January saw a weaker undertone in the slaughter lamb market coupled with heavier weights at slaughter. Does the industry have cause to get jittery?
We don’t have to look too far back to see a similar market development. From the last half of 2011 to the first half of 2012 live slaughter weights jumped 10 percent from 137 to 151 lbs. Weights topped 174 lbs. in formula trades. Concurrently, quality deteriorated as the percentage of lambs grading 4s and 5s in commercial slaughter rose from 20 to 30 percent. In twelve months, the wholesale market lost 10 percent; formula trades lost 15 percent.
Is this an industry norm: Every few years can we expect a slowdown in marketings, backed up supplies, heavier slaughter weights and questionable quality? How heavy is too heavy?
The year 2014 was an excellent year, but do all good things have to come to an end? Perhaps the first alarm was the 7 percent drop in auction prices in January. As slaughter rates slow, packers will take their own lambs and contracted formula lambs to market first. Auction lambs often fill the void and in times like this, demand for auction lambs can weaken. In January, live, negotiated lambs saw a 6 percent drop and formula lambs weakened by only 1 percent. The U.S. Department of Agriculture Agricultural Marketing Service (USDA/AMS) reported late January: “Consumer demand is struggling and packers are continuing to decrease bids.”
In January estimated lamb slaughter was down 3 percent year-on-year to 169,848 head, dressed weights were up 3 percent to 69 lbs. and production was down 1 percent. At 80.5 lbs., harvest weights in formula slaughter lamb trades were up 5 percent monthly. At 33.8 million lbs., January was the highest lamb and mutton freezer inventory on record. Cold storage stocks were 8-percent higher monthly and up 38 percent year-on-year.
As we move into February, it will become clearer whether packers are indeed putting the brakes on marketings and/or to what extent feeders and producers are stalling and continuing to feed in hopes for higher prices. Are we seeing the tragedy of the commons? If everyone continues to feed and weights get heavier, won’t that further depress prices for everyone?
In January, the estimated percentage of packer-owned slaughter lambs was at a 3-month high at 19.4 percent. Packer-owned carcass weights were 78.5 lbs., higher than the national average of 69.4 lbs., but lower than the 80.5 lbs. reported for formula trades. In January, packers owned or contracted (formula trades) a minimum of 43 percent of harvest – giving them a long position in the market which typically results in auction lambs bringing relatively less.
The growing concern is not just a Colorado packer-feeder issue for lambs in formula trades. Auctions are affected as well. Weights began to rise at auction in January because producers were putting on weight hoping to recoup costs or alternatively, demand sharply contracted as slaughter rates slowed.
As in the commercial feeder market in Colorado, this happens every few years at auctions at this time of year.
In late January, 49 percent of lambs that sold at the Sioux Falls Regional Livestock Auction ranged from 163 to 174 lbs. and received an average $127.50 per cwt. – 20 percent lower than formula trades.
In 2014 lamb prices across sectors came within 90 percent of record highs set in 2011. But, by late 2014 were prices heating up too fast? Is this market cooling a sign of consumer resistance at retail?
In addressing the beef sector, The Daily Livestock Report cautions: There’s a limit somewhere to just how much more consumers will pay for beef before they substitute a lower value protein and the pork and chicken sectors are in the process of bringing them product at more and more competitive prices! The prices of both pork and chicken are the lowest on record versus beef,” (1/19/15). Relative prices of meat substitutes — not simply lamb prices alone — can affect lamb purchases.
Meat Market Weakened
The carcass market lost 2 percent in January to land at $338.58 per cwt. In spite of the fact that only 14 percent of all carcass are traded in the carcass market, it is still a significant market because carcass prices can be used to set base prices for many formula traded lambs.
Net carcass value (the wholesale composite less processing and packaging costs) dropped nearly 1 percent in January to $343 per cwt. The rack, 8-rib, medium, jumped 2 percent in January to $823.04 per cwt. but the shoulder, loin and leg softened. The shoulder, square-cut, was down 2.3 percent to $304.35 per cwt.; the leg, trotter-off fell 1.6 percent to $359.13 per cwt. and the loin, trimmed 4 x 4, dropped one-half percent to $523.42 per cwt.
Overall, retail feature prices were mixed in January. In mid-January Loin and shoulder blade chops advertised at steady to weak prices week-to-week, and ground lamb was at a slightly higher price point. USDA/AMS explained that as the wholesale lamb market experienced heavy supplies of shoulders in January, packers were willing to move at lower prices.
Retailers were thus able to feature lamb shoulder blade chops. Lamb retail feature activity saw loin and shoulder chops comprising most of the ad space for lamb cuts (USDA/AMS, 1/9/15).
Exchange Rate Effect on Imports
Exchange rates play an integral role in the U.S. lamb market and the competitiveness of imports. A stronger dollar makes imports cheaper. From July to December 2014 the U.S. dollar gained 12 percent against the Australian dollar. The 12-percent gain means that imported Australia carcass prices were 12-percent lower than if the exchange rate had stayed at the relatively stronger value of 94 cents U.S. to Australian dollar during the summer compared to 81 cents at the end of the year.
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) explained: “Helped by the drop in the Australian dollar, lamb exports to the premium U.S. market hit 5,100 tons in October, the largest monthly shipment since 2007,” (12/2014).
Further, lamb exports to the U.S. for 2014/15 are forecast to increase by 11 percent to 47,000 tons at a value of $500 million.
The Australian dollar is forecasted to average around U.S. 85 cents in 2014/15, compared with an average of U.S. 90 cents in 2013/14. The rate is forecasted to depreciate to around U.S. 83 cents by 2018/19 (ABARE, 1/2015).
Feeder Lamb Prices Mixed
Feeder lambs in direct trade took a 14-percent hit in January, slipping from $175 per cwt. to $150 per cwt. January’s average was still 1-percent higher than its 5-year average for the month at $148 per cwt. Traded volume was very light, however, with only 500 head reported, down from 2,000 head in December.
The 3-market feeder lamb price average at auctions was $207.73 per cwt. in January, 6-percent higher monthly. Prices at San Angelo, St. Paul, Ft. Collins and Sioux Falls averaged 4-percent lower year-on-year, however.
According to USDA/AMS, Colorado lamb feeders struggled in January to keep pens dry with the recent warmer weather (1/2015). Lambs were carrying increased amounts of mud as they headed to slaughter.
Cost of Gain Down
Over the past two and half years, the cost of gain in Colorado feedlots has continued to fall steadily from an estimated $1.50 per lb. down 40 percent to around $0.90 per lb.
Depending upon how the cost of gain is defined, estimates can vary widely between feeders. One feeder might quote a feed cost of gain rather than a total cost of gain that includes health costs and death losses, etc. Some feeders calculate the cost of gain from pay weight to pay weight. However, differences in shrink can affect off-loading weights and thus pay.
In general, the larger the lamb coming into the feed yard, the higher the cost of gain. This is because the heavier lambs are not as efficient feed converters and the feeder has to spend more on feed to put on the lbs. In many cases with the heavier lambs, there are also fewer days between off-loading and sending the lamb off to market to spread out costs.
In January, USDA reported corn production was lower than anticipated. Acreage expanded, but was overshadowed by a 2.4-bushel-per-acre drop in yields. Yields and production are still record high and thus corn prices are forecasted to range from $3.35 and $3.95 per bu. in 2014/15, for a midpoint price of $3.65 per bu. (USDA/ERS, 1/14/15).
In early January, LMIC reported that given current low corn price forecasts, it expects some marginal producing grain and other crop areas back to hay in 2015 (1/11/15). In 2014 hay stocks were 3-percent higher than 2013 and yet hay production is still down compared to pre-drought levels.
Estimated Nontraditional Lamb Market Share Rises
It is estimated that a significant share of lambs fall through the cracks and are not counted in federal reporting efforts. This conclusion stems from the large discrepancy between the lamb crop that is sharply larger than commercial slaughter numbers. Even after deducting 8 percent in lamb losses, many lambs are not accounted for. This discrepancy is termed the nontraditional market.
In 2014, commercial slaughter summed to 2.312 million head while the estimated lamb crop (less 8 percent for losses) totaled 3.165 million head with the resulting discrepancy (nontraditional market) equal to 852,300 head. The nontraditional market was an estimated 25 percent of total supplies in 2013 (commercial plus nontraditional) and grew to 27 percent in 2014.
For every lamb and mutton that is channeled through commercial slaughter facilities, there is 0.37 head that is not captured in commercial reporting.
Together, the nontraditional volume and the commercial volume reveal that total estimated slaughter in the U.S. increased 2 percent last year to 3.165 million head.
The growing estimated nontraditional market share of 27 percent was a surprise. It was anticipated that the growing formalization of local food systems would “commercialize” a growing portion of the lamb supply that otherwise would be channeled through the nontraditional market.
Farmers’ markets, roadside stands and other direct-to-consumer sales have plateaued at the expense of growing intermediate marketing channels (USDA/ERS, 1/2015).
Intermediate marketing channels generally include all marketing opportunities in the local supply chain that are not farmer-to-consumer transactions, including farmers selling to grocers, restaurants, regional purveyors such as food hubs, and buying arrangements with the food service operations of schools, universities and hospitals (USDA/ERS, 1/2015).
Commercial slaughter statistics may or may not capture direct-to-consumer and other local, intermediate lamb sales. It depends on whether the lambs are harvested in a state or federally-inspected facility.
The number of livestock farms with direct-to-consumer sales increased by 1,349 (1.2 percent) between the 2007 and the 2012 Censuses of Agriculture, even as the number of livestock farms declined by 269,833 (19 percent).
Five States See Double-Digit Gains
At 5.28 million head, the U.S. saw its sheep inventory grow 0.7 percent in 2014. Nontraditional lamb market estimates reveal that out of this 0.7 percent growth, only about two-thirds of this increase will be captured by commercial market statistics.
Something else to keep in mind when reading national statistics is that there are likely niche lamb markets (and growth markets!) scattered across the U.S. for which the national commercial market dynamics may not necessarily apply.
Much of the recent growth is concentrated in a few states. Colorado saw the highest growth rate at 15 percent for a total 420,000 head, Iowa grew 13 percent to 175,000 head, Tennessee saw a 13-percent gain to 44,000 head, New Mexico grew 11 percent to 90,000 head and North Carolina also saw an 11-percent increase to 30,000 head.
Oklahoma, Kansas and Nevada are the three states that saw double-digit inventory losses in 2014.
Australian Lamb Export Forecasts
Each February and August, Meat & Livestock Australian (MLA) posts forecasts for the year to come in the sheep industry. Australian lamb slaughter in 2015 is forecast to decline 12 percent year-on-year, to 19.8 million head, following two back-to-back years of record slaughter.
Lamb production is also forecast to be 12 percent lower than last year. As a result of lower slaughter and production, Australian lamb exports are expected to decline 15 percent year-on-year in 2015.
Comprising half our lamb market, Australia’s perceptions of the U.S. market can influence our marketing efforts. MLA cite the pros of the U.S. market as being a large volume and high value market for Australian lamb.
Meat & Livestock Australia reported that growing the U.S. market can be a challenge, for about one-third of U.S. consumers do not buy lamb or have tried it. Furthermore, Australian lamb exporters to the U.S. focus only on small sections of the U.S., but these regions are more robust economically, “which assists with consumption on this relatively expensive protein,” (2/2015).
China’s Lamb Imports Grow
China’s appetite for mutton and lamb is growing. In 2014, China imported 18,759 tons of mutton breast and flap (up 15 percent) and 23,659 tons of lamb breast and flap (up 16 percent).
Five years ago, who would have guessed that lamb imports to China would exceed mutton imports?
MLA reported that the Chinese do not differentiate between mutton and lamb, and reportedly have no preference for taste or flavor between the two (2/2015). As a result of the undifferentiated perception towards lamb and mutton, China procures relatively higher value mutton cuts before opting for lamb. For example, mutton rack exports to China have increased significantly.
How long before China develops a taste for higher-valued lamb cuts as Western diets become increasingly popular?