by Julie Stepanek Shiflett, Ph.D.
June 2005 -- How long will lamb prices stay high?
Between 2003 and 2004, gross income (cash receipts) from sheep and lamb production increased 3 percent (CattleNetwork.com, 4/29/05). Receipts were up, while the volume marketed decreased 6 percent to 572 million lbs.
During good times, it is easy to become complacent. Even if gross income is rising, it says nothing of a producer?s return. Costs could be rising as well and, if so, profits may be constant or even falling. If feeder- and slaughter-lamb prices begin to soften, then costs of production will become increasingly important in defining profits.
A 1999 ewe and lamb budget with early lambing revealed that total returns, including total costs (e.g., labor, management, equipment ? costs incurred regardless of number of sheep), were all negative when slaughter-lamb prices ranged from $60/cwt. to $80/cwt. (ohioline.osu.edu). If only variable costs were counted (e.g., feed, shearing, medicine ? costs that vary with the number of sheep and lamb), returns were positive.
However, if the slaughter-lamb price would have fallen by $10/cwt. and only the variable costs were counted, then total take-home profits would have fallen 27 percent (holding all other costs fixed). If slaughter-lamb prices would have fallen an additional $10/cwt., profits would have also fallen an additional 37 percent.
Can costs adjust to keep profits stable? It is possible, but probably not as easy as receiving higher sale prices for lambs.
Key costs involved in sheep production include feed, labor and costs associated with predator control. Feed costs can account for up to 75 percent of total variable costs and 36 percent of total costs, including fixed costs.
According to Meat and Livestock Australia (2/2005), the key to profitable lamb production is to reduce the cost of production by increasing production.
One of the co-authors reported, ?By focusing on more production pastures, improving utilization of pastures, choosing the right genetics and meeting target market specifications more often, producers would be able to develop resilience to any market changes.?
Some, in the industry, feel the key to increasing profitability is to only increase lambing percentages.
Live slaughter-lamb market prices are high now, but at some point, prices may fall. As the supply of lamb increases in the United States from both domestic production and imports, prices may soften. However, an increase in demand can offset production increases, which means, prices won?t decline as much as supply increases. Even if sale prices soften for lamb, the quantity of lamb sold by any one producer may increase if he or she is restocking, thus total returns may remain constant.
Lamb Prices
Between March and April, the San Angelo feeder-lamb price rose about 3 percent, up to $137.35/cwt. The Fort Collins average price dropped about 2 percent to $130.50/cwt. Feeder-lamb prices in April were about 14-percent higher year-to-year and are likely to remain strong through the summer.
A lower corn price may continue to reduce feeding risk. The 2004/2005 forecasted corn price was revised upward to $1.95/bu. to $2.15/bu. (USDA). The ending stock of corn is likely to increase this year, putting a downward pressure on price. However, the price forecast was revised because farmers used forward contracts to lock in a higher price. The price of corn is still relatively low: $1.97/bu. in 2001/2002, $2.32/bu. in 2002/2003, $2.42/bu. in 2003/2004 and $1.95/bu. to $2.15/bu. in 2004/2005.
In April, the live San Angelo slaughter-lamb price fell only 0.77 percent to $100.10/cwt. This is 9-percent lower than the annual high in February of $109.69/cwt. The San Angelo live slaughter-lamb price in April was 8-percent higher than the average $92.90/cwt., which was seen last April. Slaughter-lamb prices may strengthen somewhat in May and June, before weakening in July and August.
Lamb and mutton production increased from 16.4 million lbs. to 16.8 million lbs. between March and April (primarily because April had five weeks compared to the four in March). Live weights fell marginally from 142.8 lbs. to 142.6 lbs.
Domestic-wholesale values continued to strengthen year-to-year, but softened between March and April. The gross-carcass value dropped nearly 4 percent in April to $259.93/cwt., up 14 percent year-to-year from $227.75/cwt. All major cuts, except loins, rose in price year-to-year. In April, leg (trotter off) prices fell 9 percent to $295.15/cwt., up 9 percent year-to-year from $271.39/cwt. The medium, eight-rib rack price was $635.49/cwt. in April, down 1 percent from March, up 14 percent from last April?s average of $437.07/cwt. The square-cut shoulder price rose 1 percent in April to $174.01/cwt., up 14 percent year-to-year. The trimmed, 4x4-loin price averaged 3-percent less in April at $371.06/cwt., 5-percent lower year-to-year. According to one wholesaler, the loins are the only cut with room to increase, without hurting sales.
International Market
There was a surprise slowdown in imports in January and February 2005. The weak U.S. dollar may have caught up with importers. In addition, alternative export markets for Australian and New Zealand lamb may have become relatively more attractive. For example, Australian lamb is being exported to the Middle East, Africa and Japan. In addition, the domestic Australian market is also a relatively high-demand market, where lamb prices are currently high.
In general, the relationship between the level of imports and the U.S. dollar has been positive since 2000 (a negative relationship was expected). A simple correlation reveals 0.23 between the U.S./Australian exchange rate and Australian imports, and 0.4 between the U.S./New Zealand exchange rate and New Zealand imports (with perfect correlation equal to one). This may be a testament to the strength of the consumer market for lamb in the United States. Over shorter periods of time, however, the exchange rate has affected import levels.
January and February lamb and mutton imports were 15.7 million lbs., down year-to-year from 26.3 million lbs. Australian imports were down 28 percent: 13.2 million lbs. in January and February 2004, down to 9.4 million lbs. over the same period in 2005. New Zealand imports were down 51 percent: 13.1 million lbs. in January and February 2004 and 6.3 million lbs. in January and February 2005.
Although imports were down in the first quarter of 2005, it is likely they will increase for the remainder of the year. Australian exports are likely to increase 15 percent in 2005 and by 2010, increase by 50 percent (Meat & Livestock Australia, 2/2005).
The United Nations Food and Agricultural Organization (FAO) recently reported that global lamb and mutton trade are expected to reach 750,000 metric tons, up 4 percent this year. Strong demand in North America and Asia will equal increased supplies in Australia and New Zealand (as a result of higher lamb numbers and increased carcass weights). However, imports into the United States may be limited by a weaker U.S. dollar and a slight recovery in flock numbers (meatnews.com, 4/15/04).
Retail Prices
In January and February, the average feature-weighted retail price was $5.39/lb., up year-to-year from $4.95/lb. The domestic price was $5.04/lb. in December, $5.28/lb. in January and $5.50/lb. in February. A relatively early Easter this year, compared to 2004, may have pushed prices up sooner in the year. Lower imports may have also put pressure on prices.
Domestic-lamb prices strengthened: $5.29/lb. in January and February 2005, up year-to-year from $5.05/lb. The domestic retail-lamb price was $5.07/lb. in December, $5.24/lb. in January and $5.35/lb. in February. Recall that domestic prices may also include imported product that are not labeled.
The imported retail-lamb price strengthened: $5.59/lb. in January and February 2005, up year-to-year from $5.02/lb. The imported price was $4.97/lb. in December, $5.37/lb. in January and $5.81/lb. in February.
Since mid-January, prices for wholesale imported-lamb cuts have been available. It is calculated that import prices are roughly 74 percent of comparable domestic cuts (ASI). Import prices range from 57 percent (fore shank) to 88 percent (loins) of U.S. prices. Imported racks, loins, legs and shoulders go into the U.S. retail, foodservice and even pet food markets.
Wool Market in Limbo
The wool market was slow in April and characterized by a ?wait and see? position prior to the sale in Roswell in early May (USDA/AMS). Demand for U.S. wool was moderate in April, particularly from overseas. Unfortunately, the weak dollar has yet to show a significant benefit in actual purchases from international buyers. Year-to-year demand for wool apparel in China and the United States was strong, but lagging in the important markets of Japan and Germany (Woolmark, 4/15/05).
In the last 10 years, the wool market has been characterized by extreme price volatility. In 1995, international prices were relatively high, than fell by approximately 60 percent in early 2001, rose by about 55 percent in early 2003, but then began to trend downward. In the two years between March 2003 and March 2005, 19-micron Australian wool lost 25 percent of its value, 22 micron lost 42 percent, 26 micron lost 45 percent and 28 micron lost 29 percent (computed from Woolmark, 4/29/05).
The Australian Bureau of Agricultural and Resource Economics reported in March that the likely continued low returns from wool are expected to drive the Australian sheep industry toward greater emphasis on meat production.
The United States is far ahead of Australia in gearing its flock toward meat production. However, wool production still warrants attention.
Mike Corn, at Roswell Wool in New Mexico, stated that if you are producing sheep, produce as good of wool as you can, because you incur the same expense. He added that there is still good demand for 22-micron to 23-micron wool, as long as the staple length is there (4/28/05).
In April, 29-micron wool gained 17 percent to $1.17/lb., while the 30 to 34 micron lost 3 percent to $1.01/lb. in the Fleece States. In general, the finer wool in the Territory States lost ground in April compared to the less fine microns. For example, the 22 micron and 23 micron both lost about 6 percent to land at $1.87/lb. and $1.72/lb., respectively. Wool prices in Texas and New Mexico held relatively firm between March and April. In April, the 19-micron price averaged $2.50/lb., 20 micron averaged $2.36/lb. and 21 micron averaged $2.33/lb.
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.