The LRP-Lamb plan of insurance uses a "Calculated Formula Live" slaughter lamb price in the price-prediction model as both one of the model variables and it generates the "Expected Ending Value" (EEV) as a Formula Live price for the insurance offer. Appropriately, this is the same price series that is used as the "Actual Ending Value" (AEV) for slaughter lambs when calculating indemnities. The Calculated Formula Live price per hundredweight is derived by multiplying the reported weighted weekly average formula carcass price by the reported weighted weekly average dressing percentage and then dividing the result by 100.
A summary of Formula lamb prices is reported weekly by USDA/AMS on a weighted average basis (USDA/AMS report no. LM_LM352). Formula prices are one of three different main types of transactions that can be described in this report. Others include "Negotiated" and "Forward Contract." Under the Negotiated and Formula categories, live and carcass prices plus imported and domestic prices can be reported. Volume and price are reported by category when doing so doesn't violate confidentiality rules. All prices reported in LM352 are in the packer direct trade; packers are required by regulation to report lamb purchases in a prescribed manner so that the summary can be reported. Lamb sales transactions that are sold outside of the direct trade are not reported in the USDA Livestock Mandatory Reporting (LMR) system.
Direct trade lamb prices were chosen to use in the LRP-Lamb prediction model for several reasons including:
- A national price is required;
- A delivered or standard delivery specification is required;
- A long, large-volume historical dataset is needed to accurately make predictions;
- Prices are reported under the Livestock Mandatory Reporting regulation; and
- The Formula category under LMR was the best fit with older data under voluntary reporting as the historical dataset was built for modeling purposes.
Lamb price levels in the Formula and Negotiated categories move together over time although daily and weekly differences are common. Likewise, lamb prices reported under the USDA/AMS voluntary system move with direct sales; however, price-level differences are normally more pronounced due to transportation cost and other "basis" differences. Therefore, the weekly average Calculated Formula Live price that is used for the LRP-Lamb insurance offering EEV and AEV is representative of the slaughter lamb market even though it may likely differ from other reported slaughter lamb prices and price series.
Definitions for "Negotiated" and "Formula" transactions are in the LMR regulation. Basically "negotiated" refers to a transaction in the cash or "spot market" -- one where the buyer and seller come to agreement on a price and the lambs will be delivered to the packer within 14 days. "Formula" means that the price for the lambs will be decided upon after they are slaughtered and the buyer and seller agree on the parameters for which the price will be decided (guaranteed yield, target carcass weight and pelt condition are examples).
Producer A talks with packer 1 and they agree that based upon last week's carcass trade, reported pelt values, producer A's reputation for quality genetics and what they think lamb demand is doing at the retail level, a fair price for producer A's 350 head of shorn lambs is $110.00 per cwt delivered to packer 1's plant next Monday morning by 4:30 AM. The price does not change at any time throughout the transaction based on how the lamb carcasses or pelts perform. This is a "Negotiated Live" sale.
Producer B talks with packer 2 and they agree that the carcass market has been moving up and down over the past month, retail demand seems steady and the weather looks threatening so the next few days would be a good time for producer B to market a 350 head load of lambs. Producer B has a reputation for good genetics and has done a good job of feeding and marketing his lambs at peak condition. Producer B and packer 2 agree that producer B will deliver his lambs to packer 2 on Thursday morning by 5:00 AM, they will be slaughtered that day, the carcasses will be weighed and sent to the cooler. The carcasses will be graded for quality and yield and packer 2 will pay producer B $218.00 per cwt for Choice, Yield Grade-1, $228 per cwt for Choice or Prime Yield Grade-2, $221.00 per cwt for Choice Yield Grade-3, $215.00 per cwt for Choice or Prime Yield Grade-4 and $200.00 for Choice or Prime Yield Grade-5. Carcass weights under 60 lbs will be discounted $4.00 per cwt; carcasses over 80 lbs. will be discounted $6.00 per cwt. There is also a $25.00 per cwt discount for Yearlings and No-Rolls. This is a "Formula Carcass' sale.
Producer C talks with packer 3 and they, like producer B and packer 2 agree that the carcass market has been moving around, demand looks steady and the weather could turn sour so they come to agreement that producer C will deliver lambs to packer 3 on Thursday morning to be slaughtered. Packer 3 has bought producer 3's lambs before, sometimes they have been of excellent quality and sometimes they have not yielded as expected or have been carrying muddy pelts. They agree on a base price of $110.00 per cwt for the load of 350 head of slaughter lambs that are expected to weigh 145 lbs. on average with a sliding scale on carcass weight and pelt condition. Producer C will be paid for his lambs once the lambs are slaughtered and the carcasses and pelts are graded. Carcass yield is guaranteed at 51.5 percent with a discount of $2.00 per cwt per 1 percent drop in carcass yield below 51.5 percent. Carcasses that weigh below 60 lbs. will be discounted $4.00 per cwt, carcasses over 80 lbs. will be discounted $6.00 per cwt. Choice, Yield Grade 1's will be discounted $3.00 per cwt, Choice, Yield Grade 2's will be at a $4.00 premium, Choice, Yield Grade 3's will be par, Choice, Yield Grade 4's will be discounted $6.00 per cwt and Choice Yield Grade 5's will be discounted $10.00. Lambs grading Prime will receive a $2.00 premium. Number one pelts are par, number two's will be discounted $1.00 on the lamb, wooled pelts will be discounted $2.00 on the lamb. Lambs with burrs or mud balls in their pelts will be discounted $5.00 per cwt. A $25.00 per cwt. discount is applied on each carcass that is a no-roll or yearling. This is a "Formula Live" sale.
Producer D talks with packer 4 and the producer agrees with the packer that they want to get their lambs slaughtered before they get too big. Producer D wants to make sure that he will get a fair price for his lambs even though some of his lambs may be considered to be on the heavy side right now. Packer 4 agrees to take the risk on what the pelts will actually grade and will not discount for any yearlings on the load. Producer D and packer 4 agree on a carcass price of 200.00 per cwt. for all lambs delivered, regardless of weight. Producer D and packer 4 agree that producer D will deliver his lambs to packer 4 on Wednesday morning by 6:00 AM. Carcasses are weighed and sent to the cooler. This is a "Negotiated Carcass" sale.