The Lamb Industry Report Card
JULIE STEPANEK SHIFLETT, PH.D., Juniper Economic Counsulting
The kids are back in school. Remember brown bagged lunches, jammed locker doors, homework and the looming tell all: report cards? What does the lamb report card look like? How are we doing? How do we measure how we are doing? Do all segments of the industry earn returns that invite reinvestment? Lamb industry growth is dependent on that ever elusive, tough-to-understand consumer demand. And demand for lamb is based upon the complex tastes of our consumers. Industry divestment and laments of lower demand might have some discouraged, but the industry is working hard on a plan for growth, so–as I tell my kids–there’s always next quarter.
Where Are We Headed?
As we enter the fourth quarter we typically see supplies drop and prices gain toward the December holidays. Last year, fourth quarter wholesale lamb was at a three-year low, but still higher than 2008 and 2009 averages. This year, tight domestic supplies, lower imports and the U.S. Department of Agriculture’s (USDA) lamb purchase program will help support domestic prices. We are on track to match 2008 and 2009 prices.
Reportedly, commercial lamb supplies in Colorado feedlots were very current last August. In fact, demands by packers likely exceeded the supply of available lambs. As heavier lambs were sent to market and newer feeders were not yet market ready (finished), slaughter weights began to fall. Dressed slaughter weights averaged 67.80 lbs. in August, down 3-percent monthly and down 6 percent year-on-year. As weights and slaughter numbers drop, production also contracts.
In the year through August, estimated lamb slaughter was up 8 percent for the year and lamb production was up 1.5 percent for the year at 94.3 million lbs. By early September, there were likely ample supplies in storage and in the pipeline for December holiday sales. Lamb and mutton in cold storage was 22.7 million lbs. at the beginning of August, up 18 percent monthly and 6-percent lower than a year ago.
Getting from early October to the December holidays might mean rationed supplies and higher bids for slaughter lambs.
In early September, the Livestock Market Information Center (LMIC) estimated that third-quarter slaughter lambs on a national direct, carcass-based trade could average $235 to $245 per cwt., up 8 percent year-on-year. Prices are expected to gain about $15 per cwt. quarterly in the fourth quarter.
In mid-October the Muslim celebration of Eid ul-Adha will likely siphon off some portion of feeders. In some markets, this Muslim Festival of Sacrifice has a larger impact on lamb prices than Ramadan which occurred in July and August.
In the three-market auction average, 60- to 90-lb. feeder lambs were estimated to range from $135 to $145 per cwt. by LMIC, up 37 percent year-on-year. LMIC’s forecast for the third quarter was from $125 to $130 per cwt., but these highs were not met as of this writing in early September. The forecast might have been built on stronger slaughter lamb prices and more confident corn forecasts. It is foreseeable that we still see feeder prices gain through September.
In the fourth quarter, LMIC estimated that lower slaughter (down 2 percent) and lower slaughter weights (down 3 percent) will put pressure on production (down 5 percent).
LMIC estimated that fourth quarter lamb and mutton imports could be the lowest in three years, at 18 million lbs. If Australia and New Zealand see improved growing conditions then slaughter rates will drop as producers begin rebuilding flocks. Additionally, if the European Union (EU) continues to grow, as it has, we could see some lamb exports from New Zealand, in particular, as well as Australia diverted to the EU. The EU is a strong lamb market, but the Middle East has also recently established itself as a growing lamb importer.
Farm incomes are expected to be lower in 2013 from a year ago. USDA’s Economic Research Service (ERS) forecasted that due to reduced farm income forecasts in 2013, median farm income is expected to decline by $2,300 — lower than the $1,453 drop seen in 2012.
There is good news, however. ERS explained that while farm incomes are down, increases in farm asset values are expected to exceed increases in farm debt, with farm real estate the main driving force. Both the debt-to-asset ratio and debt-to-equity ratio are expected to reach historic lows (8/27/13).
Many farm households do not make positive profits and for most, income comes primarily from off-farm sources. In 2013, it is expected that off-farm income for ‘farm’ families could be up 2 percent to $60,659 (8/27/13).
Feeders Up in August
Feeder lamb prices have been disappointing. With prices in 2011 and early 2012 topping $200 per cwt., the $108 per cwt. seen at auction in August was dismal. What happen to the $150 per cwt. seen in January? The industry would probably have been pleased with $150. It is believed that prices were bid up based upon expectations for stronger Easter sales and a stronger slaughter lamb market. But forecasts were likely dashed by higher-than-expected imports. First-quarter lamb imports were 27-percent higher year-on-year.
With older lambs already sent to market and the cost of feed trending lower, the market saw renewed interest in feeder lambs in August.
Feeder lambs in direct sales averaged $106.75 per cwt., up 4 percent month-to-month. August’s average was 9-percent higher than a year ago, yet down 19 percent from its five-year average.
Remember that 2011 was a record year for feeder lambs: the August average was $229 per cwt. This record makes comparing prices to a ‘normal’ year tough. This August’s price was 0.44 percent above the five-year August average if we don’t count 2011 in the average.
Feeders were moving in August with a total of 26,400 head placed in feedlots—a three-year high. Lambs were moving out of Idaho, Utah, Colorado, Montana, Nevada, California and Texas.
The three-market, 60 to 90 lbs. feeder lamb prices at auction averaged $108.81 per cwt. in August; steady with July and up 15 percent year-on-year. Prices in Ft. Collins average $104 per cwt., down 1 percent and up 9 percent year-on-year. Prices in Sioux Falls averaged $113.63 per cwt., up 2 percent monthly and up 20 percent.
In August, corn and hay prices declined which lowers feed costs and prompts increased feeder purchases.
Corn averaged $6.02 per bu. in August, down 11 percent monthly and down 21 percent from a year ago. August corn was 16-percent lower than the season high of $7.13 per bu. in March. Alfalfa averaged $200 per ton in August, 4-percent lower monthly and down 1 percent year-on-year. Hay, other than alfalfa, was $140 per ton in August, down 6 percent from September and down 1 percent year-on-year.
Overall, acreage planted and yield forecasts promise to bring lower-priced corn in its 2013-2014 season. Many forecasters are nervous, however. Good spring moisture evaporated in many states as temperatures soared and precipitation evaporated. Average precipitation across Indiana, Illinois and Iowa in August, for example, was the lowest since records began in 1895 (CME, 9/4/2013). Another concern as cited in the “The Daily Livestock Report” was that in early September both corn and soybeans growth were still very immature which gave rise to concerns about possible frost damage (9/4/13). However, on Sept. 4, the Chicago Board of Trade reported, “Weather looks to be more of the same in the near term, which should speed along the harvest from the slow crop development this year.”
The Chicago Board of Trade reported: “While the 2013 production season got off to a rocky start due to late planting in many areas, expectations into early August were for larger crops than in 2012, increased consumption during the 2013-2014 marketing year, a build-up in stocks by the end of the year, and much lower prices than during the previous year (CME, “farmdocdaily,” 9/3/2013).
In the Aug. 12 USDA report, the 2013-2014 forecast average farm price was projected in a range of $4.50 to $5.30 per bu., compared to an average near $7.00 for the previous year,” (CME, “farmdocdaily”, 9/3/2013).
On Sept. 6, corn futures were still below $5 per bu. December corn was $4.64 per bu. and $4.76 per bu. in March 2014 (Chicago Board of Trade, 9/6/13).
Slaughter Lambs Mixed
Slaughter lamb prices were mixed in August with prices at auction and on a live, negotiated basis showing some weakness while lambs on formula gained 1 percent. Lambs on formula were priced lower than live, negotiated lambs, but weights were higher.
In general, slaughter lamb prices on formula held very steady this year, with only marginal gains from about $112 to $115 per cwt. in August.
Slaughter lambs at auction averaged $107.72 per cwt., down 1.5 percent monthly yet up 10 percent year-on-year. Although the market had recovered some, August’s average was still down 10 percent from its five-year average.
However, whether prices are good or bad all depends on your point of reference (and your costs). If we compare August auction prices to the five-year average we are still down, but if you compared it to the average and remove the record-high prices in 2011, we are 4-percent higher than the August four-year average.
San Angelo was the lowest-priced market reported at $87.10 per cwt., down 5 percent monthly. Equity Livestock auction saw the highest prices in August at $119.67 per cwt. in limited trades. South Dakota was also high, at $116.68 per cwt., Ft. Collins averaged $111.25 per cwt. and Kalona, Iowa, averaged $110.13 per cwt. All markets except Equity were weaker month-to-month.
Slaughter lamb prices on a carcass-based formula averaged $228.89 per cwt. in August, up 1 percent. The live equivalent price was $115.13 per cwt. Average dressed weights of slaughter lambs on formula dropped 4 percent monthly to 80.16 lbs. On a live basis, the average was 159 lbs.
Slaughter lambs on a live, negotiated basis averaged $116.89 per cwt. in August, down 1 percent for the month. The live weight of negotiated lambs was lower, 137 lbs. in August, down 4 percent monthly.
In the first six months of the year, lamb and mutton imports were up 25 percent year-on-year. Lamb imports were up 18 percent to 76.4 million lbs. Australian lamb imports were up 17 percent to 50.7 million lbs. and New Zealand lamb was up 22 percent to 25.6 million lbs.
Total mutton imports were up 66 percent at 16.7 million lbs. Australian mutton imports were up 73 percent to 11.7 million lbs. and New Zealand mutton was up 46 percent to 4.8 million lbs.
Meat and Livestock Australia (MLA) reported record lamb exports in 2012-2013, but forecasts an export slowdown given tighter lamb supplies. “Given the impact of the higher turnoff throughout 2012-2013, the supply of lambs is expected to be tighter in the first half of 2013-2014, potentially limiting the volume of lamb to be sent to overseas markets,” (9/6/2013).
MLA reported record high lamb exports in its season ending July 2013. Shipments were higher to most markets in 2012-2013, with China and the Middle East taking record volumes for the year – up 24 percent and 37 percent respectively year-on-year. Most other major markets took large volumes of lamb, with the United States up 8 percent year-on-year and the EU up 3 percent (9/5/2013).
Lamb pelts weakened in August – back down to levels last seen in mid-2011. Fall clips averaged $12.35 per piece, down 3 percent; No. 1 pelts received $9.40 per piece, down 3 percent; and Imperial fall clips (from California) received $14.08 per piece, down 0.4 percent.
As slaughter weights come down, the size of pelts also falls. Pelt processors sell lamb pelts on a square footage basis so the smaller the pelt, the lower the price.
LMIC reported on Sept. 4 that beef byproduct values hit record highs this July. The byproduct comprises of hide values, but also variety meats including cheek meat, hearts, livers, tripe, tongue, meat and bone meal, and edible and inedible tallow. For beef, hides are by far the largest contributor to the cattle byproduct value with one hide topping $100 wholesale for the first time ever. This gain can be explained in part by strong car sales (and leather interiors!).
After the lamb or mutton is marketed, the other edibles, such as livers, are often marketed to ethnic markets where they are considered a delicacy. Lamb variety meats (kidney, liver, heart) have been relatively steady over the past year, but as supplies tighten, prices might be bid up. As a rough estimate, organ meats together with heads can be worth up to $5.20 per head.
If lamb byproduct values increase into the fourth quarter, this could help strengthen slaughter lamb price offers.
Wholesale Lamb Lower
Wholesale lamb (gross carcass value) averaged $277.79 per cwt. in August, down 0.7 percent monthly and down 13 percent from a year ago. The shoulder and leg gained marginally in August while the rack and leg posted lower prices. Except for the shoulder, all primals were down 15 to 17 percent year-on-year. The shoulder has held relatively steady over the past year.
The eight-rib rack, medium, was $495.88 per cwt., down 3 percent in August and the leg, trotter-off, was $297.03 per cwt., down 1 percent in August. The loins, trimmed 4×4, was $438.34 per cwt., up 1 percent monthly and the shoulder, square-cut, was $226.75 per cwt., up 1 percent in August.
Ground lamb was $514.75 per cwt. in August, down 2 percent monthly and down 6 percent year-on-year.
In the carcass market, lamb carcasses averaged $258.51 per cwt. in August, up 1 percent yet down 11 percent year-on-year. The lightest-weight carcasses saw a price discount relative to the heavier carcasses which strengthened into August. The light-weight carcasses might have been coming down from highs posted during Ramadan – the July/August period of fasting and celebration for Muslims. It is also possible that breakers and fabricators began to worry about tonnage as slaughter weights fell in August and were therefore bidding up the heavier carcasses.
The carcass trade covered 17 percent of the weekly slaughter, up marginally from 15 percent last August.
Where is Lamb Demand?
Lamb demand is a function of price, incomes, prices of substitutes and consumers’ love or indifference to lamb. In the past few years, many maintain that high prices hurt demand when in fact high prices — coupled with unsatisfactory quality and lower incomes — probably did hurt demand.
With some hiccups, prices in the fresh beef market trended strongly upwards over the past 12 months which is good news for the lamb industry. Beef at retail was up 1 percent in August from July and 5-percent stronger from a year ago. If the price of beef is higher, it makes lamb more competitive.
Comparing U.S. to imported prices is tricky for the available data challenges an apples-to-apples comparison. The common perception is that imports are more competitive, but this is not always the case. Some U.S. cuts might be more competitive.
Incomes growth has been slow which means less money available to spend on lamb. However, in August, car sales grew to levels not seen since before the recession. While income growth is slow and unemployment is still high, people are spending. During the second quarter, the economy fared fairly well with growth up to 2.5 percent and primarily fueled by consumer spending.
A third factor behind lamb demand is consumer preferences. Tracking lamb tastes and preferences is a tough nut to crack. Do consumers love American lamb? How do we know? There are anecdotal reports that consumers have been turned off by lambs’ high price and inconsistent undesirable quality. Price is worth talking about, but quality first.
There is little doubt that during the last year and a half when the feeding industry became less current with marketing, lambs became over-finished and older also. As sheep mature the meat quality changes. Meat from older lambs and over-finished lambs contributed to higher variability in consumers’ satisfaction levels with lamb in recent history .
Do we know what the ideal lamb looks like for maximum eating pleasure in the commercial market? Dave Thomas, Ph.D., extension sheep specialist Department of Animal Sciences, University of Wisconsin-Madison, believes that producing yield grade 2s (YGs) should be the industry’s goal (9/4/2013 and 7/17/2003).
Mountain States Lamb Cooperative would probably agree. Reportedly, it provides the highest price premiums to producers with around 84 to 88 percent of lambs yield grading 2.
According to Thomas, YG3 lambs are excessively fat, not desired by consumers and increase packer trim costs and feeder feed costs. At the other end, YG1 lambs are too thin: they might have poor eating quality due to low amounts of marbling. YG 2s are just right.
So what does the data show? Are the majority of our lambs YG 2s? Do YG 2s receive higher prices? No, and no. Over the past few years, only 34 percent of lambs were YG 2s. This means 66 percent of lambs are not what consumers want, by the definition presented here.
It was hypothesized that there would be a positive correlation between slaughter lamb prices and YG 2s. There wasn’t.
Roughly one-third of the industry is using a value-based pricing scheme to reward quality, but it is not obvious that the different grid programs across packers are rewarding the same type of lamb when looking at YG data.
Part of the problem is that there are concerns there are discrepancies between what the USDA graders grade and the actual grades. It very well could be that we are sending product to market that we think is ‘ideal’ which really isn’t. The American Sheep Industry Association (ASI), the National Sheep Industry Improvement Center (NSIIC), the American Lamb Board, along with USDA, are testing electronic instrument grading standards. It is the hope that “the equipment enhances the industry’s ability to predict quality and yield grades,” (NSIIC, 7/2013).
LMIC reported that there has been a growth in company or program type branded products in the meat and lamb industry (December 2012). However, the one national program we have in place has not been utilized: the “Certified Fresh American Lamb” program.
If labeled “Certified Fresh American Lamb” consumers would know that lamb, regardless of brand, was produced under a very narrow and optimum set of standards: It has to be YG 2. From 2000 to 2002, the USDA Lamb Meat Adjustment Assistance Program (201 Program) operated by USDA paid producers $5.00 per lamb premium for each lamb that produced a certified YG 2 carcass. The Certified Fresh American Lamb is not used today.
Now to price. Undoubtedly, price is a significant concern when choosing lamb. In a recent beef demand review, 89 percent of consumers ranked price as either the first or second most important attribute. The same would probably hold for lamb: it is less competitive than other proteins. It is also sometimes less competitive than our closest substitute, imported lamb. But high prices are not the lamb industry’s primary problem. Consumer surveys have shown that they will pay higher prices for high, consistent quality.
Imagine if the industry could offer a more competitive product. How can lamb producers — many of which have been producing for 50 years — produce lamb any cheaper? Perhaps the industry could increase efficiency by adopting accelerated lambing programs. Overall, the lamb industry is probably doing a pretty good job converting feed to pounds and lowering costs of gain in the feedlots. Lamb production per lamb has trended up since the early 1990s which suggests productivity gains. Dressed slaughter weights averaged 65 lbs. in the 1990s, and 69 lbs. in the 2000s through 2011.
The industry has a better chance for growth and investment by expanding demand rather than cutting costs. Writing with respect to the beef industry in the late 1990s, Dr. Wayne Purcell, alumni distinguished professor emeritus of agricultural and applied economics at Virginia Tech, reported: “It is also clear that any reasonable cost reductions beef producers have been able to realize are, in all likelihood, being more than offset by expanding retailer margins which drive producers’ prices lower. Doing it cheap is not working as a total or stand-alone solution to the problem,” (April 1998).
Australian Wool Hit 6-Month High
‘Brisk’ demand from China and increasing European interests led the way to higher price levels across a range of different wools (9/5/2013) says the WTiN (World Textile Information Network) Wool Market Report, based in the United Kingdom. The report followed: “Whether the pace of trading can be maintained remains questionable – how much pent-up demand remains in China after a prolonged quiet spell of trading is difficult to judge and mills and processors may begin to baulk at paying the significantly higher prices now quoted,” (9/5/2013).
The market remained cautiously optimistic, skeptical of any further price gains.The market remained cautiously optimistic, skeptical of any further price gains.
On a positive note, the weak Australian dollar makes Australian wool exports competitive and the Europeans could reenter the wool market, boosting demand. The European Union is now officially out of its recession.
In August the Australian Eastern Market Indicator (EMI) averaged 1,025 Australian cents per kg clean, up 2 percent monthly and up 7 percent from a year ago. It was the highest price level since February.
On Sept. 4, the Australian wool market averaged 1,128 Australian cents per kg clean, up 22 percent year-on-year. On a U.S. dollar basis, the average was 466 U.S. cents per lb. (AWEX “Weekly Wool Market Report,” 9/4/13).
Following the August recess, the Australian market strengthened, increasing 6-percent since the season end. “Growers appear encouraged by current levels and continued to sell into the rising market,” (AWEX “Weekly Wool Market Report,” 9/4/13).
At the end of August, Australian imported wool to the United States was bringing $5.04 to $4.85 per lb. for fine 19 and 21 micron, from $4.73 to $3.94 per lb. for mid-micron 23 to 25 micron and $3.60 to $2.72 per lb. for coarser 26 and 30 micron. Typically, U.S. wools sell for 75 to 85 percent of these values.
The U.S. wool market was quiet in August yet we will likely see some fall sales in the later part of the fourth quarter.