(March 1, 2007)

The Bush administration released its 2007 Farm Bill proposals in January. The proposed changes favor a revenue-based financial support program, conservation, the fruit and vegetable industries and trade. The bill proposed a 20-percent cut in federal spending on agriculture over the next five years and caps on subsidies for farmers.

Wool support may not see any change. “The ‘marketing loan’ program, which subsidises farmers when the prices of their produce fall below a set level, altered the calculation of the price a little to take account of actual market prices, but the change will not be dramatic,” (The Financial Times, 2/5/07).

The most important element of the Farm Bill to the sheep and lamb industry might come from an unexpected measure: increased trade programs. It plans to increase trade programs by nearly $400 million to continue the creation, expansion and maintenance of agricultural exports.

“The initiative promotes partnerships between the U.S. Department of Agriculture (USDA) and non-profit, domestic agricultural-trade organizations to share the costs of overseas marketing and promotional activities such as consumer promotions and market research,” (USDA, Fact Sheet, Release No. 0019.07).

The trade initiative is also allocated to fight trade barriers, but hopefully, this money will not go toward settling international trade disputes over U.S. subsidy levels.

Increased demand, not cost-reducing measures, is key to the growth of the sheep and lamb industry. Increased demand can come from opening and expanding markets both domestically and overseas. There have already been successful wool export programs over the past few years by the American Wool Council in cooperation with USDA’s Foreign Agricultural Service (FAS).

Domestically, there is great potential to increase lamb sales to the ethnic market, the organic market and the food-service sector. It is estimated that 37 percent of domestic production goes to the food-service sector and is growing (American Lamb Board (ALB), 2006). A survey of lamb breakers revealed that there is great optimism for expanded demand in the food-service sector. Increased promotional activities by breakers and food-service companies are the key to expansion (ALB, 2006). Great potential exists to introduce the food-service sector to the versatility and substitutability of lamb cuts.

Great potential also exists to expand export markets. Lamb exports are at record levels. Federal support is available to non-profit and private companies alike to expand exports. At 16.9 million lbs., lamb and mutton exports increased 102 percent between January and November 2006 from the same period a year earlier. Since 2000, lamb and mutton export volumes increased an average 26-percent annually.

The key to expanding markets overseas is likely research and promotion; research to understand the demand of foreign customers and promotion to introduce consumers to U.S. lamb. Private companies that wish to join forces to export wool and lamb can apply for a federal Export Trade Certificate of Review in which separate companies can legally join forces to export wool and lamb and be protected from antitrust or unfair competition lawsuits.

ALB Study Finds Lamb Demand Increased

The ALB recently released a lamb demand index (2006). The index, which tracks changes in lamb demand, revealed that lamb demand fell 18 percent between 1980 and 1990, fell 24 percent between 1990 and 2000 but increased 6 percent between 2000 and 2005 (ALB, 2006).

Much of the decline in lamb demand in the 1980s and into the 1990s might be attributed to dissatisfaction by consumers with the lamb product offering. By the mid- to late-1990s, lamb packers were re-tooling their chains and adding value to their product, which most likely helped to boost demand.

Rising incomes and prices of substitute meats also affect lamb demand. As incomes rise, consumers will buy relatively more expensive meats and also want more convenience in their dining experience. This means they will eat out more and buy prepared meals for home. It was found that a 6.8-percent increase in incomes raises lamb demand by 10 percent (ALB, 2006). Prices of substitute meats, such as beef, will affect lamb demand because as the price of beef rises, for example, it makes lamb relatively more affordable and consumers may switch to lamb. It was found that a 4.8-percent increase in beef prices raises lamb demand by 10 percent (ALB, 2006). Promotional activities by the ALB might also have contributed to recent increases in lamb demand.

The study found that lamb demand fell 4 percent between 2004 and 2005 (ALB, 2006). Incomes in this period also fell, so hopefully, demand will rebound as incomes strengthen. Softer demand at retail can translate back to weaker feeder- and slaughter-lamb prices. Softer demand can also outweigh the price-increasing effect of tight supplies.

Inventory Down 1 Percent

Tight supplies may partly explain the upward pressure on feeder and slaughter prices in January; however, rising dressed weights may also be a factor. After years of contracting, the sheep and lamb inventory increased for two consecutive years but then fell by 1 percent in 2006 to 6.19 million head due to “extremely dry weather” in theSouthwest (USDA’s National Agricultural Statistics Services (NASS), 2/2/07).

In January, lamb and mutton production was down 10 percent year-to-year. Slaughter numbers were lower as were dressed weights. Dressed weights were down an average 5 percent at 70 lbs. and January’s slaughter was 180,889 head, nearly 5-percent lower than January 2006.

Feeder-lamb prices in direct trade gained 3 percent in January to $100.44/cwt. While some feeders were sold in Texas, the majority of sales occurred in the North: Minnesota, North Dakota, South Dakota and Montana.

On average, dressed weights increased from 69.6 lbs. in December to 70 lbs. in January. However, in the five weeks starting Jan. 1, dressed weights increased from 68 lbs. to 72 lbs. As of the beginning of February, there was only minor discounting of heavy formula lambs.

The gain in weight was a surprise to me for I had thought feeders would want to sell lambs at lighter weights given the high cost of feed and muddy conditions in many Colorado feedlots. However, lamb spreads looked healthy in January with all sectors turning a profit. Perhaps packers are concerned that supplies will be tight during Easter. Admittedly, lamb supplies from the Imperial Valley are down.

Feed costs continued to increase for feeders with corn prices gaining 6 percent in January at $3.23/bu. and reaching 68-percent higher than the $2/bu. observed last January. USDA forecasted that corn prices would average between $3/bu. and $3.40/bu. during the 2006-2007 marketing year (USDA’s Economic Research Service, 1/17/07). The demand for corn from the ethanol industry will continue to put pressure on it for feed use, but the effects for feeders will be mitigated as the by-product distillers grain is used to substitute for other proteins in feed. Fifty new ethanol plants are currently under construction, and there are proposals for an additional 300 plants in the next few years (Peel, D., LMIC Factsheet, 2/07:5).

Despite a historic drop in prices in January, live slaughter-lamb prices at auction strengthened by 3 percent in January to average $88.34/cwt. The gain was led by a jump of 9 percent of prices in Iowa followed by a gain of 5.5 percent in the Midwest computer market. Prices in traditional, Midwest auction markets fell 4 percent, and prices in the Intermountain region also fell by 4 percent.

Live slaughter-lamb prices in January were an average 8-percent higher than the average $81.79/cwt. observed a year ago. Some would say the lamb market ‘crashed’ last January. A large influx of imports in December and lower-than-expected domestic lamb sales during the holidays helped to slow lamb sales in January.

Between December and January, slaughter-lamb prices purchased on formulas fell an average of 2 percent. The heavier weights received the most discounts in January while lambs weighing less than 55 lbs. gained nearly 0.5 percent to land at $187.56/cwt. Fifty-five lb. to 65 lb. lost 0.5 percent to land at $188.43/cwt.; 65-lb. to 75-lb. carcasses fell 2.7 percent to average $187.36/cwt.; the 75-lb. to 85-lb. weight category fell 3.6 percent to average $184.97/cwt.; and 85-lb. and heavier carcasses lost 4 percent at $180.17/cwt.

The meat market showed some seasonal weakness after the holiday. The gross carcass value fell 3 percent in January to $244.35/cwt., yet remained 6-percent above last January’s value of $229.88/cwt. The drop in lamb values from December is largely due to the drop in the leg, trotter-off, by 4 percent and the weakening of the trimmed 4x4 loin by 8 percent. The leg averaged $240.79/cwt., and the loins averaged $428.47/cwt. The eight-rib rack, medium, gained 1 percent in January to $601/cwt. The square-cut shoulder fell 2 percent in January to $161.84/cwt.

The gains in meat values over last January can be attributed to the stronger leg and loin, which were up 10 percent and 18 percent, respectively. The rack was actually lower in January 2006 compared to January 2005.

Pelt prices in January remained steady from December but up to 25-percent higher than January 2006 values. The Fall clip was $6.25 in January. The No. 1 pelt averaged $5.75, No. 2 was $5, the No. 3 was $2.75 and the No. 4 was $2. Lower demand might dampen pelt prices in February. Mild winters worldwide have softened demand for pelts.

USDA’s Agricultural Marketing Service reported, “Weather is a problem, slowing trade overseas as the warm winter has slowed finished-product sales. In the U.S., wet conditions in feedlots out West pressure prices for unshorn pelts with muddy conditions,” (1/26/07).

Imports Hold…..For Now

Many sheep-producing regions in Australia continued to face a severe drought. While production remained steady in 2006, the reduced flock will likely begin to impact production levels, and its exports, in late 2007 and early 2008. The flock is forecasted to decline by 5.5 million head in the year to June 2007 to around 95 million head – its lowest level since 1947 (Meat and Livestock Australia (MLA), 2/2/07).

During the first six months of the 2006-2007 season, slaughter-lamb numbers were up 9 percent from a year earlier (MLA, 2/2/07). However, slaughter numbers will likely be down by 3 percent in 2007, but heavier carcass weights will sustain production volumes.

MLA’s 2007 Cattle and Sheep Industry Projections reported, “Australian lamb exports are forecast to surpass the 2006 record by 5 percent in 2007. The ongoing shortage in world lamb supplies is expected to maintain strong prices for Australian lamb, while the decline in Australian lamb production in the second half of 2007 will constrain the growth in exports.”

Between October and November 2006, lamb imports to the United States increased 24 percent to 14.3 million lbs. and were 26-percent higher than the previous November. The graph of imports shows that imports were down in 2006, but in the 11 months, January to November 2006, lamb imports were actually up 3 percent from the same period in 2005. Over this same 11-month period, Australia’s imports were up 5.5 percent and New Zealand’s imports were down 1.5 percent.

The share of imported lamb in the domestic market increased 3 percent year-to-year in the 11 months to November 2006, from about 45 percent to 47 percent. During last July, August and November, the share of lamb imports in domestic availability surpassed 50 percent. If nearly half of the lamb sold in the United States is imported and demand is the key driver of the industry’s growth, then it is crucial that consumers be able to discern between imported and domestic product. Fortunately, legislatures are tying to move up the date for mandatory country-of-origin labeling (COOL) to Sept. 30, 2007, rather than the current deadline of September 2008.

The continued weakening of the U.S. dollar may affect lamb imports at some point as import prices rise. In general, a weak dollar makes imports relatively more costly. Since a low of 0.726 U.S. to Australian dollars last March, the rate increased 8 percent by January 2007. The dollar weakened 10 percent against the New Zealand dollar in this period.

However, the weak dollar also makes U.S. products relatively more competitive on world markets. Thus, U.S. wool, sheep and lamb exports may get a boost in world markets due to the weak dollar. The weak dollar might encourage U.S. wool processors to buy domestic wool rather than turn to imports.

Live ewe exports to Mexico totaled 16,855 head in December and fell to 9,525 head in January, but were still 19-percent above last January’s volume.

Market Forecasts

Reports of lower annual inventory and tight supplies inevitably have an impact on forecasts for the industry. At the beginning of February, the Livestock Marketing Information Center (LMIC) forecasted that total lamb supply in 2007 would increase by 1 percent. The gain would come from the net effect of an increase in imports by 7 percent and a drop in domestic production by 3 percent compared to 2006 (with some rounding) (LMIC, 2/2007).

In mid-January, Texas feeder-lamb prices (60-lb. to 90-lb.) in the first quarter were forecasted to drop almost 2-percent below 2006’s level at $104/cwt. to $108/cwt. (LMIC, 1/2007). Feeder lamb prices will strengthen with tight supplies, but we still might see some seasonal weakening in late summer and a trend downward during the second-half of the year.

Western direct slaughter-lamb prices by carcass weight were forecasted to range between $184/cwt. and $194/cwt. in mid-January (LMIC, 1/2007). Tight supplies out of the Imperial Valley and the upcoming Easter holiday will likely support prices in the upcoming few months.

Seasonal trends come into play in forecasting prices in the meat market. However, it is hypothesized that increasingly seasonal trends will be less obvious due to the growing food-service sector and its willingness to use traditional cuts during the off-season (ALB, 2006). The leg remains seasonal in the retail market, with price highs during the Easter holiday and again during the December holidays. The loins will strengthen as the summer grilling season approaches. The rack is a popular cut during the December holidays, but a traditional favorite in the food-service sector. However, imported racks are also popular in the food-service sector. Forecasting the rack’s price is perhaps the most challenging.

(USDA) Agricultural Marketing Service (AMS), 2/2/07). Sellers might want to lock in prices for spring shearing before prices drop. However, buyers were reluctant to enter forward contracts, waiting for some price stabilization (USDA/AMS, 1/26/07).

Overall, “the wool textile industry is experiencing the best conditions it has seen in the last five years,” according to Chris Wilcox, chief economist with The Woolmark Co. (American Sheep Industry Association (ASI), ASI Weekly, 2/2/07).

As for the outlook, Wilcox said, “While high wool prices are likely to continue into 2007, ranging at or near long-term highs, economic indicators for wool are weakening a little, and wool's price competitiveness against synthetics is declining,” (ASI, ASI Weekly, 2/2/07).

Between early October 2006 and the end of January, the Australian Eastern Market Indicator increased 27 percent in Australian dollars and 31 percent in U.S. dollars (Woolmark, 2007). For the most part, wool prices in Australian dollars and U.S. dollars move together; however, exchange rate movements can affect price levels in the respective currencies.

There was little activity in the domestic wool market between December and January. Roughly one-half million lbs. of wool was sold on a clean basis in January. In the Fleece States, 29 micron remained steady at $1/lb. In the Territory States, 18 micron jumped 9 percent to $2.282/lb., 19 micron gained 4 percent to $2.55/lb., 20 micron fell 5 percent to $2.08/lb., 21 micron fell 8 percent to $1.86/lb. and 22 micron fell 15 percent to $1.86/lb. In Texas and New Mexico, 18 micron fell 2 percent to $2.57/lb.

In 2006, the value of wool production in the United States was $24.4 million, down 7 percent from $26.3 million (USDA/NASS, 1/2007). The lower value was due to both lower production levels as well as lower prices. Shorn wool production in the United States during 2006 was 36 million lbs., down 3 percent from 2005 (USDA/NASS, 1/2007). Sheep and lambs shorn totaled 4.85 million head, down 4 percent from 2005. The average price paid for wool in 2005 was $0.70/lb., compared to $0.68/lb. in 2006.

In 2007, domestic wool production might be lower, but prices might be higher. Wilcox sees opportunities for U.S. wools as the supply from Australia declines and the demand for all wools, especially medium-micron wools increases (ASI, ASI Weekly, 2/2/07).

Wilcox reported, “With increased casualization and consumers' price sensitivity, he sees a need to educate the general public on the advantages of wool in order to maintain and grow the market share. The largest, wool-apparel retail sales markets in the world are in China, the United States and Japan, respectively.”

Italy is also an important wool apparel importer, but it is increasingly purchasing the higher-quality wool products.

In the 10 years, 1996 to 2005, greasy wool production fell by 25 percent in Australia, 17 percent in New Zealand but only 9 percent worldwide (FAOSTAT, accessed 2/6/07). Thus, the relative share of worldwide wool production by other countries increased. Since 2000, total world fine-wool production fell by 17 percent, 3 percent for medium wool and 1 percent for coarse wool (calculated from Woolmark, 2/07). Thus, finer wools out of Texas and New Mexico may have an increased advantage. Production of medium wools worldwide remains about half the level of both fine and coarse wools. The weak dollar coupled with relative increased market share of U.S. wool sets the stage for favorable competitive conditions for the U.S. market in 2007.

Editor’s Note: Julie is open to comments and questions and can be reached by e-mail at juniper@netecin.net or by phone: 303-619-9975.