Market Report

Stronger Markets Prevail Heading Into the New Year

Julie Stepanek Shiflett, PH.D.
Juniper Economic Consulting

What are the industries’ New Years resolutions? We’ve learned some important lessons in the last few years: quality matters, consumers are price sensitive and no one likes price volatility. As 2013 drew to a close, so too did the ALB-funded lamb industry assessment study. All segments of the industry contributed to the Hale Group’s recommended “Road map” for growth. The Hale Group explained that the road map is a process. At its epicenter is developing an industry that can consistently deliver high quality lamb.

This platform for growth couldn’t have happened at a better time, for the industry has been given the opportunity to start the New Year on an upbeat note. After a volatile and sluggish start last year, the third and fourth quarters of 2013 proved to be a welcome surprise. Lamb supplies were unexpectedly tight and the corn harvest bountiful. Supported by a high-quality product, the industry began to see prices gain in the second-half of 2013.

Feeder lambs at auction jumped 70 percent in the six months to November, while slaughter lamb prices at auction gained 42 percent over the same period. After weakening through the first half of 2013, the wholesale market did an about face and climbed 18 percent between June and November. While prices didn’t reach the 2011 record highs, I believe many producers, feeders and processors were pleased.

What’s in store for 2014? It’s a tough call given recent volatility, but there are some key indicators that point toward stabilization and growth. First, if demand stays ahead of supply – as in the fourth quarter of 2013 – we will not see the repeat problem of over-fat lambs. Quality was excellent heading into 2014. Second, high prices for all competing proteins will help support American lamb demand. Third, rising incomes – albeit slowly – will only help lamb.

As Superior Farms explained in its December 2013 Lamb Market Report, it is projecting “continued strong demand and stabilizing of pricing for American lamb in the New Year.” Producers want less volatility in the market, but so does retail and foodservice. Superior explained that retailers and restaurateurs needed stability in their pricing of wholesale products to provide a consistent, high quality experience to their American lamb consumers.

Many believe the key to success is in ensuring that producers, feeders and processors are rewarded for producing and delivering a consistently high-quality lamb to our consumers. This means receiving top dollar for a superior product. According to the Hale Group, this means product improvement can be achieved through “adoption of a consumer-driven, value-based pricing for slaughter lambs; installation of electronic grading at packing plants; and a routine Lamb Quality Audit.”

Quality consistency can command price premiums. Charlotte Maltin, Quality Meat Scotland, found that “Ninety percent of consumers would pay more for guaranteed (meat) eating quality” (The Meat Site, 2/14/2011). She continued, “On average we pay an 11 percent premium for a guaranteed eating quality and 89 per cent of consumers surveyed said that both producers and processors should be paid more for guaranteed eating quality” (The Meat Site, 2/14/2011).

The American Lamb Board and the National Sheep Industry Improvement Center co-funded a study to finalize the instrument grading standards and to evaluate the benefits and effectiveness of the system. The use of instrument grading provides the opportunity to reduce variability in the subjective application of yield grades to lamb carcasses, improving the predictability of the saleable cuts and the ability to establish value-based returns on quality lambs.

Export Value Up
Lamb and mutton exports are a viable option to manage domestic supplies and support domestic prices. The U.S. exports more mutton than lamb, but lamb exports have seen periods of growth.

In the 10 months through October, the value of U.S. sheep and lamb exports was up 7 percent to $23.6 million, but the volume was down 7 percent to 23.3 million pounds (U.S. Meat Export Federation, 12/2013). Mexico was the main lamb and sheep meat export market for the U.S. with 62 percent of the total. The numbers include fresh, chilled and frozen product, as well as carcasses, cuts and bone-in.

One long-time live exporter, David Winters, commented that the cross-border regulations to Mexico prompted him to switch from the live sheep to the sheep meat carcass trade. He commented in December that trade was good with the Dec. 12 Mexican holiday – Día de la Virgen de Guadalupe, the Feast Day of our Lady of Guadalupe, patron saint of Mexico – creating an uptick in demand.

In the nine months through September, lamb exports were up 40 percent to 358,000 pounds and mutton exports were down 31 percent to 5.2 million pounds While mutton exports were down, live trade to Mexico was up. Live exports to Mexico fell to a trickle in 2012, but the trade rebounded significantly in 2013. In the eleven months through November, over 41,000 head were shipped to Mexico.

Part of uptick in trade is likely due to the drop in ewe prices. At Producers Livestock Auction in San Angelo, Tex., cull ewe prices averaged above $50 per cwt. in 2010 through 2012, but then dropped 28 percent to $40 per cwt. in 2013 (through November).

Another reason for the renewed live trade to Mexico is likely due to the strengthening Mexican peso. In mid-2012, the peso to US dollar rate was about 14, but strengthened by 12 percent by mid-2013 to 12.2. In the second-half of 2013, the Mexican peso began to weaken, but slaughter ewe prices were sufficiently low to offset the loss.

The Hispanic Lamb and Mutton Consumer
The U.S. exports live slaughter ewes as well as mutton. But let’s not forget that there is a sizable mutton market present in the U.S. as well. This market’s consumers are not as well documented as in the lamb market, but it is understood that Hispanics, as well as other ethnic groups, comprise most of our mutton consumers.

Several researchers have found that Hispanics look first for value. Therefore, they might be more price sensitive. One report found that “meat price is the predominant purchase factor for most Hispanic consumers. They may prefer lamb and goat, but chicken and pork are often more affordable,” (Hutchens, T. et al., University of Kentucky, 2010). In addition, the Hispanic consumer in general is likely to purchase lower-priced imported sheep and goat products rather than domestic supplies.

Can we speculate that as Hispanic incomes rise, so too will mutton and then lamb consumption? Given the growth rate of this population, we might see a significant new lamb consumer emerge.

The U.S. is a net importer of mutton. In the nine months through September, mutton imports totaled 21.3 million pounds, up 22 percent year-on-year. By comparison, during this period the U.S. produced nearly 6 million pounds of mutton, down 18 percent year-on-year.

Nontraditional Market Stronger
The New Holland Sales Stable auction in Lancaster, Pa. has grown. In the last five years, the volume of sheep and lambs channeled through the market about doubled to 4,000 head per week – about equal with the volume sold through the San Angelo market.

The New Holland Sales Stable auction saw price increases in the last couple months of 2013, similar to the commercial market. It is an ethnic market, but caters primarily to Muslims and some Greeks and Italians, rather than Hispanics. Christmas doesn’t attract customers like the Muslim holidays do. However, late December is busy – perhaps because New Holland is the only sale open in the area, and also because many ethnic buyers buy in preparation for New Year festivities.

On Dec. 2, the U.S. Department of Agriculture (USDA) Agricultural Marketing Service reported that New Holland had good demand with light test. It reported that it “appears that producers are learning that a shorter supply increases demand and in turn increases value.” We know that demand is strong during the Muslim holidays at New Holland. We also know that volume is larger during these periods. Are prices higher during periods of the year when volumes are lower?

The Hale Group commented that nontraditional market growth rate is believed to be very attractive. It explained: “Demand outstrips supply and there is little price sensitivity.”

It is estimated that while the commercial market has declined in volume over the past five years, the nontraditional market has held steady.

It follows that the non-traditional market represents a growing share of commercial slaughter. Ten years ago, it was estimated that the non-traditional market comprised about 22 percent of total weekly commercial slaughter. In 2012, that percentage jumped to 32 percent.

The volume of sheep and lambs at New Holland alone totals about 10 percent of commercial weekly slaughter. From this we can make a conservative assumption that when accounting for all other nontraditional sales at San Angelo and other auctions that about one-quarter of weekly commercial slaughter is non-traditional.

On Dec. 2, slaughter lambs at New Holland ranged from $211 to $218 per cwt. for lambs lighter than 80 pounds and heavier lambs (80 to 130 pounds) averaged $183 to $209 per cwt.

On Dec. 4, San Angelo saw slaughter lambs wooled and shorn Choice Yield Grade 2 to 3 weighing between 108 and 115 pounds bring $163 per cwt. Lighter weight lambs that were Prime and Yield Grade 1 received over $200 per cwt. Feeder lambs weighing between 68 and 92 pounds averaged $160 to $182.

Feeders Sharply Higher Year-on-Year
The USDA explained in November that the feeder lamb market has found levelness after a multi-week rally. By then, the vast majority of the feeder lambs have traded for the year (USDA/AMS, 11/22/13).

Sixty- to 90-pound feeder lambs at auction in Colorado, South Dakota and Texas weakened by 2 percent monthly to $182.01 per cwt. However, the three-market average was 81 percent higher than the $101 per cwt. observed a year ago.

Feeder lambs in direct trade averaged $175.71 per cwt. in November, up 6 percent monthly. The November average was 75 percent higher than last year’s value and sharply higher than November’s 5-year average of $131 per cwt. In November, close to 6,000 feeders traded out of Montana, with lower volumes out of Wyoming, Nebraska, California and Texas. Some 100-pound feeders from Montana traded at $190 per cwt.

Lower Feedstuffs
Lower cost of corn and alfalfa will hopefully enable many feeders to regain probability after years of losses. Corn production was forecasted at a record 13.9 million bushels, 897 million higher than the previous record for 2009/10. While harvested acres were down compared to 2012, yields were higher, boosting production.

The forecasted price received by farmers ranges between $4.10 and $4.90 per bu. (USDA Economic Research Service (ERS, 11/13/13). This season, the stocks-to-use ratio is much higher, projected at 14.6 – double that of last year – which helps to support lower corn prices.

Alfalfa averaged $188 per ton in November, down 3 percent monthly and down 13 percent year-on-year (Livestock Market Information Center (LMIC, 11/2013).

Auction Lambs Hit Highest Level since mid-2012
Slaughter lamb prices at auction averaged $152.15 per cwt. in November, up 1 percent monthly and sharply higher than $90 per cwt. last November and the $119 per cwt. 5-year average for November.

In November, San Angelo saw trades in the higher $140 per cwt., Ft. Collins saw prices just above $150 per cwt., Kalona, Iowa saw $152 and in Sioux Falls prices topped $160 per cwt. For trades in the first two weeks of November, Equity Electronic auction averaged $150.50 per cwt.

Slaughter lamb prices in live, negotiated sales averaged $152.31 per cwt., up 8 percent in November and 53 percent higher year-on-year. Average weights were $127.80 per pound, down 5 percent for the month and down 6 percent year-on-year.

Slaughter lamb prices on a live basis were higher than reported trades on a carcass basis. Slaughter lamb prices in the carcass-based formula trade saw a 10 percent jump in November to $279.21 per cwt. Prices averaged 27 percent higher year-on-year. On a live-equivalent basis, November’s slaughter lambs averaged $140 per cwt.

Stronger prices were likely due to the upcoming December holidays, reduced supplies and lighter weights. In November, slaughter lambs on formula weighed 73.84 per pound on a dressed basis (147 pounds live), up 3 percent for the month, but 8 percent lower year-on-year.

In November, the lightest-weight slaughter lambs attracted the highest prices in formula trades, yet all classes of lambs were in high demand with heavier lambs close behind

The Yield Grade composition reflected lighter weights at slaughter. In 2013 (through September), the percentage of lambs Yield Grading 1s and 2s was 45 percent, up from 32 percent yearon- year. The percent of lambs Yield Grading 4s and 5s was 22 percent through September, down from 32 percent year-on-year. Yield Grades 3 fell from 36 last year to 32 percent this year.

Rack Hit 18-Month High
The wholesale lamb average (gross carcass value) was $333.17 per cwt. in November, up 9 percent monthly and up 10 percent year-on-year. All primals, in addition to ground lamb, saw significant gains in November. The rack led the charge with a 24 percent gain to $686.09 per cwt., which was a 30 percent yearon- year gain. The 8-rib rack, medium, last reached this level in May 2012.

The shoulder, square-cut, also gained in November to $265.50 per cwt., up 8 percent monthly and up 10 percent year-on-year. The leg, trotter-off, saw a 7 percent gain in November to $354.59 per cwt., up 6 percent year-on-year.

The loins, trimmed, 4-by-4, averaged $476.78 per cwt. in November, up 2 percent monthly and down 5 percent year-on-year. Ground lamb gained 5 percent in November to $521.94 per cwt., up 0.5 percent year-on-year.

In November, the carcass market had moved up 9 percent to $287.72 compared to the previously reported 5 weeks.

Pelts Up
Pelt values gained in November, but faced early December weather-related challenges. USDA reported in early December, “Pelt prices were mostly steady, with a weaker undertone prevailing. Weather conditions have resulted in a decreased pelt quality due to mud. In addition, an increase of seedy pelts was noted also causing weakness in market (12/6/13).

On average, pelt prices were up 1 percent in November to $8.30 per piece, but down 4 percent year-on-year. Californian pelts were $12 per piece in November, up 2 percent monthly and up 2 percent year-on-year.

Shorter pelts – No. 3s and 4s – averaged $3.63 per pelt, down 3 percent monthly and down 19 percent from a year ago.

Retail and Food Service
In a December newsletter, Superior Farms commented that it has seen “strong movement through both retail and food service as consumer demand for American lamb grows.” Superior continued: “In spite of the recent market volatility, American lamb quality is thought to be the finest in the world.”

During Thanksgiving, retailers increased lamb featuring with a 145 percent week-to-week jump in lamb ads (USDA/AMS, 11/22/13).

AMS explained that lamb legs were the most featured item, but at lower prices, except for semi-boneless legs that were featured at firmer prices compared to the previous period. Lamb loin chops were highly featured during this period at steady prices.

The number of rack features increased, yet rack prices decreased slightly.

Lamb at retail and food service could see a boost in demand, given high-priced substitute proteins. October saw new record high retail prices for beef, pork and broilers (Daily Livestock Report, 11/22/13). When combined with per capita consumption figures, these retail prices indicate that meat and poultry demand remained generally strong in 2013.

Stronger incomes in 2014 will also help lamb demand. The U.S. economy grew about 2 percent in 2013 and is projected to grow by about 3 percent in 2014.

Lamb & Mutton Availability Up
Through September, total lamb and mutton availability in the U.S., including imports, was nearly 219 million pounds, up 7 percent year-on-year.

The rise in lamb prices in the second-half of the year suggested that lamb demand was expanding because more lamb was being consumed at higher prices (at least for domestic supplies). The gain in prices also suggests that the USDA lamb purchase program helped take some product off the market and that the industry is keeping its fresh sales separate from its frozen (freezer inventory) market.

At the beginning of November, there was 23.9 million pounds of lamb and mutton in cold storage, up 2 percent from October and up 3 percent year-on-year.

Through September, lamb imports were up 13 percent to 108.3 million pounds year-on-year, with an 8 percent gain in Australian imports and a 25 percent jump in New Zealand lamb imports.

An estimated 1.8 million head of lambs were slaughtered through November, up 7 percent year-on-year.

Wool Report

Wool Prices Higher in December

In December, there was a Utah wool sale in which the USDA reported 317,900 pounds of confirmed trades.

About 30 percent of the sales were west coast sales, another 50 percent were fall shorn wools out of Idaho, with the remaining 20 percent wool carryover stocks from the spring.

In mid-December, another wool sales was expected at Roswell.

In the Fleece States (some of California’s wools and the Midwest) in December, 23 micron wool averaged $3.85 per pound clean and 30 to 34 micron averaged $1.71 per pound clean. In the Territory States (some of California’s wools and the West), 21 micron averaged $4.11 per pound, 22 micron was $4.10 per pound, 23 micron was $3.51 per pound, 24 micron was 3.37 per pound, 26 micron was $2.48 per pound, 27 micron was $2.16 per pound and 30 to 34 micron was $1.81 per pound. There were not any clean wool trades reported out of Texas and New Mexico.

USDA reported that wools shorter than 75 mm were typically discounted 10 to 20 cents clean. Classed and skirted wools usually trade at a 10- to 20-cent premium to original bag prices.

In general, the recent fall wool sale could be of lower quality compared to spring sales due to the presence of a greater portion of lamb wools and generally lower yields of fall shorn wools. For example, fall shorn wools often have a mid-point break due to changes in feed. This means that a price comparison to spring sales must be corrected for the difference in quality.

The Australian Eastern Market Indicator (EMI) averaged A$ 1,106 per kg clean for wool in November, practically unchanged from October, but 7 percent higher than a year ago.

In November, Australian imported wool prices ranged from $5.39 per pound clean for 20 micron, $5.27 per pound for 23 micron, to $2.96 per pound for 28 micron.

Looking into the New Year, Australian exporters continued to express confidence over business prospects. Demand is expected to remain brisker than last season, while supplies of sought-after mid-micron Merino fleece are likely to tighten (according to the WTiN Wool Market Report, 12/9/2013).

Fur Report

Red Fox called ‘Hot’ as Fur Market Steadies

The best pale to extra-pale coyote skins from the Canadian/American prairies continue to fetch $100, while slightly off-color goods move at $75-90. Good western skins from the northern Rockies to the Cascades, as well as the better Northeasterns, are moving at $40-60 less lows. Semi-heavy skins are seeing offers of $25-40, depending upon section. Buyers continue to be cautious when picking up lesser quality from the lower Mississippi drainage to the East Coast, and offers of $15-30 are most common.

Coyotes are abundant just about everywhere, and because even the lesser goods sold well last season, lots of springy goods may be trapped late this year. However, I wouldn’t count on a repeat of good prices for late goods, as they just don’t process well.

Red fox is, well, red hot, with better Canadian/Alaskan goods fetching $100 or more as they find their way to market.

Ordinary heavy prairie goods are moving in the $60-75 range, less slight discounts on paler skins. Flatter Eastern types are seeing offers of $40-65, depending on section.

Grey fox is seeing $30-35 for better collections, while kit/swift fox is selling at $14-18.

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