Markets -- Sheep Flock Increases 2 Percent

On July 1, the U.S. Department of Agriculture (USDA) released its biannual inventory report, which confirmed the sheep industry?s expansion. The total sheep flock increased 2 percent year-to-year to 7.8 million head. Numbers of breeding ewes and market lambs were up. The number of replacement ewes increased 9.7 percent year-to-year.

As producers expand their flocks, the riskiness of their investment is bound to cross their minds. Risk takes on many shapes and sizes. For example, there is a risk that the selling price will not cover costs, there is a weather-induced risk that forces feed costs up or causes lamb losses, not to mention the risk of losing livestock by predators.  Many believe a role of the federal government is to help agricultural producers mitigate the risk of production because agriculture is at the mercy of the weather. However, increasingly there has been international pressure to eliminate agricultural support.

Aside from direct federal payments, there are less obvious federal policies and programs in place to help mitigate the risk of livestock production. Although awash in controversy, the closure of the Canadian border was intended to protect the safety of the U.S. meat supply. Another example of federal support is the recently extended mandatory price-reporting program. It provides price information with the aim of enabling producers to make more informed buying and selling decisions. A less obvious role of the government is in the political pressure it may have wielded to encourage China to revalue its currency. The U.S./Chinese exchange rate is critical for the profitability of U.S. wool sold to the Chinese. 

However, perhaps foremost on producer?s minds is price risk. The proposed Lamb Price Protection Program developed by the American Sheep Industry Association (ASI) for USDA?s Risk Management Agency is a risk-management tool. The volatility in feeder- and slaughter-lamb prices year-to-year and within a year can account for a lot of the risk in lamb production. For planning purposes, researchers often use past prices as a good predictor of future prices.

For example, feeder-lamb prices in Texas varied by about 10 cents/cwt. to 15 cents/cwt. year-to-year from October to December between 1995 and 2004 ? derived from Livestock Marketing Information Center (LMIC). That is, if this year?s October price is $100/cwt. then next year?s price could drop to $85/cwt based upon history. During the rest of the year, year-to-year price spreads were up to 25 cents/cwt. Between 1995 and 2004, the year-to-year differences in Colorado slaughter-lamb prices in October through January varied by about 15 cents/cwt., but in the remaining seven months, the year-to-year price difference was as much as 45 cents/cwt.

Historical price trends over the last 10 years reveal that if you are selling feeders, year-to-year prices varied the least during the fall. Many producers sell feeder lambs during this time, mitigating their price risk. Same for slaughter lambs, the greatest year-to-year price volatility is in the spring/summer and less in the fall/winter.

Feeder/Slaughter/Wholesale Prices Remain High

Overall, prices in the lamb market remained high in July, supported by continued tight supplies and reduced imports. Total lamb imports were down 16 percent year-to-year in May (the last month that import data was available) and mutton imports were down 58 percent year-to-year.

Feeder- and slaughter-lamb prices are expected to remain strong throughout the remainder of the year with a typical seasonal slump during the fall. Slaughter-lamb prices are thought to average 8-percent to 10-percent higher year-to-year and feeder-lamb prices are likely to be 6-percent to 8-percent higher (LMIC, 7/22/05). Producers are likely to continue to hold back ewe lambs, which keeps supplies tight (LMIC, 7/22/05).

Average live-slaughter lamb prices fell 5.6 percent between June and July from $110.70/cwt. to $104.10/cwt., with a high of $106.75/cwt. at the Equity electronic auction to a low of $90/cwt. in San Angelo.

Due in part by an extra week in July, lamb and mutton production jumped 20 percent from June to 15.4 million lbs. Live weights fell from 139.25 lbs. to 136 lbs. and dressed weights fell to 68.2 lbs. in July. 

The live-price to carcass-price spread has been trending downward for at least the last 18 months. In July, the spread averaged $7.33/cwt., down from $17.43/cwt. last July. As supplies increase and live prices fall, the spread is likely to widen. Retail prices are much more likely to rise than be cut. Increased margins for lamb processors may result in increased investment in value-added processes for lamb.

There was a seasonally light demand in the international pelt market in July. Pelt prices have fallen steadily since January. Fall clips fell from $11 in January to $7.50 in July and No. 1 pelts fell from $10 to $6.50. In Australia, pelt prices varied widely with the quality of pelt, which, in turn, created a wide variance in offer prices for carcasses.

Wholesale prices softened seasonally in July, but on average, gained nearly 10 percent from last summer. The gross-carcass value lost nearly 2 percent in July to average $251.58/cwt. The leg lost nearly 7 percent in July to land at $235.14/cwt., but it remained 9.6 percent higher than last year. The medium, eight-rib rack lost 0.17 percent, down to $235.14/cwt. in July. The loins gained 1.7 percent in July, at $456.77/cwt.

Retail Prices Up in May

In May, retail prices remained high, perhaps supported by tight supplies and possible stronger demand. Domestic prices rose 4 percent to $5.46/lb. and imported-lamb prices rose 5 percent to $5.98/lb. As retail-lamb prices rose in May, so did the volume sold. This is an indicator that demand is strong and perhaps expanding.

Featuring activity also increased in May, which may have had an affect on increasing sales. In 10 out of the last 12 months, imported prices (as reported by USDA/Economic Research Service) have surpassed domestic-retail prices by an average of 33 cents/lb. All domestic cuts, except the shoulder, gained value in May.

Imports Slow

In May, lamb imports were down nearly 7 percent to 12.80 million lbs. In the first five months of 2005, total lamb imports were down 16 percent year-to-year. Australian imports were down 2 percent and New Zealand imports were down 36 percent. Supplies were tight in New Zealand due to unfavorable weather in its spring of 2004 (our fall), which resulted in a significant number of lamb deaths. Roughly half of New Zealand?s lamb exports go to the European Union.   

Imported mutton fell 58 percent between April and May. In the five months, January through May, mutton imports fell 37 percent year-to-year. Again, the largest volume decline was from New Zealand, with imports down 78 percent year-to-year.

Wool Market Remains Slow

In July, the U.S. wool market remained slow, with very light demand by domestic and international buyers. Remaining supplies were held in firm hands (USDA/Agriculture Marketing Service). For the most part, there was insufficient wool trade in the Fleece States in July to report prices. In the Territory States, 19-micron and 20-micron wool held firm, 20-micron to 24-micron wool lost up to 7 percent and 25-micron to 26-micron wool gained.

For example, 26 micron gained 15 percent, averaging $1.18/lb. in July. In Texas and New Mexico, 19-micron and 20-micron wool lost up to 13 percent to land at $2.04/lb. and $2.07/lb., respectively. 

The recent revaluation of the Chinese Yuan could be good news for the wool market. China revalued its currency in mid-July, which allowed the Yuan to rise against the U.S. dollar. This revaluation will make Chinese exports more expensive, but imports relatively cheaper. Revaluation will make U.S. wool more affordable to Chinese buyers.  

Overall, reporting of wool on a clean basis, the introduction of AWEX-ID (Australian Wool Exchange Industry Description), which makes the U.S. market more transparent and is used by some Chinese wool buyers to describe wool, and a more favorable exchange rate with China, sets the stage for increased demand by Chinese. ASI is helping to facilitate trade with China by bringing Chinese wool buyers to the United States and maintaining a ASI wool consultant in China.

Similarly, Chinese interest in Australian wool may increase. This is good news for a ?disappointing? end to Australia?s 2004/2005 marketing year (Woolmark, 7/22/05). It is thought that demand slowed, thus resulting in weaker prices and less wool offered. Australian and U.S. wool prices are correlated, so an increase in Australian wool prices is likely to affect U.S. prices.

Australian wool prices have been lackluster since 2002 relative to lamb production, which is causing many producers to shift into more prime-lamb production. However, the Merino-wool base is holding ground. It was found that the profitability of prime-lamb production with a non-Merino ewe base was not as profitable as a ?dual-purpose flock,? where Merino ewes are mated with non-Merino sires (Woolmark, 7/29/05).

Wool demand in Europe and Japan is expected to slow during the remainder of 2005. However, retail sales in the United States are likely to remain strong. China consumed about 17 percent of retail-wool sales in 2004, so its demand can easily influence international prices. Driven by strong income growth, Chinese retail sales increased 13 percent year-to-year in June (Woolmark, 7/22/05).
 
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.