(August 1, 2008)  East Coast carcass prices made an impressive $21/cwt. jump in June from $218/cwt. in May to $239/cwt. But how much of the price gain is due to higher production costs or increased demand, and what portion is due to tighter lamb supplies? Are current high freight and corn prices a passing phase or a new trend? In any event, the industry might be increasingly challenged to promote itself and prepare to sell lamb at a higher price point. 

According to the U.S. Department of Agriculture’s (USDA) Economic Research Service (ERS), higher corn prices can be explained, in part, by a longer-term trend in world supply and demand imbalances in which there is no quick fix. Higher commodity prices are likely due, in part, to worldwide consumption growth surpassing production growth (May 2008).

And then there is China. China’s unprecedented economic growth might be slowing, putting further pressure on its own, as well as global, resources. While China has largely been successful in meeting its own food needs, it is at a point where expanded food production will be more challenging than in the past (USDA/ERS, 1/07). Further, its era of cheap labor and hence relatively low-cost manufacturing may be ending. Since 2003, wages have been rising at a double-digit pace (USDA/ERS, 1/07).

Due to stagnant production, rising labor costs and growing demand, Chinese food prices have been rising. Already, urban population growth is fueling higher incomes and thus the demand for meat and, indirectly, feed grains. China’s increased demand for oil is also a factor in higher energy costs worldwide.

Thus, higher production costs might be the new reality for the U.S. lamb industry. It is now up to the industry to assure consumers that lamb and wool are worth every penny. For example, not only is lamb fresh and tastes great, but also it has a low carbon footprint. Consumers are demanding increased environmental responsibility from their products. The production and processing of lamb and its many byproducts does not appreciably emit carbon dioxide, which could exacerbate global warming.

It is yet known whether its carbon footprint could serve as a selling point for U.S. lamb. The British chain of supermarkets, Tesco, believes carbon footprints could help sell products. It plans on labeling its merchandise with a carbon footprint – the amounts of carbon released in bringing each product to the retail shelf.

June Feeder-Lamb Prices at Three-Year High
Tight lamb supplies continue to support feeder-lamb prices. Reportedly, Colorado feedlot placements in June were about 96,000 head – down from a three-year average. 

At $110.71/cwt., average 60-lb. to 90-lb. feeders at auction slipped 2-percent lower than May’s average, yet were 3-percent higher than a year ago. In June, prices in San Angelo averaged $112.08/cwt., $107.29/cwt. in Ft. Collins and $112.75/cwt. in Sioux Falls.

In direct feeder-lamb sales, 27,000 head were reported in June with an average $110.10/cwt. at an average 103.8 lbs.

Corn prices took a not-so-surprising jump in June, rising from $5.28/bu. to $6.12/bu. This increase reflects lower-than-expected yields due to slow planting progress, slow crop emergence and persistent, heavy rainfall across the Corn Belt. It is hard to believe corn averaged $3.13/bu. during the 2006/2007 season.

ERS’s projected price range for corn in 2007/2008 was raised to $4.25/bu. to $4.45/ bu. compared with $4.10/bu. to $4.40/bu. in May. The 2008/2009 farm price is projected at $5.30/bu. to $6.30/bu. (6/1/208).

As the price of corn began its sharp rise in the last couple years, the negative correlation between corn prices and feeder-lamb prices became increasingly stronger.

Slaughter-Lamb Prices Gain
Slaughter-lamb prices were mixed in June with prices at auction weakening while formula trades recorded monthly gains. June saw the finishing of the old-crop lambs and the beginning of new-crop slaughter lambs out of California and Arizona.

Slaughter-lamb prices at auction weakened unseasonably by 1 percent in June and averaged up to 9-percent higher than last June. Prices averaged $104.42/cwt. in June, up from $95.66/cwt. last June and up from the five-year average of $98.57/cwt.
Averages ranged from a low of $85.24/cwt. in San Angelo in June to a high of $115.34/cwt. in South Dakota. The South Dakota auction was a full 16-percent higher than May’s average and 14-percent higher than a year ago. No other recorded market made similar gains.

Formula slaughter-lamb prices averaged $216.68/cwt. in June, up 10 percent from May. When converted to a live weight at the respective average
weekly live weights, June’s average was $107.72/cwt.

Fifty-five to 65-lb. carcasses averaged $207.26/cwt., 65-lb. to 75-lb. carcasses averaged $221.86/cwt., 75-lb. to 85-lb. carcasses averaged $217.81/cwt. and 85-lb. and heavier carcasses averaged $212/cwt.

On a live basis, formula prices for slaughter lambs were up 11 percent from May at $109.58/cwt. Within June, live basis-formula prices gained sharply from $105/cwt. to $116/cwt.

Slaughter-lamb prices likely strengthened because supplies were relatively tight and the carcass market was strengthening. Pelt prices were not likely a factor for they remained steady in June. Fall clips remained at $7.50, No. 1s were $6.50, No. 2s averaged $5.50, No. 3s were $2.75 and No. 4s remained at $1.75.

Cull ewe prices fell 8 percent in June to $35.44/cwt. – 3-percent lower than a year ago.

Meat Prices Still High
Slower gains in wholesale prices in June relative to strengthening carcass prices suggested retail sales might be slowing.

East Coast carcass prices made an impressive $21/cwt. gain from $218.48/cwt. to $239.40/cwt. in June. The East Coast carcass price is computed by adding transport costs on to the new FOB plant reported prices under Mandatory Price Reporting. Transport costs to the East Coast have been increasing steadily from $8 in 2005 on up to $11 in 2008.

The gross carcass value gained 6 percent in June to $268.95/cwt., 5-percent higher than $254.98/cwt. a year ago. The pleasant surprise was the 21-percent jump in the loins, which perhaps got a late start and gained to $485.48/cwt. in June. However, loins were still 3-percent lower than a year ago.

The leg, trotter-off, lost 2 percent in June to $262.56/cwt., but remained 5-percent higher than a year ago. The eight-rib rack, medium, gained nearly 2 percent in June to $562.36/cwt., down only marginally from a year ago. The shoulder has been doing very well in the last 12 months. It had a 14-percent gain in June to $206.99/cwt. – 20-percent higher than a year ago.

The carcass-to-cutout price spread narrowed in June by 23 percent to $19.77/cwt. and averaged 18-percent below last June’s average. As mentioned, the carcass gained more than the cutout gain, thus narrowing the margin. The live-to-carcass price spread widened by 17 percent to $18.30/cwt. in June – 26-percent higher than a year ago.

First Trimester Lamb Imports Slow
Another factor that might explain high domestic meat prices is that lamb imports slowed 12 percent January through April year-on-year to 46.7 million lbs. Australia’s imports were down 10 percent in this period, and New Zealand’s imports were off 15 percent.

Mutton imports were also down 3 percent to 17.7 million lbs. with New Zealand imports up a sharp 400 percent to 5.7 million lbs. and Australian mutton imports down 30 percent to 12 million lbs.

ERS forecasted that lamb and mutton imports were expected to fall from 202 million lbs. last year to 193 million lbs. this year. ERS forecasted that third-quarter imports could reach 44 million lbs., even with a year ago (6/17/08). Meat and Livestock Australia expects its lamb exports to the United States to rise 2 percent by volume in its 2008/2009 season beginning in August (6/27/08).

Lamb and mutton exports fell 910,000 lbs. year-on-year to 3.2 million lbs. in the first trimester of the year.

U.S. Lamb Production Slows
Lamb and mutton slaughter fell nearly 5 percent in the first half of the year to 1.2 million head. This is 61,925 head less than a year ago. Production was also down about 5 percent to 85.4 million lbs. Production would have been lower, but live weights were up nearly 1 percent to 143 lbs.

ERS forecasted that third-quarter production will likely remain steady from a year ago at 42 million lbs. However, for the year, production could fall from 183 million lbs. last year to 177 million lbs. (6/17/08).

The Livestock Market Information Center (LMIC) forecasted that third-quarter slaughter could fall 6 percent compared to a year ago (6/3/08). Dressed weights were expected to drop to 64 lbs., and production could be up to 7-percent lower year-on-year.

Tight supplies will likely continue to support slaughter- and feeder-lamb prices. LMIC forecasted that Western direct slaughter-lamb prices could rise by $15/cwt. in the third quarter and exceed last year’s third-quarter average by 4 percent (7/3/08). It is also forecasted that 60-lb. to 90-lb. feeders could weaken by up to $8/cwt. in the third quarter while still being 3-percent higher than a year ago (7/3/08).

Editor’s Note: Julie is open to comments and questions and can be reached by e-mail at juniper@netecin.net or by phone: 970-487-3017.