(May 1, 2008)  With Western Easter falling at the end of March, the month was busy. Weekly slaughter increased to a high of 63,405 head by mid-March and slaughter-lamb prices followed suit. Days after, a report of reduced planned corn acres was released, which sent the market into a frenzy. But by month’s end, slaughter had eased, as had prices, and many were probably sitting down with pencil and paper trying to figure out how to deal with higher corn.

April will be busy, but in a different way. We hear the buzz in grocery lines and read the same in headlines: Food costs are rising. How the sheep and lamb industry deals with rising production costs and a possible economic slowdown is yet to be fully known.

It is estimated that retail food costs rose 4 percent last year and could rise by up to 4.5 percent this year. The rising cost of wheat, corn, milk and higher fuel costs are becoming visible in the grocery aisle. The higher cost of these inputs is being passed onto the consumer. What about the retail price of meat?

Between 2006 and 2007, the price index for retail ground beef jumped 6 percent. It is difficult to tease out the effect of tight supplies, higher corn prices and higher fuel costs. The U.S. Department of Agriculture (USDA) reported that in 2004 only 20 percent of retail food sales is accounted for by its farm value. The share to the lamb or beef producer may be this low, depending upon the value added in preparation, packaging and transport.

The price of corn would account for an even smaller portion of the retail beef or lamb. If the price of corn rose 50 percent, then consumer retail prices would rise by less than 1 percent (USDA’s Economic Research Service (ERS), 2/2008). However, the conversion is much larger at the feedlot. It takes an estimated seven pounds of corn to produce one pound of beef.

Without a retail lamb price series, it is difficult to tell what is happening to lamb prices. From the trend in slaughter-lamb prices, it appears that feeders are unable to pass on the higher corn prices in higher slaughter-lamb prices. In fact, since last July, carcass-based slaughter-lamb prices have been volatile but trending downward.

However, at second glance, lamb prices are already relatively high and holding. East Coast carcass prices averaged $211.46/cwt. in March, a three-year high. However, the gross carcass began to soften marginally last November after a strong upward trend. The gross carcass value averaged $229/cwt. in 2006 and $253/cwt. last year. The more recent downturn in wholesale values refutes the theory that higher production costs are being passed onto consumers. Sentiments concerning an economic slowdown may be outweighing efforts to pass on costs.

The live-to-carcass price spread was down 10 percent in the first quarter year-on-year to $12.05/cwt. However, the carcass-to-cutout price spread rose 9 percent to $29.25/cwt. During the first 12 weeks of the year, both spreads trended upward.

Unfortunately, lamb feeders might feel the brunt of higher costs in the lamb industry. It is unlikely that slaughter-lamb prices have strengthened to offset higher production costs. Live auction slaughter-lamb prices were well above $1/lb. in 2005, and there were a few weeks in 2007 with more than $1/lb. trades, but since last summer, price offerings have been flat and lower, in the mid-90s.
 
Feeder- and Slaughter-Lamb Prices Weakened
Live 60-lb. to 90-lb. feeders at auction averaged $112.91/cwt. in March, down 2 percent from February and 11-percent higher than last March. Prices averaged $114.56/cwt. in San Angelo, $114.17/cwt. in Ft. Collins and $110/cwt. in Sioux Falls.
Feeders may be offering less because of the seemingly unrelenting high production costs. The price of hay, other than alfalfa jumped from $122/ton to $128/ton in March, up from $115/ton last March.

Corn prices strengthen from $4.53/bu. to $4.83/bu. in March, up from $3.43/bu. a year ago. In mid-March, the USDA forecasted that corn would range between $3.75/bu. and $4.25/bu. in its marketing year. However, that was before USDA announced that corn plantings were less than expected, probably due to high input costs. In early April, corn prices jumped to a record $6/bu. Corn futures took off. As of April 6, December corn was $6.08/bu.

However, last year, farmers ended up planting much more corn than they indicated they would in surveys. The recent report that shot corn up to $6/bu. was only planned corn acres as in some areas, corn had yet to be planted.

Live, auction slaughter-lamb prices weakened 2 percent in March to $94.27/cwt., but remained 4-percent higher than a year ago March.

The average price at the Equity Electronic Auction for slaughter lambs was $93.13/cwt. in March. Compared to February, the number of head was down 225 to 650 head, weights were down 5 lbs. to 125 lbs. 

Slaughter-lamb prices on a carcass-based formula gained 1.7 percent in March. With the Western Easter in late March came a boost for lighter-weight lambs. The carcasses weighing 55-lbs. and lighter brought an average $212.11/cwt., 7-percent higher than February and 14-percent higher than the same few weeks before Easter last year.

In March, 55-lb. to 65-lb. carcass-based formula slaughter lambs gained 1.7 percent to $196.48/cwt.; 65-lb. to 75-lb. carcasses fell 0.5 percent to $196.11/cwt.; at $198.46/cwt, the 75-lb. to 85-lb. carcasses gained 1.2 percent; and the 85-lb. and heavier fell almost 1 percent to $187.01/cwt.

Strong Leg Supported Easter Sales
The leg was particularly strong over the Western Easter at the end of March, giving average meat values a lift. However, other cuts from the rack, loin and shoulder showed less vigor. The Greek Easter falls at the end of April and it is very likely that lamb cuts may show some strength at that time.

In March, the gross carcass value averaged $259.87/cwt., up 1 percent from February and up 7 percent from last March. The eight-rib rack, medium, was $276.20/cwt., down 2 percent from February and up nearly 2 percent from a year ago. The leg, trotter-off, was up about 6 percent to $299.31/cwt. in March, up 15 percent from last March. The trimmed loin, 4x4, weakened nearly 3 percent in March to $378.61/cwt. and was down 4 percent from a year ago. The shoulder, square-cut, was up one-third percent to $168.49/cwt. in March and up 6 percent year-on-year.

By some accounts, Easter sales were disappointing. Consumer wariness about finances and higher costs of food may have been realized in reduced meat purchases. In the second quarter, we may see weights increase and more meat on the market and in storage. However, this depends on the remaining supply of old crop lambs.

Strong and stable domestic and international demand for U.S. pelts supported a 30-cent gain in March. Fall clips gained 38 cents to $7.50, No. 1 pelts gained 31 cents to $6.50, No. 2 pelts gained 56 cents to $5.50, No. 3 pelts gained 25 cents to $2.75 and No. 4 pelts held at $1.75.

Supply Situation
In the first 13 weeks of the year, lamb and mutton production totaled 44.1 million lbs. – down 7 percent year-on-year. Slaughter numbers were down about 7 percent, but live weights were up nearly 1 percent to 142.8 lbs.

Lamb imports remained strong in January with total imports up 4 percent year-on-year at 12.2 million lbs. Australia’s imports were up 17 percent from a year ago, but New Zealand’s imports were down 26 percent.

Mutton imports were down 10 percent in January year-on-year at 5.6 million lbs. Mutton imports from Australia were down 26 percent, but New Zealand’s imports were up more than 300 percent to 1.1 million lbs.

Live slaughter-ewe exports to Mexico totaled 24,740 head in the first quarter of 2007, down 11,443 head year-on-year. Lamb and mutton exports totaled 910,000 lbs. in January, down from 1.4 million lbs. last January.

Forecasts
Prices in the second quarter of the year might be the most difficult to forecast. Second quarter volatility has been high in recent years and higher than the rest of the year. When a trend is forced, slaughter-lamb prices typically strengthen toward June before weakening. Feeder-lamb prices typically begin to weaken in April and continue to slide well into the third quarter.

In early April, the Livestock Market Information Center (LMIC) forecasted that commercial lamb and mutton production could reach 44 million lbs. in the second quarter, down from 45 million lbs. a year ago. Imports could reach 48 million lbs. in the second quarter, up from 44.3 million lbs. a year ago. Total supply was forecasted to reach 104.89 million lbs., down from 105.46 million lbs. a year ago.

In late April, California springers likely entered Colorado feedlots for slaughter in May. Weights will likely be in good shape, for feed conditions are considered good.
In early April, LMIC forecasted that 60-lb. to 90-lb. feeder lambs out of Texas could weaken by about $2.50/cwt. in the second quarter. Prices could range between $107/cwt. and $111/cwt., 1.5-percent higher from a year ago.

LMIC also forecasted that western direct slaughter-lamb prices would strengthen by about 1 percent from the first to second quarter and average about 4-percent higher from the second quarter of 2007.