|Tight Supplies Fuel Consolidation
(December 1, 2010) Tight supplies and lower sheep numbers were likely a catalyst in the recent acquisition of Iowa Lamb by Superior Farms. Superior cites excess capacity of U.S. slaughter houses and increased efficiencies as motivation for the purchase. But what does it mean for sheep producers? Typically increased market power in meat packing doesn’t bode well with producers.
However, empirical evidence of a correlation between increased market power and depressed producer prices is less than conclusive. A 2009 Government Accounting Office (GAO) report found that “the empirical economic literature has not established that concentration in the processing segment of the beef, pork or dairy sectors or the retail sector overall has adversely affected commodity or food prices.” While some studies found lower producer prices associated with increased market power, the ability to isolate the cause is difficult. Critics argue that there might be some other trends causing lower producer prices.
Historically, producer prices have not risen as fast as food prices which suggest exertions of market power, but it could also be that marketing costs increased. The farm share of total consumer expenditures has dropped from 37 percent in the 1950s to 19 percent in the 2000s (U.S. Department of Agriculture’s (USDA) Economic Research Service (ERS), 10/2010). Between the 1950s and the 2000s, the marketing bill share grew from 63 percent of total consumer food expenditures to 81 percent. The marketing bill includes processing, wholesaling, transportation, retailing costs and profits.
To my surprise, ERS reported that labor, packaging material, fuel and electricity have held relatively constant, as a share of consumer expenditures, between the 1970s and the 2000s (10/2010).
A few studies found efficiency effects that were larger than the market-power effects of concentration. It is possible that the efficiency gains lower costs of production per head and thus allows a packer to offer lower slaughter-lamb prices while maintaining, or even increasing, margins.
In 2007, the combined market share (by volume) for the four largest sheep and lamb slaughter firms was 70 percent (USDA’s Grain Inspection, Packers and Stockyards Administration, 3/2009). This compares to an average 67 percent over the previous 10 years. By comparison, the top four firms in the beef industry account for 79 percent of the market and 63 percent for pork.
It is theorized that the Iowa Lamb acquisition by Superior will not significantly increase the top-four firm level of concentration. That said, there might be ramifications that will be difficult to measure. In the Midwest, Superior might be able to attract a significant number of slaughter lambs away from the non-traditional market into the commercial sector.
Second, the removal of Iowa Lamb from bidding in auctions could lead to reduced competition. It was found, for example, that slaughter-lamb prices from Equity Electronic Auction are highly correlated with Iowa (96 percent) and South Dakota (90 percent) auction prices. In addition, the degree of correlation with the formula slaughter-lamb price was 85 percent. It is impossible to say one price series influences another, but likely the larger-volume formula trades affect the smaller markets.
Overall, the lamb industry has faced record-high prices in recent years under a very concentrated processing market. Could price levels have been even higher with more players in the market? Hard to imagine.
Feeder-Lamb Trade Slows, Prices Strong
With very current slaughter and reduced supplies, feeder-lamb prices continued to hold into October, albeit with sharply reduced trades. Since more than 100,000 head traded in May, volume has slowed to 830 direct feeder-lamb trades in October. Reportedly, there is a shortage of current feeders with fewer ewe lambs on feed due to greater producer retention.
Feeder-lamb prices in direct trade jumped to $138/cwt. in October in thin trade compared to $137.20/cwt. in September and $97.41/cwt. last October.
Feeder lambs at auction gained 3 percent monthly to $152.33/cwt. and 55-percent higher year-on-year.
By October, optimism of yet another bumper corn crop was tempered with reports of sharply lower-than-anticipated yields. ERS reported, “Tight supplies and strong demand boost expected corn prices 60 cents on both ends of the range to $4.60/bu. to $5.40.bu., compared with $3.55/bu. for 2009/2010,” (10/13/10). Although yields were down a forecasted seven bushel per acre in October, the year still boasts of the third-largest crop on record.
In October, corn prices jumped 17-percent monthly on the back of higher-priced corn forecasts. Within October, corn rose from $4.53/bu. to $5.33/bu. (Dodge City, Kan., Cooperative Exchange, High Plains Journal, 11/1/10). In one month, corn rose to average $4.78/bu., 36-percent higher than $3.53/bu. over the 2009/2010 season ending August.
It is difficult to determine whether higher corn or tight feeder supply will drive feeder-lamb prices in coming months. My bet is on tight supplies. Lamb feeders are experimenting with dry distillers’ grain — the nutritious corn parts that remain after the starch is processed for biofuels. This move can help offset the cost of rising corn, to some degree.
Slaughter-Lamb Prices Keep Climbing
Slaughter-lamb prices reached unprecedented levels in October. The formula, carcass-based price averaged $279.95/cwt.
in October – over $70/cwt. higher than its five-year October average. On a live basis, the October average was $141.93/cwt. The lightest carcasses continue to receive a price premium although the margin has narrowed sharply from late 2009 and earlier this year.
Equity Electronic Auction continued to set records with an October weekly high of $155.25/cwt. On average, slaughter-lamb prices at auction averaged $139.49/cwt. in October, up from $91.58/cwt. last October. Live, auction markets ranged from a low in San Angelo of $128.50/cwt. to a high in South Dakota of $149.25/cwt.
Wholesale Market Resilient
The lamb-meat market continued its bullish push upward into October with all major primal cuts reporting gains. The wholesale market jumped 4 percent in October to average $337.18/cwt., up $83/cwt. from its five-year average for October and up from $244.03/cwt. a year ago.
In October, the eight-rib rack, medium, gained 4 percent to average $730.09/cwt.; the shoulder, square-cut, gained 6 percent at $273.19/cwt.; the loins, trimmed 4x4, gained 4 percent to $522.04/cwt.; and the leg, trotter-off, jumped 7 percent to land at $347.97/cwt.
At the beginning of the fourth quarter, the rack, leg and shoulder reached price levels that far exceeded levels seen in 2008 and 2009. By October, the loin had just surpassed its 2008 record high and was far stronger than its 2009 average.
The East Coast carcass market gained 5-percent monthly in October to $291.14/cwt., up $67/cwt. from $224.01/cwt. a year ago.
We will likely see food-service lamb sales increase in coming months. Restaurants have been adding jobs at four times the rate of the economy overall (Los Angeles Times, 10/28/10). This news is good for the economy overall. “Many experts view the industry as a bellwether of the economy, because eating out is generally the first thing people cut back when they’re feeling strapped — and the first activity many people pick up again when they’re feeling more flush,” (Los Angeles Times, 10/28/10).
Replacement-Sheep Prices Setting Records
Replacement-sheep prices are generally stronger this year compared to a year ago. Ewe lambs were up 20 percent through October year-on-year to $131.50/head and yearling ewes were up 51 percent to $196.68/head year-on-year. Aged ewes were up 56 percent to $90.61/head.
Jim Caras, sales manager at the Utah Ram Sale at Spanish Fork, commented that they had the highest grossing sale this past October (11/3/10). There was a lot of interest in ewe lambs and white-wool rams were popular. The sale sold rams into six different states.
Perhaps most encouraging, Caras mentioned that younger generations have taken an interest in raising sheep. A few years of consecutively high lamb and wool prices has perhaps mitigated some of the skepticism that younger producers carried.
Lamb Imports Up
During the first five months of the year, lamb imports were down 9 percent or 9.8 million lbs. year-on-year. In June through August, lamb imports played catch-up. Imports were up 4.8 million lbs. year-on-year. Overall, in January through August, lamb imports were up 2 percent to 97 million lbs. year-on-year. Within this period, Australian lamb imports were down 7 percent to 61.8 million lbs. and New Zealand’s lamb imports were up 25 percent to 35.1 million lbs.
In January through August, mutton imports were down 22 percent year-on-year to 17.7 million lbs.
Lower lamb exports in 2010 were likely because the relative profitability of the domestic market rose (higher prices) compared to markets overseas, in spite of the weak U.S. dollar. At 1.5 million lbs., lamb exports were down 16 percent between January and August year-on-year. Mutton exports were up 18 percent in this period, to total 10.4 million lbs.
Total lamb availability, including imports, was down in the year through August. Total lamb availability (imports plus domestic production, subtracting exported lamb volume) totaled 191.95 million lbs., down 7 percent year-on-year from 206.42 million lbs. In this period, domestic lamb supplies (less lamb exports) totaled 94.97 million lbs., down 10 percent year-on-year.
Lamb demand worldwide is likely on the rise, particularly in the Middle East. In spite of the strong Australian dollar, the value of Australian lamb exports increased through August. As reported by the meat tradenewsdaily.com, the Middle East is the most valuable export market for Australian lamb, earning $19.9 million (up 22 percent year-on-year), mainly due to the increase in volumes to Middle Eastern markets. Exports to the United States are valued at $17.5 million (up 3 percent year-on-year). Export values are also up for Greater China, Southeast Asia, Japan and the European Union.
Editor’s Note: Julie is open to comments and questions and can be reached by e-mail at email@example.com or by phone: 970-812-6873.