In the first half of 2003 average feeder-lamb prices exceeded average prices in recent years. What holds for feeder-lamb prices in the second half of the year will depend largely on the price of corn and whether ewe lambs are held back for breeding. The bottom line is that corn prices are likely to remain strong throughout the remainder of 2003 and the continued drought may reduce incentives to hold ewe lambs back for breeding. In summary, feeder-lamb prices are likely to stay strong.

The average feeder-lamb price in the first six months of 2003 was 98.90 $/cwt., compared to 67.3 $/cwt. for the same period in 2002, 86.7 $/cwt. in January through June 2001, and 90.30 $/cwt. for the same period in 2000. In March, feeder-lamb prices reached more than a dollar a pound and increased to an average $1.06/pound in June. By the end of June, feeder-lamb prices in San Angelo were 107-108.50 $/cwt. for 40-60 pounds and 102-107.50 $/cwt. for 60-70 pounds and 100-106 $/cwt. for 70-90 pounds.

Since early 2001, 37 percent of the variation in feeder-lamb prices can be attributed to the variation in corn prices. The combination of reduced production, increased use and lower beginning stocks means global corn stocks are at their lowest since the 1977/78 season. However, U.S. Department of Agriculture projections of higher acreage plantings and slower exports mean that corn prices may soften in the 2003/04 marketing year (September-August). Corn supplies are expected to increase 5 percent in the 2003/04 marketing year (USDA/ERS 5/14/03). In 2003/04, a record 10 million bushels are expected, up from 9 million bushels in 2002/03. This increase is due to an increase in area planted as well as a record yield. Corn use is also expected to increase, but not as fast in comparasion to corn supply.

Corn prices over the past few years increased, but are likely to weaken, on average, in the coming marketing year (September-August). According to USDA?s Economic Research Service, average farm prices of corn are expected to be lower in 2003/04, at 1.90-2.30 $/bushel, compared to 2.25-2.35 $/bushel in the 2002/03 marketing year. In the last three marketing years (September-August) corn prices were an average $1.88/bu in 2000/01, $2.00/bu in 2001/02 and $2.37/bu in September through May 2003.

Although average corn prices are expected to weaken in the next corn marketing year, one market analyst, ODJ, has projected that corn prices in July could reach 2.70-2.80 $/bushel. Corn prices in December are expected to reach 2.60-2.70 $/bushel. With corn prices remaining strong and strengthening through the end of 2003, it is unlikely that feeder-lamb prices will soften much.

Supply and demand will be issues of importance as the industry moves into fall. Toward the end of June, prices of slaughter lambs began to weaken. The average live price in May was 101.24 $/cwt., but fell to an average of 97.50 $/cwt. in June. At the end of June, live slaughter-lamb prices were roughly 95-100.50 $/cwt. in San Angelo, down from 98-106 $/cwt. the previous week. Some believe the meat trade can no longer support high prices as it has for most of the year. Some in the industry believe slaughter-lamb prices will remain steady until Labor Day.

The gross carcass value increased from an average $2.36/pound in May to $2.46/pound in June. Carcass-price strengthening can be attributed to the increase in the price of the 8-rib rack from $6.19/pound to $6.52/pound as well as an increase in the price of the loin from $4.16/pound to $4.82/pound from May to June.

Slaughter-lamb supply remains questionable. Some reports from the field indicated that feedlots are far below capacity. Reportedly, only about 20,000 head of lambs were on feed in Texas in June -- a historic low. Expecting increased scarcity of supplies, some of the largest packers secured supplies through the fall through forward contracts. However, supplies may not be as short as first expected -- slaughter numbers remained mored than 50,000 head a week to the surprise of many.

USDA?s National Agricultural Statistical Service (NASS) recently released its 2003 Agricultural Statistics (found on the Internet at www.usda.nass.gov, ?Publications,? ?Ag Statistics USDA?). NASS predicts that the breeding sheep inventory in 2003 will fall 5 percent ? to 4.6 million head compared to 4.9 million head in 2002. The annual rate of decline in breeding sheep inventory was 5 and 6 percent in the late 1990s, but slowed to 1 percent between 2001 and 2002. The rate of decline between 2002 and 2003 may have increased to 5 percent due to the drought, which would overshadow the positive effect of the ewe-lamb retention program.

The drought persists in many parts of the country. In early June 16 percent of the U.S. pasture and range was reported as in very poor or poor condition for grazing -- the two lowest categories -- compared to early May when 21 percent of pasture and range was reported as very poor or poor (LMIC). Despite their improvement, pasture and range conditions are still not as favorable as the previous 5-year average of 15 percent (LMIC).

As the U.S. Dollar strengthens, it is relatively more expensive for importers to import Australian lamb. The U.S./Australian Exchange Rate was 61 cents per Australian Dollar in April, 64 cents per Australian Dollar in May and 66 cents per Australian Dollar in June.

Supply concerns may outweigh exchange rate concerns for the Australian export industry. Export returns for lamb increased in the last 10 years by 550 percent, but those profits will erode as supply shrinks. In June, prices reached record highs, primarily due to short supplies, but it is questionable whether high prices will hold ground after the Australian recess. Some packers may shut down slaughter chains because the high prices are unsustainable. This move would reduce competition and weaken prices for available supplies. ?Some major processors have closed plants until numbers increase in spring while others expect their regular maintenance closure to last a little longer than in previous years? (Meat & Livestock Australia, 6/20/2003).

The Australian think-tank, ABARE, is forecasting lamb prices to fall 5 percent in 2003/04. ?A prediction of more favorable lambing conditions during the second half of 2003 is expected to see lamb supply increase marginally over the next 12 months, with lamb slaughter expected to increase 2 percent in 2003/04, to 17.4 million head,? (Meat and Livestock Australia 6/27/03).

The feature-weighted average retail price of domestic lamb fell from $4.44/pound to $3.98/pound between March and April. The volume index increased from 85 to 148 and the percent of volume sold under featuring rose from 13 percent to 40 percent. Between March and April the feature-weighted average retail price of imported lamb fell from $4.46/pound to $3.78/pound, the volume index rose from 107 to 172, and the percent sold under featuring increased from 33 percent to 49 percent.

The correlation between the domestic price and volume sold is -75 and -85 for imported product. A correlation close to +1 or ?1 means the two variables are strongly related. For domestic lamb, 56 percent of the variation in retail price is negatively related to the variation in volume. For imported lamb, 72 percent of the variation in price is negatively associated with the variation in volume. This means that more of the variation in price (e.g., lower prices) of imported product is associated with more product being sold for imported product than for domestic product.

The percent variation in prices that is related to the variation in the percent sold under featuring for domestic and imported lamb was 71 percent and 40 percent, respectively. Almost double of the variation in prices was associated with the variation in percent of volume sold under featuring for domestic lamb compared to imported lamb. This may mean that when domestic lamb is offered under a price special, the price discounts are larger than the price discounts offered for imported lamb.

U.S. Wool Trade Slow

Wool trade was slow during June with prices remaining steady. Reportedly, producers continue to hold wool, so much so that wool stocks will be carried into the fall.

By the end of June, wool prices, clean, delivered, were: Grade 70s (19.15-20.59 micron), 2.40-2.60 $/pound, Grade 64s (20.60-22.04 micron), 2.20-2.50 $/pound, Grade 62s (22.05-23.49 micron), 2.10-2.40 $/pound, and Grade 60s (23.50-24.94 micron), 2.00-2.30 $/pound.

In the second half of 2003 price volatility is like to continue and prices are likely to remain relatively steady. Chief economist with Woolmark, Chris Wilcox, said Chinese buyers have been driven from the shops by SARS, Germany's economy is going backwards and Japan continues to falter. Elders wool broker, Gregg Andrews, reported, "We will see these big swings in prices from week to week and until we see evidence of an improvement in the global economic conditions and therefore in retail sales, we will have this situation for quite some time."

China imported the largest share of scoured wool in 2002 -- 16 percent, thus its presence in the market can impact prices. The United Kingdom, Brazil and Italy are also important players. The United States is less important as a wool market for Australia, importing only 4 percent of the world?s scoured wool production in 2002.

In the coming season, Australia?s production is likely to remain low, thus putting upward pressure on prices. Australia's wool clip next season is predicted to be the lowest ever recorded, according to the latest figures from the Wool Production Forecasting Committee. Wool production for the 2003/04 season has been forecasted to decline 5 percent from the previous year (Meat and Livestock Australia 6/27/03). Probable reasons for low production are the long-term drought, volatile prices and a swing away from wool production and into prime lamb production (Australia Broadcasting Corp. 6/24/03).

Editor?s Note: Julie is open to comments and questions and can be reached by e-mail at juniper_economists@tds.net or by phone: 303-619-9975.

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