Marketing Lambs With Inflated Cost of Production

Having just completed a large 1,000 plus mile circle through Wyoming the same week I am writing this article, there were a few things standing out. 

I saw a lot of green grass, which was a welcome sight after last year’s brown and grey spring. I also saw several bands of sheep both out on the range and in farm pastures with a good crop of lambs. 

Finally, with all the driving time, I heard a lot about the current state of the economy and the issues with inflation on the radio. All of this got me to thinking about how the sheep industry – from the producers’ perspective – will fare with the current challenges of inflation.

The feeder lamb market has been consistently strong with the three-market average price for 60- to 90-pound lambs remaining above $200 per hundredweight (cwt) for more than a year now. The three-market average price for the first week of June 2022 was $248.07 per cwt. 

However – despite these strong prices for lambs – cost of production has also been steadily climbing during this same time period. While determining prices received is relatively easy for producers, it can often be more difficult to have a handle on an accurate cost of production. 

With this in mind, I thought it would be interesting to look at average costs of production in comparison to the current prices.

The U.S. Baseline Lamb Cost of Production Analysis: 2018 Update is a publication seeking to provide the American sheep industry with periodically updated estimates regarding the on-farm/ranch cost of lamb production. This publication can be found at SheepUSA.org. 

In this publication, cost of production budgets were generated by interviewing producers in the Western, Northcentral, Southcentral and Eastern U.S. A national cost of production budget was also generated from the four regions.

These budgets represent an average of the producers interviewed, while a producer’s own cost of production might be very different from those reported. These budgets should not be used to calculate individual profit projections, but can be useful in looking at national averages.

In 2018, the total cost of production estimate for each region was the following: Western – $160.50 per ewe; Northcentral – $157.44 per ewe; Southcentral – $134.13 per ewe; and Eastern – $180.59 per ewe. The national average cost of production from those four regions was $157.07 per ewe.

Returns were also estimated for each region using a singular set of pricing assumptions for lambs and wool. It is important to note individual producer returns could be significantly different from these estimates given differences in market timing, weights, end points, etc. The assumptions were standardized to create consistency in the budget analysis.

With this said, the return projections on a per ewe basis was the following: Western – a loss of $15.67; Northcentral – a gain of $16.47; Southcentral – a loss of $1.55; and Eastern – a loss of $22.77. The national return was estimated at a loss of $6.20. The prices used to calculate these returns were the three-market average feeder lamb price of $1.81 per pound and the greased wool price of $1.75 per pound.

Using the estimated returns, I calculated a breakeven price per pound for 75-pound feeder lambs in each region. Using the regional budgets, the average price needed to breakeven in 2018 ranged from $1.61 per pound to $2.13 per pound. The price needed to breakeven using the national average budget was $1.90 per pound.

So, what does 2022 look like? The U.S. Baseline Lamb Cost of Production Analysis has not been updated, but we all have a sense of rising costs of production. While it is difficult to accurately reflect the new cost of production without doing a full update of this publication, another simpler approach is to adjust the costs for inflation. This simple inflation calculation is a good approximation, but again, might not reflect actual costs of production. 

However, by using this simple calculation, producers can see costs have likely increased significantly. The adjusted cost of production (2018 dollars to 2022 dollars) on a per ewe basis for each region is the following: Western – $186.74; Northcentral – $183.18; Southcentral – $156.05; and Eastern – $210.11. The estimate for the national average cost of production in 2022 would be $182.74 per ewe.

I thought it would be helpful to go back to those same 2018 budgets and adjust the cost of production with the new estimates to determine the new breakeven price for each region. I updated the cull ewe prices and wool prices to current 2022 prices to focus in solely on the price needed for lambs to provide a breakeven.

Using the regional budgets, the average price needed to breakeven in 2022 ranges from $1.86 per pound to $2.47 per pound. The price needed to breakeven using the national average budget was $2.17 per pound. This represents approximately a 13 percent increase in the price needed to breakeven from 2018 to 2022.

Again, a producer’s individual breakeven will be different from these estimated values. Producers can utilize the templates provided in the U.S. Baseline Lamb Cost of Production Analysis to determine their own actual cost of production.

Once producers have this number, they can then calculate the price needed to breakeven on their own lambs. However, this analysis is useful in helping to understand there has likely been at least a 13 percent increase in the price needed to breakeven.

The three-market average price for the first week of June 2022 on 60- to 90-pound feeder lambs was $248.07 per cwt. This was down from the last week of April high of $315.38 per cwt. 

As of the June 6 forecast, the Livestock Marketing Information Center was still projecting a strong fall with prices for the three-market average in quarter three ranging from $272 to $279 per cwt and quarter four ranging from $270 to $278 per cwt.

While these projections remain above the estimated breakeven prices, it is also evident with the rising cost of production there is less room for error. Producers certainly will need to keep a close eye on their costs to maintain positive returns. 

Wool outlook

After a couple of weeks of losses in the Australian Eastern Market Indicator (EMI) in May, the EMI strengthened in early June. After a loss of 14 Australian cents per kilogram clean the week of May 25 and a loss of six cents per kilogram clean the week of June 1 with the market closing at 1,414 Australian cents per kilogram clean or U.S. $4.59 per pound, the EMI increased 24 cents to close at 1,438 Australian cents per kilogram clean or U.S. $4.71 per pound in week 49 of the current market year on June 8.

This was the highest weekly value posted since March 2020. At the time this article is printed, the industry will be through the final week of the marketing year and starting on next year.

The Australian EMI report showed prices on an upward swing across all micron levels for the week ending June 10. Price increases ranged from U.S. 15 cents per pound to U.S. 18 cents per pound for micron levels between 17 and 22 as demand for fine wools remains strong this year. Micron levels of 26 and 28 saw the smallest gains of U.S. two cents per pound and U.S. three cents per pound, respectively, as the demand for coarse wool remains sluggish.

There is much uncertainty with the current economic environment and its potential impact on consumer demand for wool. The exchange rate between the Australian dollar and the U.S. dollar will continue to influence the wool market as the international economy adjusts to rising inflation.

If price inflation continues as forecasted, consumers’ willingness to pay for wool products could change as any slowdown in the world economy could also cause a reduction in the demand for wool.

This article is courtesy of University of Wyoming Interim Associate Director Bridger Feuz. It was featured in the July 2022 Sheep Industry News, Volume 26, Issue 7. Send comments on this article to roundup@wylr.net.