during the same period in 2003. Although the U.S. dollar may get relatively weaker (relative to the currencies of its major trade partners) in 2005 before it gets stronger, the strength of demand for lamb and mutton is such that imports are likely to increase in 2005 to an estimated 199 million pounds (ERS 12/16/04).

Strong U.S. import demand helps to support Australian lamb prices. In December, in Australia, ?meat prices continued to experience boom conditions, with many advisers extrapolating the current price relativities into the long term, which is always a brave thing to do,? (Nyngan Observer Australia 12/22/04). In fact, sheep producers in Australia are being encouraged to put more resources into meat production.

This year may see some production increases or at least a slowdown in the rate of production declines seen in the recent past. Year-to-year production fell 4 percent, from 190.4 million lbs. in 2003 to 183.4 million lbs. in 2004. Production levels primarily fell because slaughter numbers were down. Dressed weights actually increased, from 68.20 lbs. in 2003 to 69.10 lbs. in 2004.

Lamb and mutton production increased seasonally for the holidays, from 13.90 million lbs. in November to 14.60 million lbs. in December. By comparison, 15.20 million lbs. of lamb and mutton were produced in December 2003.

Lamb prices also increased seasonally. Formula prices for lambs weighing between 65 lbs. and 75 lbs. brought an average $175.26/cwt. in November and $184.13/cwt. in December. Lambs weighing between 75 lbs. and 85 lbs. brought $176.91/cwt. and $182.55/cwt. over the same period. San Angelo live slaughter-lamb prices increased seasonally from $95.58/cwt. in November to $99.75/cwt. in December (compared to $96.13/cwt. last December).

As lamb demand increased seasonally in December, so did wholesale values. The gross carcass value increased from $226.52/cwt. in November to $240.45/cwt. in December. The 8-rib medium rack increased from $465.78/cwt. to $562.17/cwt. between November and December. The leg, trotter-off, price increased nearly 30 cents per hundredweight in December. Its price increased from $235.79/cwt. to $264.97/cwt. December?s rack price was 31 percent higher than the December 2003 price. The square-cut shoulder fell in value from $163.48/cwt. to $155.02/cwt. between November and December. The loins, trimmed 4X4, price fell from $428.44/cwt. to $395.02/cwt.

The average retail price of feature-weighted lamb dropped from $5.53/lb. in September to $5.06/lb. in October. The retail price of lamb (domestic and imports) averaged $5.09/lb. between January and October 2004 compared to $4.62/lb. during the same period in 2003. The price of domestic lamb fell from $5.54/lb. in September to $4.95/lb. in October. The price of imported lamb fell from $5.49/lb. in September to $5.39/lb. in October.  The validity of the USDA retail price series is questionable given that only a small fraction of retailers are sampled. However, it does represent price trends. Some industry advocates maintain that the imported price remains below the domestic price at most grocers.

Retail lamb loins, shoulders, and legs gained in value, while roasts and chop prices fell between September and October. Lamb loins jumped from $8.90/lb. to $9.03/lb. between September and October. The shoulder posted modest gains, from $4.05/lb. to $4.08/lb. The lamb leg also gained, from $4.62/lb. to $4.74/lb. Lamb roasts softened during this period, from $8.59/lb. to $8.11/lb. Lamb chops also lost some value, falling from $8.50/lb. to $8.43/lb.

After remaining relatively steady, pelt prices slid downward during the last half of 2004. Fall clips were $13.50 in May and June, but slipped to $11.78 by December. No. 1 pelts also fell, from $11.50 to $10.19 during the same period. However, toward the end of December, there were signs that international demand was picking up with moderate interest at higher price levels.

Weak U.S. Dollar Attracts International Buyers?

As the wool season approaches it will be interesting to see whether the weak U.S. dollar attracts international buyers to the U.S. market. The weak dollar makes U.S. wool more competitive on international markets. In December there was solid demand for short lamb wools for exports.

If 2004 is an indicator of price levels, U.S. prices gained or lost depending upon micron level. Grades 46 to 56 (microns 26.4 to 34.4) actually saw modest year-to-year price gains, but prices fell for the finer wools (microns 26.3 and lower). For example, Grade 70s wool averaged $2.47/lbs. in 2004, down from $2.52/lbs. in 2003. Grade 62s wool averaged $2.17/lbs. in 2004, down from $2.28/lbs. in 2003. By contrast, Grade 50s wool averaged $1.10/lbs. in 2004, up from $1.02/lbs. in 2003.

Eighteen percent more wool was sold during the first half of the Australian season, exceeding the 5 percent decline in price (Woolmark 12/24/04). Woolmark took this as a signal that demand for wool is ?improving.? However, this may not be necessarily true. It may just be an indicator that wool consumers are not very price sensitive.

ABARE, the Australian Government forecaster, predicted that wool prices in the 2004/05 season would be 8.5 percent lower than in the 2003/04 season (Woolmark 12/24/04). Increased offerings coupled with the strong Australian and New Zealand dollars relative to the U.S. dollar could help keep prices soft. The U.S. dollar gained some strength by mid-December due to increased confidence in the U.S. economy, but then lost some value toward the end of December.

Wool prices in 2004 were slightly subdued relative to the highs enjoyed in 2002 and early 2003. Wool producers lamented that 2004 was not one of the better years and that demand for wool is falling. Some observers felt that demand for fine wool, in particular, is actually growing (12/22/04 Nyngan Observer Australia).

China experienced strong growth in 2004 compared to 2003. Between January and October, Chinese imports of greasy and semi-processed wool was higher than the total volume imported in 2003 (Woolmark 12/24/04).

It is likely that China?s demand for wool will grow in coming years. At the beginning of 2005, all textile quotas on imports were removed, giving China the incentive to increase production of wool textiles and apparel. It was predicted that China would take between 50 and 75 percent of the world trade in textiles and apparel once quotas were removed. It was also expected that China would grow to 65 to 75 percent of the United States market (www.fairmarket.com, Accessed 12/21/04). However, due to the potential harm to the U.S. textile interests, the United States is likely to impose alternative trade barriers on imports.

Editor?s Note: Julie is open to comments and questions and can be reached by e-mail at juniper_economists@tds.netor by phone: 303-619-9975.