Drake’s Market News

Saturday, Feb. 13, 2010

On January 29th, USDA, National Agricultural Statistics Service released its semi-annual Sheep and Goat report. I gave you my guesstimate last month. The numbers are close. The sheep and lamb inventory in the U.S. on January 1, 2010 equaled 5.63 million head (‑2%). The number of breeding sheep and lambs were 1.3% lower than a year ago, amounting to 4.19 million head. Ewe lambs equaled 655,000 million head, 1.2 % more than a year ago. The number of ewes, one year and old, declined 1.9% from 2009 to 3.34 million head. Market lambs over 105 lb. are down 6.3% from a year ago. This is a number that industry really missed.

USDA released the results of its semiannual survey of US cattle and calf operations. The total cattle and calf inventory were 93.1 million head, 0.9% lower than a year ago and the smallest cattle inventory since 1959. Beef producers have yet to show any appetite for expansion. The number of heifers held back for beef herd replacement was 5.436 million, 1.7% lower than a year ago. Beef cow number has declined for four straight years. There is an outside chance the industry could see an increase in herd replacement numbers in 2010, but much will depend on what happens with corn and feed prices and I am not yet convinced that feed costs will stay low going forward. The dairy herd on the other hand is showing an increase of 2.4% over 2009. This will lower milk prices if their imports of dry product continue. Rebuilding the dairy herd in this environment is a truly courageous or foolish thing to do. 

The latest foodservice sales forecasts from the National Restaurant Association point to an expected 2.5% increase in nominal sales growth but a 0.1% decline in real (inflation-adjusted) sales. It is a sobering forecast given that real (inflation-adjusted) restaurant sales were down 2.9% a year ago. If the current forecast materializes, it would represent the third consecutive year of declines in inflation-adjusted foodservice sales. In the four recessions of the last 40 years, inflation adjusted foodservice sales never declined for more than one year (they did not decline in 2002).

The sheep industry is at the point to stop the decline in production.  But the question is “How do we do this”? The Ethnic Trade has pushed the old ewe market up so high that bred ewes are going to slaughter. An estimation of Ethnic lamb slaughter is about 700,000 head to maybe as many as 1.2 million head. The goat slaughter is on top of this, as huge amounts of immigrants are congregating in areas like the Twin Cities, Cleveland, Milwaukee, and other areas throughout the U.S. I am projecting a lamb crop of 3.8 million head for 2010. This is optimistic.  I am also projecting a slaughter of 2.27 million head. Subtract the carryover of 640,000 hd. of old crop lambs, the FI industry needs 1.63 M lambs from this year’s crop. Now subtract the replacement ewe lamb of about 700,000 head, an optimistic death loss of 200,000 head and an Ethnic demand of 700,000 head and the industry has a carryover of 570,000 HD. This is a workable number, but no room for error.  This also means there will be extreme competition for every lamb and very low margins. For the producer, 2010 will be a wonderful year.
The USDA raised its forecast of corn use of ethanol production by 100 M bu. to 4.3 billion bu. in the 2009-10 marketing year. November’s record ethanol production was up 3% from the previous record in October, as higher prices for ethanol and distiller’s grains boosted ethanol producer returns. November-December corn use for ethanol was up 16% from the same period in 2008-09. Although returns have declined since November, recently lower corn prices continue to support profitability for ethanol producers. USDA lowered its estimate of corn stocks at the end of the marketing year to 1.7 billion bu. from 1.76 billion bu. projected a month ago. USDA narrowed its projected marketing year average farm price for corn by 5 cents on both ends of the range to $3.45 to $3.95 per bu.

Demand for pelts and wool will continue to be good as worldwide inventory declines. One and two inch shorn lambskins are widely available, whereas lambskins under half-an-inch are harder to purchase. International customers have reported slow purchases due to the high prices for some lengths. All proteins worldwide are on the decline. Everyone in the industry has to increase production and lower costs. Capital requirements will be moved to the breaking points.  I have talked about plateaus before, but the sheep industry could be seeking a new level. The new levels will definitely be higher. Will this level stop demand?  The economy will be a definite factor at these levels.