Market Report

Sharp Feeder Lamb Advances Causes Optimism in Market

By Julie Stepanek Shiflett, Ph.D.

Feeder lamb prices made significant advances in August and were sharply higher from a year ago. In direct trade feeder lambs averaged $173.94 per cwt., 5 percent higher monthly and up 62 percent year-on-year. Lighter weight feeders selling at auction (60-90 lb.) jumped 9 percent to $201 cwt. in August, 82 percent higher from a year ago. 

The million-dollar question is then: Can feeders pay these high prices and still make money?   Feeder profitability – like profitability at every stage of the industry – can mean expanded growth for all. 

On average, Colorado feeders bought lambs at 102.3 lbs. for $173.94 per cwt. in August. If we add in shipping from Nevada (for example) then the value of the feeder is $183.25 per cwt. If the cost of gain in the feedlot is about $1 per lb. and the target slaughter weight is 140 lbs., then the break-even price for that slaughter lamb is $220.95 per head, or $157.82 per cwt. 

This simple enterprise budgeting exercise gives us the slaughter lamb price that the feeder must receive to exactly recover his or her costs. 

If slaughter lamb prices climb into the low $300s per cwt. on a carcass basis this fall – as forecasted by the Livestock Market Information Center – then this translates into about $154 per cwt. on a live basis. At $154 per cwt., the feeder in the scenario above will lose $3.82 per cwt., or about $5.35 per head. 

However, that is far from the end of the story. If prices rise 3 percent higher than the forecasted $158.62 per cwt., then the projected loss turns into an 80 cent per cwt. profit. 

Sale prices are important to the bottom line, but so is the cost of feed. If the cost of gain falls from $1 to 80 cents per lb., then the feeder makes a profit of $1.57 per cwt., holding everything else constant. In fact, feeders might have been bidding up prices in August because of sharply lower forecasted corn. They know higher purchase prices can be offset by lower corn.
The U.S. Department of Agriculture (USDA) reported mid-August: “Excellent growing conditions in most corn areas support a record forecast production of 14,032 million bushels, breaking the 14 billion bushel barrier for the first time,” (8/14/14). USDA forecasted corn could range from $3.55 to $4.25 per bu. this marketing year (8/14/14). December 2014 corn was trading at $3.45 per bu. on September 10. It was only as recent as a year ago September that corn was over $5 per bu.

Lamb weights coming in and at shipping time also can affect profitability. It is possible – within some bounds – to feed lambs to heavier weights to improve profitability. The feeder is in the tenable position of meeting its purchasing agreements with producers and at the same time fulfilling its slaughter lamb shipment dates. Scheduling can consume management. It is in the feeder’s best interest to save costs and plan ahead. If, however, a feeder can make money by selling a heavier lamb at a later date, then this move can turn a loss into a gain. 

Suppose the feeder faced losing $3.82 per cwt. at a slaughter weight of 140 lbs. Under the same prices and costs, assume the feeder can feed another 10 lbs. and market the lamb at 150 lbs. Profit then jumps into positive territory. The break-even price per head rose due to a higher feed bill, but dropped per cwt. This works because in many cases, a feeder will receive the same slaughter lamb price within a 10-lb. range. 

The feeder can face variable weights when lambs are delivered which can also affect the bottom line. 

For example, if lambs come in at 110 lbs. and the feeder was counting on 90 lbs., then the feeder is faced with the costs of refiguring a feeding plan and shipping date. Weight slides can be an important tool in this case for feeders whereby a producer might be docked for lbs. above the agreed-upon delivery weight.

Weight slides might also be more advantageous (and more heavily enforced) to the feeder this year due to lower corn. That is, it might be to the feeder’s advantage to feed an extra 20 lbs. in the feedlot rather than buy the extra 20 lbs. from a producer.
ASI maintains a compendium of sheep enterprise budgets at that can help industry producers and feeders estimate their bottom line.

Supplies Slow

This year, weekly slaughter averaged close to 41,000 head per week, allowing feedlot supplies to move and not get backed up and over weight. Through the year, quality was excellent: 32 percent of lambs yield graded 2, up from 28 percent a couple years ago. 

In August, however, weekly slaughter fell from an average 41,172 head in July to 38,516 head in August, down 6 percent. It is possible that feedlot supplies were thinning. This can help explain higher bids in the feeder lamb market in August. Reduced supplies might help explain higher slaughter lamb prices.

Feeder Lamb Tops $2

August is a big month in the feeder lamb market: Lambs in many western states come out of the forests or off pastures and into Colorado feedlots for finishing before heading to market. In most years, one-third to one-half of all feeders trade between August and the end of October. This August, lambs were moving out of California, Idaho, Colorado and Nevada, with smaller volumes from Montana, Texas and Wyoming.

In August, 35,350 head of feeders traded in direct trade – the highest monthly total thus far in 2014. For the year through August, the volume of feeders in direct trade totaled 134,650 head, 23 percent higher than a year ago. 

In the first week of September alone, 19,200 head of feeders were reported in direct trade with an average $188 per cwt. for 98 lbs. delivered. Five thousand feeders out of Utah received an average $205 per cwt. for 92.5 lbs. Many lambs are priced and reported that might not be delivered for a month or two, but most of these reports were for immediate delivery.

Higher feeder prices are atypical for the heavy supplies of the fall run. However, concerns over available supplies for the December holidays can push prices higher. Feeder lamb prices at auction historically soften from spring through the fall as supplies come to market. By late fall, feeder lamb prices begin to climb, until its annual high, typically in March.
Feeder lamb prices in direct trades averaged $173.94 per cwt. in August, up 5 percent monthly and 63 percent higher year-on-year. The August average was 33 percent higher than its 5-year average of $131.26 per cwt. 

Feeder lamb prices at auction (60-90 lbs.) averaged $198.17 per cwt. in August, up 8 percent monthly and 80-percent higher year-on-year. The two markets that defined the August average were San Angelo and Sioux Falls. In San Angelo, the average was $178 per cwt. and up to $218 per cwt. in Sioux Falls. 

Slaughter Lamb Market Gained

This year slaughter lamb prices started off high, over $150 per cwt., slumped into the $130s per cwt., but rebounded to over $150 per cwt. by August. Slaughter lamb prices at auction historically soften from its annual high mid-summer through October before climbing again through to the spring, so the August jump was a surprise.

Slaughter lamb prices at auction averaged $154.34 per cwt. in August, 3 percent higher monthly and 43 percent higher year-on-year. August’s average was 28 percent higher than its 5-year average of $121 per cwt.

In thin trading, the Equity Electronic Auction in the Midwest posted a 5 percent gain in August, up to $164.42 per cwt. San Angelo saw a 2 percent gain to $151.10 per cwt. and South Dakota also saw a 2 percent gain to $154.95 per cwt. 
In formula trades, the August average was $297.55 per cwt. on a carcass basis, up 3 percent for the month and 30 percent higher year-on-year. On a live-equivalent basis prices averaged $151.52 per cwt.

On a live, negotiated basis, the average was $152.99 per cwt., up 3 percent in August and 31 percent higher year-on-year. 

Freezer Inventory Higher

Reported lamb and mutton freezer inventory was 34 million lbs., up 9 percent monthly and 46 percent higher than a year ago at the beginning of August. This volume is just shy of the second-quarter total lamb and mutton production: The industry produces about 10 million lbs. a month. 

The Livestock Market Information Center (LMIC) explained that increased domestic production and import volume are two factors pushing up cold storage numbers (8/22/14). 

Total lamb and mutton domestic production through July was up 2 percent compared to July 2013, which translates to 1.4 million pounds. Total lamb and mutton imports, which have data reported through June, are 1.6 million pounds, 2 percent over June 2013 totals. LMIC explained that increased imports are mainly being driven by competitive prices resulting from higher than normal quantities of Australian lamb moved due to drought.

LMIC continued to report:  “The large increase in cold storage is a headwind in the lamb market in terms of prices. The question becomes when will these stocks hit the market and by how much will they depress sheep and lamb prices? Although sheep and lamb prices are above those of 2013 across the board, the large cold storage stocks are seen as an overhang in the market. This prevents prices from moving up any further. After these stocks filter through, the market should be in better shape.”

In early September, the LMIC forecasted that slaughter lamb prices on a carcass basis in the fourth quarter could range from $300 to $306 per cwt., 10 percent higher year-on-year. On a live-weight basis this translates roughly to $153 per cwt. Feeder lamb prices at auction could range from $197 to $204 per cwt., up 7 percent from a year ago.

U.S. Pelts See Small Lift

U.S. Fall Clips saw a small uplift in price and demand in August. Across pelt types, prices were up 4 percent to $2.66 per piece, but down 70 percent from a year ago. The bright spot in the market was the $6.25 per pelt received for Imperial Fall Clips and the 5-percent jump in Fall Clips to $3.95 per pelt. Producers were still docked up to 50 cents per piece for No. 3s and 4s.
The Australian pelt market remained mostly steady in August with some price premiums awarded for quality. “New season lambs in dry condition or with burr-affected skins were reportedly being discounted. Reports suggest that overseas demand continues to be quiet,” (Meat and Livestock Australia, 9/5/14).

Meat Market Gained Modestly

The wholesale lamb composite (gross carcass value) saw a 1-percent gain in August to $362.88 per cwt., up 31 percent year-on-year. The stronger shoulder pulled the composite up when it posted a 2-percent gain to $296.39 per cwt., up 30 percent from a year ago. The loin, trimmed 4×4 also saw a gain, up 1 percent to $509.05 per cwt. and up 11 percent year-on-year. The rack, 8-rib, medium gained only 0.10 percent at $795.06 per cwt.

Ground lamb saw a 1 percent drop in August to $537.29 per cwt., 4 percent higher year-on-year.
Some popular sub-primal cuts saw some positive movement in August. The rack, roast-ready, frenched gained nearly $1 per cwt. to $1,494.65. The rack, roast-ready, frenched special (cap off) saw a larger, 5 percent jump to $1,984.85 per cwt. The leg, trotter-off, partial boneless, saw a 7 percent gain strengthening to $462.26 per cwt.

Labor Day Lamb Promotion Up

According to the theory of demand, if you lower prices, more product will sell. The lamb industry has effectively offered lower leg of lamb featured prices during Easter to move more legs, but featuring also occurs for the 4th of July and Labor Day. Retailers featured lower shoulder blade chops and loin chop prices in hopes to move more product over the Labor Day weekend. 

The U.S. Department of Agriculture (USDA) noted “shoulder blade chops were the most popular lamb feature item with nearly three times more features (1,320 ads) week to week. Average prices fell, however, from $5.65 per lb. to $4.92 per lb. 
The second most popular featured cut was the lamb chop. Its ads more than doubled in the last weekend of August, but prices dropped weekly from $10.08 per lb. to $7.17 compared to $9.37 per lb. a year ago. USDA confirmed: “More aggressive pricing was noted on lamb loin chops,” (8/29/14).

The butterfly, boneless leg, was the third most popular featured item with over 700 ads nationwide (up from 200 the previous week). Its average feature price was $6.99 per lb., up from $6.83 the week before. 

Retail Prices See Positive Trend 

Industry prices are often vulnerable to swings in supply and not necessarily driven by changes in consumer demand. That is, price volatility is often due to supply shocks, but we have seen an underlying current of stronger prices at retail which does provide a stronger “bottom” to the market.  

Retail lamb prices have made modest, but steady gains over the past year. In grocery ads, shoulder blade chops were 22 percent higher in August compared to a year ago at $5.52 per lb. Prices had gained an average 1 percent per week through the year. Loin chops have also gained an average 1 percent per week over the past year. Last summer loin chops sold for $8.50 per lb. but were up to $9.25 per lb. in August. Boneless, butterflied leg, has seen a 3 percent weekly gain, on average, over the past year. It was about $6 per lb. a year ago, rose to around $9 per lb. in December and was down to about $6.90 per lb. in August. 

The retail lamb industry price gains are mirroring increased beef and pork prices, but to a lesser extent. In the coming year, beef and pork supplies will continue to be in short supplies which means higher prices. Chicken, on the other hand, is relatively more competitive. In response to higher poultry prices, chicken production will likely expand which might further erode the competitiveness of beef, pork and lamb.

In the food service sector, consumer demand is also strengthening, suggesting that higher lamb prices can be passed onto consumers. The July National Restaurant Association’s (NRA) Restaurant Performance Index (RPI) was “indicative of a restaurant sector that is contributing positively to demand – and demand growth – for food items (Daily Livestock Report, 9/2/14).

Drought-Induced Slaughter

Australia experienced a couple of years of higher-than expected slaughter rates given its prolonged drought. The country has yet been able to get flock rebuilding back on track, but hopes 2014-15 will be different.  At 72.2 million head, sheep inventory was down nearly 3 percent in the past year, but there are reports that targeting 75 million in coming years is not unrealistic.
Australian flock rebuilding might have little impact on its exports to the U.S. The U.S. remains a high-value market for Australia and any contraction in domestic lamb production – as lambs are held for replacements – might mean less lamb for its domestic market and a greater share for export.  Through June, total U.S. lamb imports were 77.5 million lbs., up 2 percent year-on-year. However, lamb imports began to slow into June when totals fell 7 percent month-to-month to 11.4 million lbs.   
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