July 2005 -- Lamb imports from China. Why not?
Newsweek recently ran a cover story, ?China?s Century? (5/9/05). In the last 25 years, China has grown about 9 percent per year. Perhaps more startling is that of Wal-Mart?s 6,000 suppliers, 80 percent are from China. Why not one more account?
China is currently a net importer of lamb; it imports more than it exports. Since 1990, China?s lamb and mutton import volume grew about 12 percent annually. By contrast, its exports grew 71 percent annually.
In the last quarter century, China moved 300 million people out of poverty and quadrupled the average Chinese person?s income (Newsweek, 5/9/05). In general, as incomes rise, so too does the demand for red meat. The value of Australian lamb exports to China for the first quarter of 2005 jumped 31 percent compared to 2004 (Meat & Lamb Australia, 5/20/05). Whether China exports lamb to the United States is a function of the relative profitability between the two markets.
Lamb imports may seem unlikely, but it really depends on how sensitive lamb consumers are to price. Some research has found that lamb is relatively insensitive to price. China?s comparative advantage is usually to undercut its competitors by offering a cheaper product. If lamb consumers are relatively insensitive to price, Chinese lamb may not gain a significant market share.
However, retail data has shown that price discounts do prove to move product. Therefore, consumers will buy more products if the price of lamb is lower. If this is the case, Chinese lamb imports might be successful.
One possible limiting factor affecting lamb imports from China is its ability to provide source verification. Increasingly, companies, McDonald?s and Wal-Mart, want to be able to trace beef back to its farm of origin. Lamb may be next. This move is to ease customer?s concerns about meat safety. McDonald?s, the world?s largest beef buyer, exceeded its 2004 goal of tracing 10 percent of all U.S. purchases (Waldoch, AgJournal, 4/29/05). One option is for China to import carcasses from Australia and New Zealand and then export cuts to the United States.
Regardless of whom the competitor is, some industry proponents are concerned that U.S. lamb is not priced competitively and consumers (e.g., restaurateurs) will buy a cheaper substitute. Production, processing and marketing costs, and margins to respective operators throughout the marketing chain are a significant portion of the retail prices. However, the producer may be most important. If he or she is not receiving a favorable return, there will be no investment in sheep.
The irony is that sheep and lamb producers are primarily price takers, subject to the price offered by lamb feeders. However, they do have control over their costs, and thus their return. One import variable is feed costs. As mentioned last month, feed costs can equal up to 75 percent of total operating costs.
Feed Costs
Eighty-six percent of producers surveyed managed their operations as a farm flock (USDA/APHIS 2002). Other management styles included: fenced range (14.3 percent), feedlot (5.1 percent) and herded/open range (1.6 percent).
Regardless of management practice, 94 percent of operations fed grain to their sheep. The percentages were higher in the East (98 percent) and Central regions (100 percent), but also high in the Pacific (86 percent) and West Central (85 percent) regions. Ninety-three percent of operations fed corn. Oats was the next common grain. Most producers (64 percent) had to purchase grain; it wasn?t produced on their operation.
Hay was also important in sheep production. Ninety-seven percent of producers fed hay to their sheep, of which 53 percent produced their own hay (USDA/APHIS, 4/2003).
Corn, oats and hay prices exhibit strong seasonality, so cost savings may be possible if they are purchased during low-cost months. To save money, the cost of grain or hay plus the cost of storage (if necessary) must be less than if purchased during the higher-priced months.
Corn prices in the United States have been volatile year-to-year. On average, corn prices have increased 1.26-percent annually since 1990, but annual averages don?t capture the large annual price swings. Between 1995 and 1996, the price of corn rose 39 percent, only to drop 27 percent between 1996 and 1997. Between 2000 and 2001, corn rose another 13 percent.
Oat prices also followed historical seasonal trends. Since 1990, oat prices were high during the first-half of the year, peaked around May, fell toward late summer, but then strengthened gradually toward winter.
The price of hay in the United States increased an average of 0.72-percent annually since 1990. However, hay prices have been extremely volatile, with year-to-year swings from a negative 13 percent to an increase of up to 18 percent. Hay exhibited strong price seasonality with higher-priced hay during the summer months and lower during the winter.
Even if a producer has his or her own hay, increasing hay production can have a net effect of lowering the unit cost per ewe because more ewes may be placed out to pasture. It was found in a cattle study that if the edible grass production increased by one ounce per square yard, then the carrying capacity of 1,000 acres could increase by 33 cows, which translates into additional rent of nearly $6,000/year (at $180/cow/year) (Grissom, agJournal 5/6/05).
The price of feed required by sheep in a pasture or range is often valued in Animal Unit Months (AUM). An AUM is the amount of forage an animal requires. It is standardized for the amount of forage required for a 1,000-lb. beef cow in a month. The AUM equivalent for a 120-lb. sheep is about 0.15 AUM. The price of AUMs in the western 17-state region increased nearly 2-percent annually since 1994 (USDA/NASS). Like any commodity, the price of an AUM is driven by demand and available supply. As land becomes scarce due to development or recreational uses, the price of AUMs will be pushed up.
The average AUM between 1995 and 2004 was $11.57/mo., with a minimum of $10.50/mo. and a high of $13.10/mo. (USDA/NASS). Between 2003 and 2004, the average AUM jumped 6.3 percent, from $12.30/mo. to $13.10/mo. This percentage increase year-to-year could affect a producer?s bottom line.
Grazing on public land is often cheaper than on private land. While an AUM is the unit of measure on public lands, private lands also are often leased per acre or per head. Some private-land leases also include some services, such as animal, fence and water management. Public grazing leases don?t include such services.
Lamb Market
The current lamb market remains very high, promulgating solid returns. Although still very strong, feeder- and slaughter-lamb prices softened seasonally in May. Feeder-lamb prices in San Angelo softened 2.2 percent to $134.25/cwt. Although feeder-lamb prices reached new records this year, they are expected to continue to weaken during the summer. In addition to a seasonal weakness, reduced pelt values may pull feeder-lamb prices down. However, feeder-lamb prices are still forecasted to reach 2-percent to 4-percent above 2004 averages (Livestock Market Information Center (LMIC), 5/2005).
San Angelo slaughter-lamb prices fell 3 percent in May to $96.94/cwt. It is expected that slaughter-lamb prices will decline modestly during the remainder of the year, with seasonal lows in the fall (LMIC, 5/2005). Similarly with feeder-lamb prices, the depressed pelt market could affect live prices because the carcass-to-live margin is thought to be tight. The LMIC forecasted that slaughter-lamb prices are likely to increase 3 percent to 4 percent than 2004 averages, but due to increased supplies, prices in 2006 are likely to fall 2 percent to 7 percent.
Sheep and lamb production fell 18 percent between April and May, with 13.7 million lbs. produced in May. By late fall and early winter, the domestic market may see production increases. Another factor that may lead to increased supplies is the increased number of hair breeds of sheep that are geared for the ethnic trade (National Lamb Feeders Association, 4/5/05). In theory, increased supply of hair breeds means more slaughter lambs available for the traditional commercial market.
The lower sheep and lamb slaughter this year is an indicator of producers? retention of mature ewes and ewe lambs for rebuilding flocks. Another sign is the slowdown in cull-ewe exports to Mexico. The pace of exports has declined.
The gross carcass value fell 3 percent from April to May to $251.59/cwt., but remained higher than last May?s average of $220.80/cwt. The leg lost the most value, which pulled the gross carcass value down. The leg, trotter off, lost 10 percent from April to May to land at $266.82/cwt. However, the leg was still higher than a year ago at $242.29/cwt. At $173.21/cwt., the shoulder lost 0.46 percent in May, but remained higher than the $153.19/cwt. observed last May. The average price of the 8-rib rack increased 0.16 percent from April to May to $636.48/cwt., compared to $450.06/cwt. last May. The loins, trimmed 4x4, rose 3 percent in May to $382.36/cwt.; lower than last May?s average of $393.86/cwt.
Retail Prices
In March, retail prices fell 12 percent, volume sold increased 93 percent, and the percent sold under some feature activity increased 86 percent. Recall that there is a lag of two months in the release of retail prices. The average feature-weighted price of retail lamb fell from $5.50/lb. in February to $4.84/lb. in March. As we?ve seen before, it appears that there is a degree of price sensitivity by customers: as prices fall, more lamb is sold. The average price of domestic lamb fell 12 percent in March and the volume sold jumped 109 percent. The price of imported lamb fell 10 percent in March and the volume sold increased 60 percent. The leg fell a sharp 15 percent between February and March and the loins fell 2 percent, but prices of other cuts increased.
Imported Lamb and Mutton
In the first quarter of 2005, imports fell by 22 percent and by 2 percent in value, compared to the first quarter of 2004. Australian imports fell 11 percent and 5 percent by value. New Zealand imports fell 35 percent in volume, but rose 2 percent in value. The weak U.S. dollar helped support the value of imports even though volumes were down.
Unit values from the total import volume and value were calculated and found that on average, during the first quarter of 2004, Australian lamb was $2.75/lb., but increased 6 percent to $2.92/lb. in the first quarter of 2005. New Zealand lamb was $2.59/lb. in 2004 and increased 56 percent in 2005 to $4.04/lb.
Imported mutton also slowed in the first quarter. Mutton imports were 61-percent lower than last year?s level.
Weaker Australian Dollar Gives Market a Lift
The Australian dollar weakened slightly relative to the U.S. dollar in May, which helped boost sales. Reportedly, relatively cheaper Australian wool enticed Chinese buyers into the market. In May, there were three to four times more Chinese buyers in Australia than other buyers. The Chinese Yuan is tied to the U.S. dollar so when the U.S. dollar is weak relative to the Australian dollar, so is the Yuan.
The latest retail data from China revealed that wool products in Chinese department stores recorded double-digit growth in March compared to a year ago (Woolmark, 5/13/05). Increasing consumption in China is reportedly due to rapid growth of its urban middle class, as well as a cut in taxes, subsidies to farmers and improved social security benefits to the urban poor (Woolmark, 5/13/05).
In Australia, wool in the 19.5-micron to 20-micron range saw the greatest price increase (ABC Australia, 9/19/05). In the United States, in general, the best demand for wool in May was for wool less than 23 micron (USDA/AMS, 5/13/05).
Demand for wool was slow in the first half of May in the United States. Important wool sales in May ? Roswell, N.M., and three sales in Texas ? set the month?s tone. In Roswell, trading was moderate. Demand was strongest for 22.5 micron and finer wool and wool styles. However, prices at Roswell averaged 20-cents to 40-cents/lb. lower than last year. By contrast, prices were higher than last year in the Texas sales.
On a bright note, U.S. exports are up. U.S. raw-wool exports through February totaled 802,900 lbs. compared to 1.22 million lbs. last year at this time. Top exports totaled 529,000 lbs. compared to 60,000 lbs. last year. As the American Sheep Industry Association projected, wool-textile exports for the first two-months are up 34.4 percent. Wool yarn, apparel, home-furnishing and floor-covering exports totaled 23.5 million lbs., compared to 17.5 million lbs. last year at this time. The weaker dollar appears to be the major factor assisting wool-textile exports.
In the Fleece States, 29-micron to 34-micron wool fell 10 percent in May. In the Territory States, 19 micron saw the greatest price gain with a 4-percent increase to $2.20/lb. Twenty-micron wool fell 0.1 percent, 21-micron wool gained 1.6 percent; however, most other micron categories fell. For example, 27 micron and 28 micron fell an average of 11 percent to $0.94/lb. and $0.97/lb., respectively. In Texas and New Mexico, the 19-micron to 21-micron wool fell 8 percent.
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.