Markets -- Year-to-Year Production Rises

August 2005 --  Lamb and mutton production rose 3.13 percent year-to-year in June, from 12.8 million lbs. to 13.2 million lbs. Part of the reason for the production increase was the rise in average-dressed weights from 68 lbs. to 71.5 lbs., but it may be the beginning of sustained production increases.

Production fell from 13.7 million lbs. in May to 13.2 million lbs. in June, down almost 4 percent. Live weights increased from May to June, which suggests that slaughter numbers were down. Live weights averaged 142.25 lbs. in May and rose nearly 1 percent to 143.50 lbs. in June.

As proven by slaughter rates this year, the United States sheep flock began to expand after decades of year-to-year declines. Federally inspected mature-ewe slaughter from January through April totaled 41,000 head compared to 45,000 head a year ago, a 9-percent decline (CattleNetwork.com, 6/6/05). On a weekly basis, mature-ewe slaughter on average was down 17 percent for the first three weeks of May. Another indicator of flock expansion is exports of cull ewes to Mexico, which is down 2 percent from January through mid-May (ASI).

The quantity of lamb demanded is a function of price as well as available supplies. When we think of factors that can shift demand we often think of income and taste, but forget about the price of substitutes. If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. This is called the cross-price elasticity of demand. It is a measure of the rate-of-response of quantity demanded of one good, due to a price change of another good. That is, how sensitive is the demand for domestic lamb to a price change of imported lamb.

If the price of imported lamb changed by 1 percent, the quantity demanded of domestic lamb will rise 0.19 percent. That is, imported and domestic lamb are substitutes ? if the price of one rises, the quantity demand for the other will increase. However, the relationship is weak.

In only three out of the last 12 months has domestic-retail prices been reported higher than imported-retail prices. In 2003, domestic prices were an average $0.06/lb. higher than imported lamb, in 2004 domestic prices were an average $0.14/lb. lower and in January through April 2005, domestic-retail prices fell to $0.40/lb. lower than imported prices.

The same is true for beef.

The U.S. Secretary of Agriculture Mike Johanns recently stated, ?The price of beef is getting very, very high per household?American consumers will start choosing other sources of protein,? (High Plains Journal, 6/20/05).

The secretary most likely meant consumers might switch to cheaper meats, but higher beef prices also make lamb relatively more affordable.

Empirical research revealed that beef is an important substitute for lamb, but pork and chicken are not. That is, if the price of beef increases by 1 percent, per capita lamb consumption will increase by 0.57 percent (Schroeder, T. et al., 2001). This research may assume that the price of lamb remains constant while the price of beef rises, but there may still be some effect.

Country-of-origin labeling and advertising from the lamb checkoff can help reduce the degree to which lamb consumers substitute imported for domestic lamb by building loyalty to American lamb. A sheep producer, Walt Stubbs of Cobden, Ill., believes the sheep industry needs something like the successful ?Other White Meat? campaign, which generated consumer awareness and acceptance of pork (FarmWeek, Ill., 6/2/05).

Slaughter Lamb Prices Hold

Feeder- and slaughter-lamb prices were mixed in a historic period of seasonally soft prices. Feeder-lamb prices in San Angelo fell 1.35 percent between May and June to land at $132.43/cwt. The average, live-San Angelo slaughter-lamb price was $100.06/cwt. in June, up 3.22 percent from $96.94/cwt. in May, but about even with the $100.13/cwt. observed last June. Formula slaughter-lamb prices by carcass weight also strengthened, to $224.12/cwt.; the 75- to 85-lb. carcasses increased 5 percent to $215.38/cwt.; and 85- to 100-lb. carcasses rose 4 percent to $214.50/cwt.

Slaughter-lamb prices (Choice, San Angelo) are forecasted to remain high in the third and fourth quarter of 2005, from $95/cwt. to $101/cwt. (USDA/ERS, 6/16/2005).

The gross-carcass value rose 2 percent in June to $256.03/cwt. The leg lost the most value, which tempered the gain in the gross-carcass value. The leg, trotter off, lost 5 percent in June to land at $252.29/cwt. However, the leg was still higher than a year ago at $231.04/cwt. At $176.70/cwt., the shoulder gained 2 percent in June. The average price of the 8-rib rack increased 1.63 percent in June to $646.86/cwt. The loins, trimmed 4x4, rose 18 percent in June to $449.99/cwt.

Imports Weaken

Between January and April, lamb imports were 47.6 million lbs., down 18.7 percent from the same period in 2004. However, due to the weaker U.S. dollar, the value of imports increased 6 percent to $145.7 million. Australian lamb imports fell 3.2 percent year-to-year and New Zealand imports fell 35.8 percent.

There was very little movement in the Australian and New Zealand dollars against the U.S. dollar in June. The Australian dollar remained at $0.76 AUD/USD and the New Zealand dollar weakened marginally from $0.72 NZD/USD to $0.71 NZD/USD. These rates are 11-percent and 13-percent higher than June 2004 averages, respectively.

In Australia, drought persisted but in late June the rains began, which further reduced supplies and consequently put pressure on lamb prices. Export-lamb prices jumped almost 50 cents in late June, bringing the rise over the past two weeks to 28 percent (Meat and Livestock Australia (MLA), 6/24/05).

Overall, the Australian flock continues to shrink. According to the Australian Bureau of Agricultural and Resource Economics (ABARE), the Australian sheep flock is forecasted to fall by around 2 million head in 2005-2006 (MLA, 6/24/05).

Imports into the United States may continue to slow because Australia is facing a drought. Australian supplies are tight, which is putting an upward pressure on prices.

In early June, it was reported, ?export lambs over 24kg cwt (53 lbs.) were hard to source in most areas,? (MLA, 6/8/05).

The export-lamb category suffered larger falls than their trade-weight counterparts. Light exports (22 to 24kg cwt) declined between 4 cents and 9 cents to average around 297?/kg cwt. Medium exports (24 to 26kg cwt) fell 14? for 4 scores to average 297? and heavy exports (over 26kg cwt) were down 16? to average 269?/kg cwt. (MLA, 6/8/05).

Lamb supplies are also tight in New Zealand. Processing companies are said to be so short of lambs that they are reported to be doing special deals with farmers (Stuff.NZ, 6/23/05). New Zealand lamb exports for May were the lowest on record, with only 20,800 tons shipped to the United States, which is a year-to-year decrease of 45 percent.

In Australia, there will be increased competition for the heavy-lamb export market to the United States. Live-sheep exports are expected to increase dramatically with the opening of the Middle Eastern market. It all depends on the relative prices in the two markets. The ABARE reported that live-sheep exports will climb 24.3 percent to 4.3 million in 2005-2006 (Sydney Morning Herald, 6/20/05). However, the supply of wethers ? primarily used in the live-export trade ? is very tight. It is reported that younger wethers are being added to the older-wether supply to meet demand (ABC Online, 6/22/05). Live-sheep exports plummeted after the Cormo Express affair, which resulted in the key market of Saudi Arabia being closed to Australian farmers.
 
On the domestic front, lamb variety-meat exports increased 85 percent year-to-year between January and April and increased in value by 138 percent. This increase may be partly driven by the weak U.S. dollar. Canada remained the most important lamb-export market, accounting for about 75 percent of exports in quantity and value.

Retail Prices Rise

The retail price of domestic and imported lamb rose from $4.84/lb. to $5.40/lb. between March and April. Domestic-retail prices jumped to $5.27/lb. from $4.69/lb. from March to April ? more in line with the year?s average of $5.14/lb. While domestic-retail prices rose, the volume sold dropped by half and the percentage sold under ?featuring? fell about 75 percent. Imported lamb also strengthened in April, from $5.24/lb. to $5.71/lb.

International Wool Market Ends June on a High Note

In general, June was a slow month worldwide, so the price gains toward the end of the month were encouraging. According to ABC Australia, the Australian wool market hit its lowest point in almost five years (ASI Weekly, 6/17/05). Although, the United States also experienced a three-year low, the difference in what the two countries experienced is primarily due to currency exchange variances and the Australian dollar getting stronger. However, it is also due to increased demand for U.S. wool by bringing international buyers to the domestic market over the last five years.

Against the odds, the price of medium-micron wool in Australia increased towards the end of June. Supplies were tight, which is an indication that prices might fall, but demand held despite the Australian dollar appreciating slightly against the U.S. dollar and BWK Elders, a key buyer in the Australian market, being absent.

Australia?s largest wool-topmaking plant closed its doors at the end of July. Elders, the owner of Australian Topmaking Services, will move all of its topmaking operations offshore. The general manager of wool with Elders says topmaking is no longer economically viable in Australia.

In the last five years, the number of combing mills in Australia fell from nine to two. The reason for this is that China is switching to combing at home instead of buying tops from Australia, reported The Wool Record Weekly (ASI Weekly, 6/10/05).

?The management of Australian Topmaking Services owned by Elders Wool, one of the country?s oldest agricultural companies, says the plant in central western New South Wales in Parkes cannot compete with lower-cost producers overseas,? (ASI Weekly, 6/17/05).

The June wool market remained slow in the United States. Buyers were very selective for micron, yield and style (USDA/AMS, 6/24/05). Seller interest was tepid at given prices. Many sellers considered holding wool until the fall.

Wool trading in the Fleece States was mixed: prices fell 4 percent to $0.95/lb. for the 29-micron wool and rose 4 percent to $0.98/lb. for the 30- to 34-micron wool. In the Territory States, prices were also very mixed. In general, prices for the finer wool softened, but 23-micron wool jumped almost 10 percent to $1.76/lb. Prices for 24- and 25-micron wool increased about 4 percent, but 26 micron fell 5 percent to $1.03/lb. Twenty-eight micron jumped 9 percent to $1.06/lb., 29 micron remained unchanged and 30 to 34 micron increased 6 percent to $0.88/lb. Wool prices were also volatile in Texas and New Mexico for the relatively finer categories and remained unchanged for the broader microns. For example, 19 micron fell 1.68 percent to $2.34/lb. Twenty micron rose 3 percent to $2.30/lb. Twenty-three to 26 micron remained unchanged.

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.