Markets -- Inventory Up? Ewe Bet!
March 31, 2005
March/April 2005 -- The recent report that U.S. sheep and lamb inventory is up, coupled with a favorable outlook for demand over the next five years, is good news for the industry. Typically, increased supply tends to soften prices. However, lamb prices are likely to remain high for some time. Even as domestic lamb production begins to increase (perhaps in 2006) robust retail demand may keep prices steady.
Between January 2003 and January 2004, total sheep and lamb inventory increased 0.49 percent -- from 6.11 million head to 6.14 million head. The rise in inventory can be contributed to a nearly 10 percent year-to-year increase in replacement lambs. The number of rams, one-year-old and older increased 1 percent, but the number of ewes fell 1 percent. Overall, the breeding inventory increased 0.76 percent year-to-year due in part to the Ewe-Lamb Replacement and Retention Payment Program. Due to the increase in breeding flock, the actual numbers of market sheep and lambs fell year-to-year by 0.25 percent.
Whether this inventory gain is the beginning of a long-term trend is unknown, but the market looks favorable for industry expansion. After years of decline, the sheep and lamb inventory expanded by an average 3 percent per year between 1987 and 1990. However, the inventory increases didn't last as there were severe declines from 1993 through 1996, followed by 1-percent to 2-percent changes until 2004. Lower producer prices (as low as $45/cwt.) may have been a contributing factor to the subsequent inventory declines along with the elimination of the National Wool Act in 1993 and temporary loss of preventative predator control on federal lands in 1993 and 1994. Producer prices in recent years have held steady and strong, and there is no one factor that leads me to believe producer prices will soften dramatically in the near future. Demand and imports are expected to stay strong.
The inventory expansion in the late 1980s coincided with a short-term increase in the number of sheep and lamb operations by about 1 percent. It will be interesting to see whether the current inventory expansion is because current operations are expanding their flocks, whether the current high prices and federal programs have enticed people to enter or re-enter the industry or both. In 2004, there were 67,160 operations, 69,200 operations in 2000, and 105,640 operations in 1990.
Slaughter-Lamb Prices Maintain Strength
In January, direct feeder-lamb prices increased year-to-year by 13 percent. Live slaughter-lamb prices in January of this year were $107.69/cwt. compared to $98.68/cwt. last January. Live prices rose in January from $99.75/cwt. in December. Slaughter-lamb prices purchased on a formula also rose.
In January, formula slaughter-lamb purchases by carcass weight rose from December levels. For example, 65 to 75 lb. carcasses rose from $184.13/cwt. to $192.62/cwt. between December and January, and higher than $173.99/cwt. prices seen in January 2004. Similarly, 75 to 85 lb. carcasses rose from $182.55/cwt. to $189.41/cwt. between December and January, higher than $173.35/cwt. prices seen in January 2004.
This spring feeder- and slaughter-lamb prices are likely to increase seasonally. Price strength is due to continued tight supplies as well as because producers are holding back ewe lambs. It is anticipated that slaughter-lamb prices will remain in the $90s/cwt., but a modest drop is possible after the Easter holiday.
Lower corn prices may continue to reduce feeding risk. Corn farm prices averaged $2.13/bu in September through November, and are estimated at $1.80/bu to $2.10/bu for the entire market year (Sept. through Aug.) (USDA/ERS, 1/14/05). By comparison, corn prices averaged $2.42/bu in the 2003/2004 marketing year. An increased corn supply eases prices. The 2004/2005 corn supply is estimated at 12,780 million bushels, up from 11,190 million bushels last year (USDA/ERS 1/14/05).
Year-to-Year Production Down
Year-to-year production fell 6 percent from 14 million lbs. in January 2004 to 13 million lbs. in January 2005. The actual number of head slaughtered between these periods dropped 7 percent. Dressed weights also fell year-to-year, from 72 lbs. to 71 lbs.. Between 2003 and 2004, lamb and mutton production fell 3.3 percent. With the recent news of an inventory expansion, the industry will likely see lamb production increase by next year. Although lamb production was down, year-to-year mutton production was up. In 2004, 10.29 million lbs. of mutton were produced, up from 9.69 million lbs. in 2003. Exports to Mexico were down dramatically.
Yield Grades 1 & 2 Drop in 2004
The portion of lamb grading 1 and 2 dropped in 2004 compared to recent years. Yield grades 1 and 2 averaged 36 percent of kill during the fourth-quarter 2004, compared to an average 48 percent during the fourth quarter over 1993-2003. Yield grades 1 and 2 made up 38 percent in October, 36 percent in November and 34 percent in December. Yield grade 3 comprised 49 percent of kill during the fourth-quarter 2004, compared to an average 43 percent during the fourth quarter over 1993-2003. Yield grade 3 made up 49 percent in October, 48 percent in November and 50 percent in December. Yield grades 4 and 5 comprised 15 percent of kill during the fourth-quarter 2004, compared to an average 9 percent during the fourth quarter over 1993-2003. Yield grades 4 and 5 made up 13 percent in October, 16 percent in November and 16 percent in December.
Domestic Wholesale Prices Up
In general, wholesale lamb prices have been trending upward for the past three years and the strengthening continues. The gross carcass value was $240.45/cwt. in December and rose to $244.84/cwt. in January, compared to $208.05/cwt. in January 2004. The stronger gross carcass value may be a result of strengthening rack and shoulder prices.
The rack steadily declined in price in 2003, only to rebound in 2004. In March 2003, the rack hit a high of $7/lb. It was thought that the subsequent price softening was because the market didn't support a $7/lb. rack. However, the recent price rebounds indicate that perhaps lamb demand is stronger than first thought. The rack may yet hit $7/lb. again this spring. The leg price lost some momentum in January. In late 2004, the leg was most likely supporting the weaker rack. Thus, the leg gained while the rack softened. The leg didn't have to carry the rack as the rack gained value in early 2005 so the leg softened.
The medium rack made an important gain: from $562.17/cwt. in December to $618.07/cwt. in January. January's price was 33 percent higher than the average $424.16/cwt. last January. The leg, trotter-off, fell from $264.97/cwt. in December to $261.20/cwt. in January, but still above $226.36/cwt. in January 2004. Similarly, loins fell from $395.02/cwt. to $381.25/cwt., but above $378.90/cwt. average in January 2004. Shoulders, square-cut, rose from $155.02/cwt. to $158.72/cwt., up from $141.55/cwt. in January 2004. In the next few months, rack and leg prices are expected to strengthen toward the Easter holiday. Loin prices will likely increase toward the summer grilling season.
Import Wholesale Prices Released
The U. S. Department of Agriculture (USDA) recently released prices of imported wholesale cuts from Australia and New Zealand. In the first five weeks in which prices were published (Jan. 10, 2005 to Feb. 7, 2005) 51 percent of imports were fresh cuts and 49 percent were frozen. An average of 1.5 million lbs. was imported each week for a total of 7.5 million pounds over five weeks. By comparison, the United States produced an average 3.35 million lbs./week during January.
The definition of import cuts doesn't exactly match the reporting of domestic cuts, but comparisons can be made. A comparison of cuts revealed that imported cuts are relatively cheaper than domestic wholesale prices. It is thought that imported lamb is underselling domestic lamb by about 35 percent. The weak U.S. dollar likely had an impact on narrowing this margin. Imported lamb may have been underselling domestic lamb by as much as 50 percent before the U.S. dollar weakened (ASI 2/2005).
For example, over the five-week period the imported rack was $882.93/cwt. compared to $1,150.75/cwt. for the U.S. rack; loins were $468.49/cwt. compared to $652.34/cwt. for U.S. loins; the leg was $245.21/cwt. compared to $381.28/cwt. for a U.S. leg; and the shoulder was $140.83/cwt. compared to the U.S. shoulder at $161.27/cwt. Overall, the price spread was wider for the higher value cuts. Keep in mind, however, that these findings are for only five weeks and not indicative of long-term trends.
The finding that imported wholesale cuts are cheaper than domestic cuts contradicts a recent trend at the retail level where imported lamb is reported to be more expensive than domestic lamb. There appears to be a good mix of imported product, which may help explain this contradiction. It is thought that some of the higher-value, imported cuts are sold at retail, while some of the lower-value cuts may be sold into food service or even pet food industries.
On average, between January and November 2004, imported retail lamb was more expensive than domestic lamb -- $5.05/lb. for domestic lamb and $5.22/lb. for imported product. However, since 2001, domestic lamb has most often been more expensive than imported lamb. The average feature-weighted price between 2001 and 2003 was $4.47/lb. for domestic lamb compared to $4.25/lb. for imported lamb.
Most of the imported product purchased thus far entered on a negotiated, rather than forward-contract, basis. This means that most of the product is purchased and delivered within 21 days. This was a surprise to me. I expected that more of the product would be purchased at least two to three months in advance to secure supplies for the upcoming Easter holiday. One explanation is that domestic suppliers may have already secured supplies for Easter through domestic contracts. Another explanation is that domestic suppliers were hesitant to import lamb given the current weak U.S. dollar. They may be postponing purchases in hopes that the dollar gains strength in coming weeks.
Imported Retail Price Softened
Between November and December 2004, the domestic retail lamb price jumped from $4.95/lb. to $5/lb. whereas imported lamb softened, from $5.39/lb. to $5.25/lb. The portion of both domestic and imported retail lamb sold under some price-featuring activity doubled between October and November by about 20 percent.
Most of the domestic retail cuts lost value between November and December, but the shoulder and roast gained. Lamb chops fell from $6.43/lb. to $6.21/lb., loins fell from $9.03/lb. to $7.02/lb., leg of lamb dropped from $4.52/lb. to $3.75/lb., shoulder rose from $4.08/lb. to $4.18/lb., and lamb roasts rose from $8.11/lb. to $8.70/lb.
Year-to-Year Imports Rise
Between January and November 2004, lamb imports totaled 130.1 million lbs., up from 122.3 million lbs. during the same period in 2003. Year-to-year mutton imports were also up over the same period, from 26.8 million lbs. in 2003 to 35.6 million lbs. in 2004. Imports slowed toward the end of 2004 compared to 2003, which may be an indicator that the exchange rate was having an affect on imports -- making it harder for imports to compete domestically.
The prospects for continued strong imports are good. Lamb, in particular, has been positioned throughout the world as a premium red meat and we're commanding strong prices driven by food service and retail (New Zealand Herald 2/7/2005).
Imports continue to increase its share of domestic lamb and mutton consumption. It is possible that as U.S. production expands and demand also increases, that the United States will regain some of this market share. The increasing share of imports reinforces the importance of COOL (country-of-origin-labeling) as well as the promotional efforts of the American Lamb Board.
In January through November 2004, lamb and mutton imports averaged 52 percent of total availability (domestic production and imports), up from 46 percent during the same period in 2003. Over the same period, lamb imports averaged 47 percent of lamb availability, up from 42 percent during the same period in 2003. In January through November 2004, mutton imports averaged 77 percent of mutton availability, up from 73 percent during the same period in 2003.
Marketing System Helps Maintain Quality
As competition from imported lamb increases, it is critical to maintain the high quality of American lamb. Sheep and lamb purchases on a formula basis and live from auctions, remain the dominant means of marketing by producers. A formula sale is where the price is based on a formula and established after the sale. The formula may be tied to the quality of the animal, as well as to a live price in some specified market. Formula pricing can reward producers for quality lamb, whereas live sales are based on weight. Each marketing option accounted for about 40 percent of slaughter since August 2001. Negotiated sales (i.e., the seller and buyer agree on a price) remained important at about 12 percent. The percentage of slaughter lambs sold on a forward contract (i.e., seller and buyer agree on price but delivery is more than 21 days out) dropped to zero in mid-2003 and 2004.
Live sales remain important most likely because they enable packers to mitigate fluctuations and interruptions in slaughtering that may increase their costs. Over time, the portion of formula purchases appears to mirror live purchases which indicates that the two complement each other.
Live Exports Plummet
A sharp reduction in sheep exports is indicative of industry expansion because live exports are dominated by slaughter-ewe exports. Live-sheep exports to Mexico totaled 79,517 head in 2004, down from 142,806 head in 2003. While live exports fell, lamb and mutton exports increased year-to-year. Lamb and mutton exports to Mexico totaled 4.38 million lbs. between January and November 2003, and up to 5.10 million lbs. during the same period in 2004. Lamb and mutton exports totaled $3.56 million in 2003 and $3.68 million in 2004.
Pelt Prices Gain in 2005
After holding strong and steady in 2003 and the first-half of 2004, pelt prices softened toward the end of 2004. However, in January 2005, prices strengthened somewhat, but not to levels seen in early 2004. In January, fall clips were $11 compared to $13.25 in January 2004. No. 1 pelts were $10 in January compared to $11.50 a year earlier and No. 2 clips were $8.75 compared to $10.50.
In general, pelt prices are expected to strengthen in 2005. However, trade was slow into mid-February with light to moderate demand and offerings (USDA/AMS, 2/11/05). Recent news from Turkey warrants attention. In early February, it was reported that Turkey had ample supplies and thus was not in the market to buy U.S. pelts. This is a concern because most of our pelts are shipped to Turkey: 97 percent in 2003 and 98 percent in 2004.
Since the late 1990s, the United States has added value to its pelt exports by increasing the share of exported pelts without wool. Since 1999, the export of sheep and lamb skins, pickled, without wool, has increased from 315,000 pieces to 3.3 million pieces in 2004. As expected, the portion of sheep and lamb skins with wool on dropped considerably since 1999.
Will the U.S. Dollar Strengthen in 2005?
It is anticipated that the U.S. dollar will strengthen against currencies of its major trading partners in 2005. To date, the U.S. dollar has remained relatively weak because of concerns about its deficit. The Australian National Institute of Financial Studies predicted that the Australian dollar would fall below U.S. 60 cents (Australian Broadcasting Corp. 2/8/2005).
In mid-2004, the U.S. dollar began to strengthen, reaching about 0.69 USD/AUD, but that trend quickly reversed and the U.S. dollar again weakened against the Australian and New Zealand dollars. In the first six weeks of 2005, the USD/AUD hovered at about 0.76 and 0.77 while the USD/NZD rate was at 0.70 and 0.71. A stronger U.S. dollar will make Australian and New Zealand lamb relatively more competitive on the U.S. market and wool relatively cheaper on the world market. The biggest challenge for the meat and wool trade is the exchange rate against the U.S. dollar. While the dollar is over 70USc, it is hurting foreign exports and farm returns (New Zealand Herald 2/7/2005).
Exchange Rates Favor U.S. Wool Market
In general, the Australian and New Zealand markets are relatively expensive for wool buyers because of the strength of these currencies against the relatively weak U.S. dollar. The Chinese, for example, may be wary about buying a lot of wool from New Zealand and Australia - relatively expensive markets compared to the United States. Reportedly, the Chinese have relatively low stocks (Meat & Wool New Zealand 1/2005). If so, their interest in U.S. wool may increase this season. The United States may have an advantage if the U.S. dollar remains weak throughout the wool season.
The Chinese wool market remains strong for both processing and consumption of wool. Its wool industry is fueled in part by its strong domestic demand as well as robust demand in its key export markets for more formal apparel. China is the world's largest retail market for wool apparel followed by Japan and the United States. China is also a major consumer of raw wool and tops. In 2003, China processed at spinning 33 percent of the world's apparel wool (Woolmark 2/11/05). In 2004, China's imports of raw and semi-processed wool increased by 28 percent year-to-year (Woolmark 2/11/05).
In 2004, Australia's production rebounded since the low levels that were seen during the drought in 2003 and prices fell compared to 2003, so China stepped up its Australian purchases. Despite the strong Australian dollar, Chinese imports of Australian wool increased by 68 percent between 2003 and 2004 (Woolmark 2/11/05).
The price forecast for wool in 2005 is very uncertain. The price of U.S. wool sold in 2004 increased 9.6 percent year-to-year. The average grease price paid for wool sold in 2004 was $0.80 per lb., up from $0.73 per lb. in 2003. It is reported that New Zealand wool prices will average $4.46/kg ($2.03/lb.) over the 2004/2005 season - the lowest level since 1999/2000 (Meat and Wool New Zealand 1/2005). The strong New Zealand dollar against the U.S. dollar is a contributing factor.
Australian wool prices are also likely to soften, although its wool may be marginally less price sensitive. In general, the Australian clip is finer than New Zealand wool. Roughly 90 to 95 percent of Australian wool is geared for apparel rather than carpets and rugs (Woolmark 2/11/05). Australian wool prices may soften because production is up and the U.S. dollar remains weak against the stronger Australian dollar. Wool production increased 14 percent year-to-year over the first half of the Australian season (July 2004 to January 2005) (Woolmark 2/11/05). Continued concern over the U.S. trade deficit pushed the Australian dollar higher in mid-February to 0.78 USD/AUD.
The USDA, Agricultural Marketing Service (AMS), made an important change in its reporting of wool prices. Rather than reporting wool on a grease basis, wool prices will now be reported on a weighted-average clean basis by micron, which is a more internationally accepted type of reporting. In addition, AMS is now reporting prices by regions. The regions are: Territory, Fleece States (Midwest and East), Texas and New Mexico. This type of reporting, in an easy-to-read table format, provides the producer more complete information on true wool values. It also encourages more companies and growers to share information as individual wool sales are combined to makeup the weighted average price (ASI 2/4/05). To view the new report, visit www.ams.usda.gov/ mnreports/GL_LS850.txt
Readily accessible price information by micron on a clean basis may facilitate sales to international buyers. Now, U.S. producers can readily compare their prices to those on international markets, and it may also help them become more competitive.
Although prices in the United States remain on a per lb. basis, having wool on a clean basis facilitates the conversion to kilograms and allows for easier price comparisons to be made with that of Australia, New Zealand and Uruguay.
During the first six weeks of 2005, U.S. prices of 19 to 21 micron were roughly 12 to 40 cent/lb. higher in Texas and New Mexico than in the Territory States and Fleece States. Prices of 19 to 21 micron wool ranged from an average $2.65/lb. to $2.37/lb., respectively, in Texas and New Mexico during the first six weeks of 2005.
As expected, there were only sales of the finest wool in Texas and New Mexico over this period. Wool prices for 28 to 34 micron ranged from $1.30/lb. down to $1/lb. in the Fleece States, respectively, and from $1.13/lb. down to $1.07/lb. in the Territory States.
By comparison, wool prices in Australia in mid-February were U.S. $7.3/kg clean ($3.31/lb.) for 19 micron, $6/kg ($2.72/lb.) for 21 micron, $5.5/kg ($2.49/lb.) for 23 micron, and $4.60/kg ($2.08/lb.) for 25 micron. On Feb. 11, 2005, the Australian Eastern Market Indicator (EMI) was U.S.$5.75/kg clean or U.S.$2.61/lb.
The recent inventory gain in the sheep and lamb industry will increase the production and value of wool in the United States if current price levels hold. Since the early 1980s, wool prices have been volatile, but have generally trended downward. However, prices have significantly increased since 2000. Average wool prices per lb. were 33 U.S. cents/lb. in 2000 and rose to an average 80 U.S. cents/lb. in 2004.
Editor's Note: Julie is open to comments and questions and can be reached by e-mail at email@example.com or by phone: 303-619-9975.