(December 1, 2009)  Across the board, slaughter-lamb, carcass and wholesale values weakened in October. It is also assumed retail prices softened. It is likely that retailers lowered prices to move more product. The lamb demand index fell an estimated 8 percent between 2007 and 2008. It might have held steady for most of 2009, relative to other meats, but might have softened into the third quarter. Lamb demand tracks beef demand to some extent. Beef demand was estimated at 4-percent lower annually in 2008 and 1-percent lower in early 2009 (J. Mintert, Kansas State University, Jan. 2009).

Demand for lamb in food service sales was also likely down. The Restaurant Performance Index (RPI) found that the health of the restaurant industry fell between August and September. As incomes drop and unemployment rises, consumers are not eating out as often.

Possible reduced lamb demand is likely a function of reduced-priced substitutes. The prices of substitutes beef and pork dropped in recent months, which could have lowered lamb demand.

Lower demand  might also be due to a change in demographics, change in income levels or changes in tastes and preferences. Many of these factors are outside the control of industry members.

It was found that one-third of reduced beef demand from 1982 to 1994 was due to a rise in cholesterol and heart disease published information (Kansas State, 6/15/09).  Conversely, beef demand benefited from increased information regarding the health benefits associated with zinc, iron and protein (Kansas State, 6/15/09). 

Production Increased
Federally inspected production jumped from 12.5 million lbs. in September to 15.6 million lbs. in the five weeks of October – down from 17 million lbs. during the same period last year. Dressed weights were up only marginally in this period, but slaughter numbers were up 23 percent to 230,122 head (given an extra week in October).

In October, lamb and mutton in cold storage was 17.5 million lbs., down 15 percent from October 2008, but 22-percent higher than its 2005 to 2008 average for October.
October represented the fourth consequent month of reduced freezer inventories. The U.S. Department of Agriculture lamb roast purchase program likely helped reduce cold storage. The program might have also helped to support prices throughout 2009 as price levels could have weakened further.

The weak U.S. dollar might be just what the lamb industry needs to move product and support prices. As U.S. lamb becomes more competitive on international markets, lamb exports could surge, taking product off the domestic market.

In the eight months through August, lamb and mutton exports were up 49 percent year-on-year. A 73-percent jump in mutton exports explained the gain, with exports up to 8.8 million lbs. Lamb exports fell 12 percent year-on-year to 1.8 million lbs.

Wholesale Values Down
Wholesale lamb values (gross carcass value) dropped 2 percent in October to $244.03/cwt. This was 8-percent lower than October 2008 and 2-percent lower than its October five-year average of $249.54/cwt.

The October leg, trotter-off, was 6-percent higher than both the 2008 and five-year average. The leg fell 0.25 percent to $250.59/cwt. between September and October.
The shoulder was also sharply higher annually. The October shoulder, square-cut, leveled at 20-percent higher than both the 2008 and five-year average. The shoulder, square-cut, fell 1 percent to land at $222.53/cwt. between September and October.

By contrast, the October loins, trimmed 4x4, were 20-percent weaker than both the 2008 and five-year average. The loins, trimmed 4x4, dropped 6 percent in October to average $375.36/cwt. This year, the rack was sharply lower than the 2007, 2008 and even its 2004 to 2008 average. The rack continued its annual slide and fell to about 20-percent below its past October averages. The medium rack, eight-rib, experienced a 2-percent monthly drop in October to $457.01/cwt. I still remember the rack hitting $7/lb. in March 2003.

East Coast carcass prices fell 4 percent from $233.88/cwt. in September to $224.21/cwt. in October, down from $233.90/cwt. a year ago October.

Slaughter-Lamb Prices Steady to Lower
Weaker wholesale prices likely have a negative affect on slaughter-lamb prices.
At $92/cwt., live, auction slaughter-lamb prices held steady between September and October. However, prices were 2-percent lower year-on-year. In October, prices in San Angelo ($89.60/cwt.), Iowa ($92.06/cwt.) and the Equity Electronic auction ($93.35/cwt.) gained while prices in the Mountain region ($90.69/cwt.) and South Dakota ($91.93/cwt.) softened.

The formula slaughter-lamb price on a carcass basis fell 1 percent monthly to $197.03/cwt. in October – 10-percent lower than October 2008 and 2-percent lower than its five-year October average. When converted to a live basis, the formula slaughter-lamb price averaged $100.09/cwt. in October.

To exacerbate already weakening lamb demand, pelt prices softened in October by an average of 8 percent. Fall clips fell monthly from $6.50 to $5.08 per piece in October and No. 1 pelts fell from $4.63 to $4.50 per piece. Packers are likely to reduce price offers to producers if the pelt credit weakens.

Feeder-Lamb Prices Weak
In the third quarter, feeder-lamb prices in direct trade took a sharp dip below its
2008 and five-year average. However, by October, as direct trade was winding down, prices gained 4 percent to $97.41/cwt. at an average 84 lbs. In September, nearly 72,000 head were reported in direct trade, but that number fell to 23,000 head in October. 

Feeder lambs at auction (San Angelo, Ft. Collins, Sioux Falls) averaged $98.10/cwt. in October, down from $100.81/cwt. in September, but up from $96.23/cwt. a year ago.

Despite forecasts for a record corn harvest, wet weather and a delayed harvest were driving up corn prices in October. It is also possible that the weak U.S. dollar was causing concerns of tight domestic supplies if exports boom. Active corn speculation might also be the reason corn has seen some recent gains. 

The U.S. Department of Agriculture (USDA) forecasted farm-gate corn prices for this season to range between $3.05 to $3.65 per bushel during the 2009/2010 marketing year (USDA/Economic Research Service, 10/14/09). This compares to $4.06 in 2008/2009.

Slowdown Forecasted for Lamb Imports
I erroneously forecasted a slowdown in lamb imports in the past; thinking that Australia’s prolonged drought and weak U.S. dollar would restrain trade, it didn’t. The popularity of the U.S. market as an export destination for Australian product was likely driven by its relative strength of demand compared to other export markets. That might be changing. While U.S. lamb imports have been up year-on-year, a slowdown might in the future.

In the 10 months to October, Australian lamb exports beat its 2007 record for the same period by 3 percent and were 10-percent higher than 2008. The rise was contributed to an increase in Australian lamb production, but also strong demand in the Middle East, China, Hong Kong and Taiwan (Meat and Livestock Australia (MLA), 11/4/09).

Australian lamb exports to Hong Kong nearly doubled this year due to the “growing popularity of lamb hot pots, population expansion (especially ex-pat populations) and the increase in high-end foodservice outlets,” (MLA, 11/4/09).

For the year through September, Australian lamb production was up 7 percent year-on-year (MLA, 11/4/09). A 7-percent increase in slaughter rates and a 4-percent gain in carcass weights contributed to this gain.

In late October, the Livestock Market Information Center (LMIC) forecasted an annual 2-percent slowdown in U.S. lamb and mutton imports for 2010. Domestic production is also expected to fall 2 percent, which amounts to a 7-percent decline in lamb and mutton availability in 2010. Reduced lamb availability could raise prices; further reducing quantities consumed and lead to industry contraction.

U.S. lamb imports January through August were up 4 percent year-on-year to 95 million lbs. Within this period Australian lamb imports were up 9 percent and New Zealand’s imports were down 6 percent.

In the eight months to August, mutton imports were down 31 percent to 22.8 million lbs. Australian mutton imports were off 22 percent and New Zealand imports were down by half.

Even if lamb imports slow in volume, the U.S. market still has to contend with often lower-priced imports.

Even as the U.S. dollar weakened, Australian product still remained lower-priced than U.S. lamb. For example, the average wholesale price of the U.S. fresh frenched cap-off rack was $1,000.63/cwt. between January and August, but the comparable Australian product was $803.70/cwt. The U.S. semi-boneless leg, trotter-off, was $401.37/cwt. while the Australian leg was $296.49/cwt.

Inventory Expansion? 
With good weather and tighter supplies, the demand for replacement sheep is likely up. Prices for replacement sheep have gained in recent months. In the 10 months through October, ewe lambs jumped 53 percent year-on-year to $109.24 per head, yearling ewes lost 5 percent to $130.48 per head, running-age ewes held steady at $92.83 per head and aged ewes jumped 20 percent to $57.95 per head.

Increasing retail lamb demand is crucial. If lamb supply expands through inventory gains and demand is constant, then prices for all segments of the industry could soften.

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