Activity Buzzes Ahead as Markets Experience Rally
JULIE STEPANEK SHIFLETT, PH.D.
(December 1, 2013) In a matter of weeks, the lamb industry saw a bustle of activity. Feeder and slaughter lambs at auction saw up to an unprecedented 47 percent price jump in the four weeks to November. Even the wholesale meat market saw an 8 percent lift after dropping 11 percent between January and September.
After working through months of over-finished lambs, commercial feedlots became very current in 2013. So much so that after months of relatively higher weekly slaughter rates, the pipeline began to decrease and feeders and packers began to bid up prices in order to fulfill orders.
I confess I worried that the government shutdown would have an ill effect on the industry, but I couldn’t have been more wrong. When the government reopened, it was with such relief to see that slaughter lambs on formula were higher and the meat market had gained.
The Livestock Market Information Center (LMIC) cautioned in late October that "much of the recent wholesale and live animal price gains have been due to reduced supply, not rebuilt consumer demand." If demand is holding constant and supply begins to shrink then this puts pressure on lamb prices to rise. Between July and October, weekly slaughter slipped from about 44,000 head per week to about 40,000 head. Not since 2010 have we seen so many weeks at around 44,000. This high rate of slaughter likely put pressure on feeders to deliver and consequently slaughter weights began to drop.
Demand got ahead of supply this year and supply couldn’t catch up. As a consequence, we saw higher prices and much lower slaughter weights, down 13 percent from a year ago at 63 pounds. Slaughter rates in the second and third quarters were higher than a year ago. Overall, weekly slaughter through October averaged over 2,200 head higher than a year ago. As demand outpaced supply, weights began to drop. As weights dropped, it took an even greater number of slaughter lambs to meet production targets. By mid-October, supply couldn’t keep up and slaughter levels began to fall sharply lower than a year ago.
Feeder Lambs Sharply Higher
Within a matter of 4 weeks, feeder lambs in direct trade jumped 32 percent or 40 cents per cwt. We haven’t seen this kind of activity since the run-up to record highs in 2011. LMIC reported that "feeder lamb prices have been pulled higher by stronger slaughter lamb markets and lower feedstuff costs faced by lamb feeders" (10/28/13).
By early November, the feeder lamb market steadied after a multi-week rally, reported the U.S. Department of Agriculture’s (USDA) Agricultural Marketing Service (AMS). The vast majority of feeder lambs have traded for the year although "there will still be a few clean up sales in the next few weeks" (11/1/13).
At Producers Livestock Auction, San Angelo, feeder lambs gained an average 47 percent in the month to Oct. 26. Forty- to 60-pound feeders jumped to $190 per cwt., 60- to 90-pound. feeders averaged $194 per cwt. and 90- to 110-pound. landed at $186 per cwt.
Feed Cost Moved Lower
USDA predicted a record corn crop this year, but farmers across the United States have had varying results at harvest due to being too dry or too wet. In September, the USDA Economic Research Service (ERS) reported higher yields for the Central Plains, and across the South, more than offset yield reductions for Iowa and North Dakota.
Corn weakened in July and even more sharply in August – the last two months of its marketing year – and yet the 2012/2013 farm price was still a record high at $6.90 per bu. (USDA/ERS, 9/16/13).
The USDA ERS 2013/2014 corn price forecast is for $4.40 to $5.20 per bu. (USDA/ERS, 9/16/13). Jim Hilker, agricultural economist at Michigan State University, forecasted $4.20 per bu. for the 2013/2014 marketing year.
On Nov. 4, the December corn future was $4.28 per bu. and the March contract was $4.37 per bu. The futures price for corn represents the ‘market’s’ best estimate of what the corn cash price will be at the maturity date specified on the futures contract (Hilker, J., 2013).
Lower corn has helped lower feed costs. By October, the cost of gain of lambs on feed dropped by about 50 cents per lb. to roughly $1.10 to $1.25 per head compared to a year ago.
Alfalfa slipped 0.5 percent lower in October to $193 per ton, 9 percent lower than a year ago.
Slaughter Lambs Strengthened
Bolstered by tight supplies and hopefully stable demand the slaughter lamb market saw a significant lift in October. Slaughter lambs at auction jumped 22 to 36 percent in the four weeks to Nov. 1. Slaughter lambs on formula, however, saw only a 4 percent gain.
Equity Cooperative Livestock Auction saw prices climb steadily week-to-week through October. The September average was $108 per cwt., but jumped weekly to $137 per cwt., to $165.50 per cwt. and then to $158.50 by Oct. 31. Slaughter lambs averaged $147 per cwt. over three weeks in October, up 18 percent monthly and up 63 percent from one-week’s sale last October.
On a live, negotiated basis, the last week of October saw a $140.54 per cwt. average, up 15 percent monthly and up 37 percent from a year ago.
By contrast, slaughter lambs bought on formula – or a grid – averaged much lower than live sales. Slaughter lambs on a carcass-based formula averaged $254.84 per cwt. in the last week of October, up 4 percent monthly and up 15 percent year-on-year. On a live equivalent basis, the average was $128.44 per cwt.
In late October, LMIC forecasted that commercial lamb and mutton slaughter could fall 10 percent between the fourth quarter of 2013 and first quarter of 2014. With dressed slaughter weights gaining a few pounds, production is expected to fall 1 percent quarterly. With supplies tightening sharply into early next year, both feeder and slaughter lambs are expected to rise quarterly.
Packer-Owned Lambs Up
In August, September and October, the share of packer-owned lambs in total weekly slaughter began to climb. In September, packers owned 19 percent of weekly slaughter, which backed down to 11 percent by October. While high historically, we have seen even higher rates of ownership. In June 2011 – as prices were on their record-breaking upward trajectory – packers owned 27 percent of monthly slaughter.
This high rate of ownership might be a signal of tight supplies. The commercial market might be facing heightened competition with the nontraditional market this year, but there are also reports of western lambs that went straight to slaughter that once were sent to feedlots. The recent strong packer position in the market might also be a sign that orders need to be filled, which is good news.
Slaughter Weights Drop Sharply
Reduced availability of slaughter lambs put pressure on slaughter weights. As LMIC explained in late October, "It appears many lambs were processed early this year and the pipeline is now reduced."
In the last two weeks of October, the average slaughter weight was 126.50 pounds, down 4 percent from the last two weeks of September and down 13 percent year-on-year from 145 pounds. The end-of-October dressed weight average was 63.5 pounds.
The USDA ERS reported that "the lighter carcass weights suggest that lamb quality is improving and the problem of over-finished lambs may have abated" (9/18/13).
If dressed weights are 72 pounds and weekly slaughter is 40,000 head, then production equals 2.88 million pounds. If dressed weights drop to 63.5 pounds., then a little algebra tells us that in order to maintain production targets, slaughter has to increase by 5,354 head per week or 13 percent. For packers to attempt to secure this excess, prices got bid up.
Maintaining some critical mass of lambs channeled through a slaughter plant is important to keeping employees employed and keeping costs down. If slaughter numbers fall below some critical threshold, then costs begin to rise. In a lamb market with sluggish demand recovery at retail, passing on these increased production costs might be a challenge.
The effect of lighter-weight slaughter lambs was clearly visible in yield grade reports. Increasing yield grade values are positively correlated with heavier slaughter lambs. As average slaughter weights dropped, the number of yield grade 4s and 5s dropped and we saw an increase in lower yield grades.
In the first nine month of the year, the percent of lambs yield graded that were yield grade 4 dropped from 18 to 14 percent year-on-year and yield grade 5s dropped from 14 to 9 percent. Also, as lambs got lighter weight, the percent of yield grade 1s jumped from 5 to 8 percent.
Meat Market Gained
In September, there was some concern that the meat market would not respond to higher slaughter lamb prices. That apprehension evaporated by the end of the October.
The gross carcass value (wholesale average) was up 8 percent monthly at $303.25 per cwt. in October, although down 1 percent from a year ago. There is still some uneasiness, however. For packers to maintain margins at September levels the wholesale market will have to rise even further to cover higher input costs (that is, the price of slaughter lambs).
In October, we saw our high for the year with the wholesale market pegged at over $331 per cwt. Is this too high? Will we see another consumer backlash as in 2011? No, not likely. The wholesale market was still 26 percent below the record-high $409.76 per cwt. seen in November 2011, nearly 2 years ago.
There are a few factors that suggest that meat prices can easily move higher without consumer resistance as seen in 2011. First, our lamb is now very good quality, not the heavier, fatter lambs produced two years ago. Second, U.S. incomes – after accounting for inflation—are 1 percent higher than two years ago. This helps boost consumers’ willingness to pay. Third, retail beef is record high. If beef is high relative to lamb, some consumers might substitute lamb for beef.
The leg posted the greatest percentage gain in October with the shoulder and rack close behind. The leg is a typical holiday order and October is the time when retail and foodservice operators begin to fill their coolers.
The leg, trotter-off, was $331.72 per cwt. at the end of October, up 10 percent monthly and down 0.5 percent from a year ago. The shoulder, square-cut, was $245.63 per cwt. in October, up 8 percent monthly and up 2 percent from a year ago. The 8-rib rack, medium, was $552.38 per cwt. in October, up 7 percent for the month and up 1 percent year-on-year. The loins, trimmed 4x4, was up 5 percent for the month and down 10 percent from a year ago.
At $462.87 per cwt., the leg, trotter-off, semi boneless was up 6 percent month-to-month yet down 5 percent year-on-year. The rack, roast-ready, special averaged $1,350.44 per cwt., up 4 percent monthly and down 3 percent from a year ago.
At the beginning of October, 23.4 million pounds was reported in cold storage, 7 percent higher monthly and on par with a year ago. While average monthly freezer volumes have come down 3 percent this year, volumes are still historically high.
Eid ul-Adha, the Muslim Festival of Sacrifice was held on Oct. 15 this year compared to Oct. 25 a year ago. The holiday coincided with the run-up in commercial feeder lamb prices so it is questionable whether the two markets fed on each other to push prices even higher.
In the six weeks leading up to the Muslim holiday, 90- to 110-pound slaughter lambs at the New Holland, Pa., auction saw prices that were 3 percent higher over the previous six weeks and 11 percent higher than a year ago at $128.88 per cwt.
In early November, the USDA AMS reported that featured retail lamb "pricing on the majority of items trended modestly higher" (11/1/13). The two most heavily featured items continued to be the shoulder blade chop and the loin chop.
The shoulder blade chop was featured at $5.43 per lb. in the two weeks to early November, up 8 percent year-on-year. The loin chop averaged $8.14 per lb. in this period, down 8 percent from a year ago.
Replacement Market Saw Lift
Muslim Holiday Boosted Nontraditional Market
Retail Trended Higher
As feeder and slaughter lamb markets saw much higher trades, the replacement market followed in suit. By early November, AMS reported that replacement ewes were mostly steady with a firmer undertone (11/1/13). The uptick in replacement trades might mean we see higher inventory counts next January.
Ewes averaged 12 percent higher monthly in October and 10 percent higher year-on-year. Yearling ewes (12 to 24 months) received $182.81 per head in October, up 10 percent monthly. Young ewes (2 to 4 years old) averaged $150.16 per head, up 16 percent monthly. Middle aged ewes (5 to 6 years old) received $97.43 per head, up 13 percent monthly.
Ram prices were not established in October.
Reportedly, 3,000 to 4,000 head of sheep were lost in the early October South Dakota blizzard (High Plains Journal, 10/28/13). Hopefully, producers will be able to receive compensation for their lambs through USDA programs. Fortunately, the national USDA replacement value for lambs under 50 lbs. jumped 36 percent monthly in October to $79.32 per cwt., 30-percent higher than a year ago.
Lamb imports were up 15 percent through August year-on-year to 99.8 million lbs. Australia’s lamb imports were up 10 percent in this time to 67 million lbs. and New Zealand’s imports were up 25 percent to 32.2 million lbs.
Through August, total lamb availability (domestic and imported) was 199.18 million lbs., up 8 percent year-on-year. In this period, domestic production was up 2 percent and imports were up 15 percent.
Mutton imports were up 37 percent through August to 19.5 million lbs. Australia’s mutton imports totaled 13.8 million lbs., up 44 percent, and New Zealand mutton was up 15 percent to 5.3 million lbs.
Live slaughter ewe exports to Mexico totaled 22,349 head through October compared to 0 head during the same 10 months a year ago. In total, live sheep exports were down 2 percent year-on-year through October to 29,957 head.
Lamb exports totaled 354,000 lbs. through August, up 79 percent year-on-year. Mutton exports were down 28 percent in the first eight months to 4.7 million lbs.
AMS reported in early November that slaughter ewe prices were firmer on increasing export demand.
At Producers Livestock Auction, San Angelo, Texas, ewes gained between 20 to 36 percent in the month to November. Good ewes averaged $45 per cwt., utility ewes averaged $44.50 per cwt. and cull ewes averaged $34 per cwt.