- November 2018
- President’s Notes
- Leading the Way
- ASI Announces Elections
- Lamb Chislic is Official Nosh of S.D.
- Guard Dog Program Supports Legal Defenses
- Raw Material Chronicles Woman’s Wool Industry Journey
- Around the States
- Nominations Open for ASI Awards
- VS Announces Reorganization Plans
- Market Report
- The Last Word
United States-China Trade War Hits Close to Home
JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting
On Sept. 24, China enacted a 10-percent tariff on American wool exports to China, with plans for a 25-percent tariff in January 2019 if the tit-for-tat retaliatory tariffs continue.
The current tariff level of 10 percent was announced as nearly all United States raw wool exports to China had been shipped, so the effect this season was minimal according to ASI Wool Consultant Barry Savage. However, there were some export buyers that did not honor their contracts and there were also four to five containers of wool that did not get shipped before the tariff was implemented. According to Savage, the wool export losses this season could range from $150,000 to $300,000.
Savage said that if the 25-percent tariff takes effect in January, “the collateral damage will be widespread.” The margins on wool are thin – less than 10 percent – and nowhere near 25 percent, he added. It is anticipated that Chinese buyers – and others – will ask for a price discount equal to the tariff next season, or even worse, will not buy American wool at all.
Wool is less expensive to process in foreign countries with lower environmental restrictions and wages, as well as larger volumes. It makes economic sense for American wool to be shipped to relatively lower cost processing countries and then shipped back to the United States in semi-processed and finished products. If the United States processing sector were to absorb additional raw wool, grower prices could plummet. Other export markets are available, although the volume demanded is lower. The United States could expand raw wool exports to India, Eastern Europe and to a lesser extent, Western Europe.
In January through August, 61 percent of American wool exports were sent to China – 47 percent by value. Mexico purchased 14 percent of this year’s clip by volume and India purchased 7 percent.
Long-term, sheep producers will be the most impacted in loss of income and employment, but there will also be secondary losses in income and employment in local, rural economies. According to ASI’s 2017 economic impact study, one dollar in total sheep output adds an additional $2.87 to the United States economy. Thus, one dollar invested in sheep has a multiplier effect of nearly three times the initial investment. Furthermore, about 10 jobs in the sheep industry at the producer level supports an additional three jobs in backward-linked industries and another six jobs in jobs created from sheep-related income, for a total of 19 jobs.
American wool exports range from $23 to $32 million per year. Back-of-the-envelope calculations reveal that even a 20-percent drop in raw wool exports can mean a loss of $16 million to rural economies across the United States.
In coming months, the global wool market will see pronounced indicators of the prolonged Australian drought. Sharply reduced global wool supplies in the spring of 2019 – coupled with continued strong economic growth in developed countries – could see stable, or even higher, wool prices during the next American wool season, assuming the United States-China trade war subsides.
In September, Australian wool production saw a 19-percent contraction year-on-year. Furthermore, the Australian Wool Production Forecasting Committee’s updated forecast of shorn wool production in 2018-19 is 322 million kg greasy, which is down by 6 percent from 2017-18 (9/2/18). The Wool Market Weekly Report forecasted, “Tight supply will definitely be a factor going forward, but fluctuating demand at these (high) price points and general uncertainty in the global trade scene will have an impact,” (10/5/18).
By Oct. 5, the Australian Wool Exchange Eastern Market Indicator had fallen for the third consecutive week to 1,992 Australian cents clean/kg. In United States dollar terms, the EMI indicator averaged 1,411 cents clean/kg. Although down monthly, wool averages were still at historic highs: 16 percent higher in U.S. dollars. In general, the finer the wool, the greatest the downturn.
Wool reports out of Australia were hesitant to explain the recent wool price weakening except to say that this time, currency movements were not to blame. It is likely that wool prices hit levels that were unsustainably high, for it was the higher-priced finer wools that were hit the hardest. It is also possible that trade uncertainty between the United States and China is cause for pause. Last May, wool market analyst Chris Wilcox cautioned that a trade war will be bad for the wool market, directly due to tariffs on wool productions, but also because of the impending slowdown in economic growth in both the United States and China (Sheep Central, 5/21/18).
Floor Drops out of Pelt Market
By some accounts, there is currently no market for American sheep skins. The highest-quality unshorn supreme pelts lost 95 percent of their value since March, dropping from $11.75 to $1.00 per piece. Premium and standard pelts lost as well, 89 and 75 percent, respectively.
According to Mike Wheeler, president of The Nugget Company, the 20-percent tariff on lambskin exports to China is a factor in the recent downturn, but there are more complicated, contributing factors. There has been a significant loss in Chinese domestic demand for sheepskin textiles. Middle class Chinese consumers are perhaps not faring as well financially as once thought, and tastes have changed as synthetic leathers have seen an uptick in Chinese fashions.
Additionally, the weaker Chinese currency relative to the strong American dollar raises the price of American pelts for Chinese tanners. Lastly, the downturn in the Australian wool market in September and early October reduces global pelt values.
In a more typical year, the United States will export more than 1 million pelt pieces worth more than $15 million. The loss of $15 million in pelt exports can mean a loss of up to $45 million in non-sheep multiplier effects in the United States.
September Lamb Production Higher
American lamb is not traded to China, so it is unlikely producers will see an impact from the trade dispute in that area. However, the lamb market could feel the loss as complementary producer income from wool and pelts are hit.
Lamb and mutton harvest through September was 3 percent higher year-on-year, at 1.48 million head. Harvest weights were 3 percent higher at 140.9 lbs. which yielded a 5-percent bump in lamb and mutton production to 103 million lbs. through September. Estimated lamb production through September was 99 million lbs., up 6 percent year-on-year.
The most recent lamb and mutton trade data through July also shows an increasing trend. In the seven months through July, lamb imports were up 7 percent year-on-year to 130.4 million lbs. Australian lamb imports were up 11 percent year-on-year to 95.7 million lbs. and New Zealand lamb was down 2 percent to 33.8 million lbs.
Total lamb available – domestic and imported production – was 217 million lbs. in the first seven months of the year, up 6 percent year-on-year.
Some additional product was put into freezers. By early September, the amount of lamb and mutton in cold storage was 39.7 million lbs., down 6 percent monthly, but up 23 percent year-on-year. It was the first downturn in freezer inventory in six months.
Commercial Feeders Active
More than 15,000 head traded in direct feeder lamb sales in September. In Wyoming, 5,500 head traded at $153 per cwt. for 82.5 lbs. In Idaho, 10,000 head traded as 82.5 lbs. feeders received $150 per cwt. and 100-lb. feeders received $135 per cwt.
Commercial feeders at the Billings, Mont., auction averaged $149.50 per cwt., up 1 percent monthly and down 16 percent year-on-year.
Live Slaughter Lamb Market Steady to Weaker
Slaughter lamb prices on formula/grid averaged $281.02 per cwt. on a carcass basis, about even with August and down 12 percent year-on-year. The live-equivalent price was $143.09 per cwt.
Dressed weights were down 4 percent in September at an average 80.68 lbs., but up 6 percent year-on-year. Typically, by September the heavier lambs have been sent to harvest and dressed weights dip into the 70-lb. range. This year, it has taken a little longer to get heavier lambs to market.
The live, negotiated slaughter lamb average was $140.98 per cwt. in September, down 3 percent monthly and down 14 percent year-on-year. Harvest weights were up 1 percent to 151 lbs., up 1 percent year-on-year.
Meat Market September Gains
The wholesale composite averaged $378.23 per cwt. in September, up 6 percent monthly and down 7 percent from a year ago.
The 8-rib rack averaged $861.73 per cwt., up 4 percent monthly; the loin, trimmed 4×4, averaged $536.24 per cwt., down 2 percent; the leg, trotter-off, was down 2 percent monthly to $363.78 per cwt.; and the shoulder, square-cut, averaged $288.70 per cwt., up 3 percent from August.
All primals were down from a year ago, with the shoulder seeing the steepest downturn, down 13 percent. The rack, 8-rib, medium lost 2 percent, the leg lost 6 percent, and the loin lost 11 percent in value compared to last year.
The American shoulder was under pressure from rising shoulder imports this summer from both Australia and New Zealand. The price of the Australian shoulder peaked this year in April, but trended lower toward August, putting pressure on the demand for American shoulders. The Australian dollar is weaker this year relative to the U.S. dollar, which makes high-priced (Australian lamb hit records this year) Australian lamb more competitive for American lamb importers and provides a buffer, giving importers the necessary margin to keep import prices competitive in United States markets. Overall, imported lamb prices are higher this year, but would be even higher without the discount provided by the weaker Australian dollar.
Lamb Market Forecasts
In early September, the Livestock Market Information Center estimated that slaughter lambs could weaken by about $4 per cwt. into the fourth quarter. It estimated that national, direct slaughter lambs could be $275 to $279 per cwt. on a carcass basis in the fourth quarter, down 3 percent year-on-year. The live, equivalent forecast is about $138.50 per cwt.
By contrast, LMIC estimated that feeder lambs could jump by about $15 per cwt. into the fourth quarter, to $156 to $162 per cwt., down 4 percent year-on-year. LMIC’s positive forecast for feeders is likely based, in part, on the assumption that at some point Australia’s drought is going to affect supply.
Thus far, Australia’s drought has prompted an increase in Australia’s slaughter, and imports to the United States. In 2019, Australian lamb and mutton imports are likely to slow. In the driest eastern states in Australia, lamb harvest far outpaced its five-year average for most of the year as producers faced feed challenges; however, by August, production fell sharply. Meat & Livestock Australia is forecasting that the national sheep flock could contract by 6 percent in 2018 and hold steady in 2019 (9/2018).
LMIC forecasted in early October that lamb and mutton imports to the United States next year could be down 7 percent year-on-year. It also forecasted that domestic production could be down about 1 percent. LMIC forecasted that domestic slaughter lamb prices could be marginally weaker in 2019, perhaps due to slowdown in lamb demand and lower economic growth (possibly brought about by the United States-China trade war).