|Fuel and Corn Drop
(December 1, 2008) My husband came home the other day after fueling up his F250 with a grin on his face. He had calculated that he will likely save $100 this month on gas alone. $100! Hmmm, I thought, maybe now we can eat out more often…maybe I can buy some lamb chops (I am sure tired of ground beef and chicken!). Unemployment is up and food prices remain high, but it is possible that savings at the pump could boost lamb sales.
December’s lamb sales might face tough competition for it is believed Americans are being very selective at the meat case. A report from foodservice consultants at Technomic revealed that although consumers are spending less on dining out, many are willing to spend more on “higher quality” menu items if they include premium ingredients (American Meat Institute, 10/28/08). Consumers might eat out less and purchase higher-end meat cuts less frequently, but when they do choose high-quality meat, we want them to choose lamb. Quality is more important than ever.
HedgersEdge analyst Andy Gottschalk reported, “Domestic demand (for beef) is down at mid- and low-level restaurants, while white-tablecloth restaurants also have suffered, with significant declines in sales,” (meatingplace.com, 11/4/08).
Meat Slows Unseasonably
After rising sharply above the 2003 to 2007 average, mid-year lamb wholesale values dipped unseasonably in October. For a time, the industry was likely able to pass some of the higher production costs on to consumers, but to a limit. In the third quarter, consumer spending slowed, particularly at higher-end restaurants where lamb is often featured.
The wholesale value of lamb dipped 2 percent in October to $266.62/cwt., but remained 1-percent higher than last October. The leg, trotter-off, was up 1 percent in October to $257.88/cwt. The shoulder, square-cut, gained 0.5 percent to $224.73/cwt. The eight-rib rack, medium, fell 3 percent in October to $543.84/cwt. After enjoying historical highs this summer, the loins, trimmed 4x4, fell 9 percent in October to $462.61/cwt.
Although the U.S. dollar got stronger in October, lamb pelt prices held steady, while reportedly, the drop credit in the beef industry declined. Fall clips averaged $7.75, No. 1 pelts were $6.75, No. 2s were $5.75 and No. 3s were $2.75.
Lamb Supply Down
In the first 47 weeks of this year through Nov. 1, 7.4 million lbs. less lamb and mutton was produced at 138.2 million lbs. This translates into 150,549 fewer head slaughtered this year through October, or 1.9 million head. Year-to-year live weights were only slightly heavier, from 138 lbs. to 139 lbs.
Lamb and mutton imports were off 4 percent through August year-to-year. At 91.5 million lbs., lamb imports were down 11 percent through August compared to a year ago. During this period, Australian imports were down 11 percent and New Zealand imports were down 9 percent.
At 33.2 million lbs., mutton imports were up 16 percent. Mutton imports from Australia were down 15 percent, but imports from New Zealand increased by 4 percent.
The Livestock Market Information Center (LMIC) forecasted in early November that total lamb and mutton supply for the year would be down 3-percent annually to 439.3 million lbs. (11/5/08). Imports were forecasted down 7 percent from a year ago and domestic production is expected to be down 4-percent annually.
Ending stocks in 2008 were forecasted up 18 percent compared to 2007, which helps soften the expected supply drop. At the end of the third quarter, LMIC forecasted that ending stocks were 21 million lbs., up from 15 million lbs. Therefore, although supplies and imports might be tight going into the holiday season, frozen lamb will help boost supplies.
In general, since 2000, the U.S. dollar has weakened – it has taken more U.S. dollars to purchase one Australian dollar. This makes imported lamb relatively more expensive to U.S. importers. Between September and October, however, the U.S. dollar to Australian dollar rate continued its four-month slide (strengthening) and dropped from US$/A$ 0.817 to US$/A$ 0.617.
The stronger U.S. dollar against both the Australian and New Zealand dollars helps to reduce the cost of lamb imports, reduces the competitiveness of U.S. pelt exports and, if stable, could reduce the competitiveness of U.S. wool overseas next spring. It now takes more foreign currency to purchase one U.S. dollar.
Marketing Lamb: Covering All the Bases
In this uncertain time of volatility in the stock market and rising unemployment, risk-mitigating tools such as the Livestock Risk Protection-Lamb (LRP-Lamb) can be helpful.
Purchasing insurance can help reduce the financial hardship of an unexpected decline in price. In the long run, it is hoped that LRP-Lamb will reduce producer’s marketing risk thereby encouraging producers to invest in their operations.
Calculation of basis might help producers determine whether to purchase insurance. As David Anderson, Ph.D., explained in Sheep Industry News last month, the basis equals the market price received by each producer (for simplicity, let’s say cash price) minus the LRP-Lamb ending value, which is represented by the formula live-basis national price (basis = cash price - insurance end value).
In theory, the basis is less variable than the cash price or the insurance ending value because prices received by producers and the ending value react to similar conditions. Calculation of the basis over a period of years will typically reveal a repeated pattern, or seasonality.
Producers are encouraged to determine for themselves if their unique basis is a good predictor of expected sale price. However, there will be volatility in basis for the same marketing month year after year. That is exactly why LRP-Lamb was conceived, to help smooth lamb income.
The basis can be used to estimate the cash price received by producers in their local markets. Reversing the above equation yields: expected cash price = basis + insurance end value. Thus, when the estimated basis is known, it can be added to the published ending value in a particular week and a producer will know if his or her estimated price at the time of marketing will likely be higher or lower than the ending value in LRP-Lamb.
In practice, a producer’s actual slaughter-lamb price does not factor into the indemnity payment. A producer will receive an indemnity if the actual end value was less than the initial coverage price in which the producer purchased the insurance.
Since late 2001, formula live-basis slaughter-lamb prices were an average $1.48/cwt. higher than average live slaughter-lamb prices at auction. Week-to-week, formula live-basis prices varied an average $15/cwt. while prices at auction varied an average $13/cwt. However, averages are only averages. Week to week, the price series might be much more variable or the formula prices might be much lower than auction prices. Again, this is why insurance is important.
USDA’s Risk Management Agency (RMA) recently introduced a new online tool to aid farmers and ranchers in focusing on how to protect against down-side risks, as well as how best to take advantage of up-side opportunities in the market. The Web site may be accessed at the address www.Farm-Risk-Plans.USDA.gov or from the main RMA site at www.rma.usda.gov.
Feeder- and Slaughter-Lamb Prices Softened in October
Feeder-lamb prices in direct trade slipped marginally from $99/cwt. to $98.15/cwt. in October. At auction, 60-lb. to 90-lb. feeders received $95.18/cwt. in October, down from $99.58/cwt. in September and down from $101.92/cwt. last October. Prolonged months of high corn prices and reassurance of available supplies likely reduced offer prices by feeders.
Hay, other than alfalfa, fell from $126/ton to $122/ton in October, up from $111/ton last October.
The average corn price was $4.45/bu. in the 2007/2008 marketing year but is likely to soften this year. Producer corn prices are expected to decrease due to sharp declines in futures and an abundant harvest. In Illinois this summer, corn pushed toward $8/bu. but then fell sharply to $4/bu. by October.
The 2008/2009 USDA corn forecast was lowered 80 cents on both ends of the range recently to $4.20/bu. to $5.20/bu. (USDA’s Economic Research Service, 10/15/08). On Nov. 7, the December corn future was $3.78/bu. and the March future was $3.95/bu. (Chicago Board of Trade, 11/7/08).
Live-basis formula slaughter-lamb prices fell nearly 3 percent in October to $108.18/cwt. On a carcass basis, formula prices fell 0.7 percent to $220.13/cwt. Negotiated live trades fell 2 percent to $101.15/cwt.
On average, slaughter-lamb prices at auction fell from $94.78/cwt. in September to $93.85/cwt. in October. Slaughter-lamb prices fell about 1 percent in Kalona, Iowa, to $93.68/cwt. and at the Equity Electronic auction to $95.73/cwt.
Cull-ewe prices basically trended downward this year from a high of $41.69/cwt. in January to $22.27/cwt. in October. Cull ewe prices are typically lower seasonally from April through about October, but this year was unusually low. The 2003 to 2007 cull-ewe average was $41.69/cwt. in October.
Lamb Price Forecasts
LMIC forecasted in late October that western direct slaughter-lamb prices by carcass weight are expected to fall $7/cwt. from the third to fourth quarter (10/31/08). A seasonal slowdown is expected at this time of year. Prices in both quarters remain about 7-percent higher than a year ago.
LMIC forecasted that feeder-lamb prices in Texas (60-lb. to 90-lb.) might slide $1/cwt. between the third and fourth quarter and fall about 4-percent below last year’s levels. The softening in feeder-lamb prices is atypical. Prices often strengthen into December.
For the first quarter of next year, LMIC forecasted that Colorado direct slaughter-lamb prices could strengthen 5-percent above this year’s first quarter average. Feeder-lamb prices in Texas could strengthen 1-percent above this year’s first-quarter average.
Feeder-lamb prices are largely a function of corn prices and where corn prices are headed is a tough call. Some say increased corn yields can easily fulfill ethanol needs, while others say demand for corn in food and feed can easily outpace advances in yields, thereby keeping prices high (Korves, R., Avery, D. from meatingplace.com, 10/31/08).
Editor’s Note: Julie is open to comments and questions and can be reached by e-mail at firstname.lastname@example.org or by phone: 970-487-3017.