Market Report

Industry Gears Up for the Holidays

JULIE STEPANEK SHIFLETT, Ph.D.
Juniper Economic Consulting

It is that time of year when the industry gears up for holiday sales. Meat is often contracted through the December holidays, putting pressure on a tight supply . This summer the lamb industry quickly got caught up on slaughter, rapidly liquidating its heavy lamb situation.  

Harvest weights dropped sharply since May and weekly slaughter dropped by 2,000 head a week in four months. Moving forward, the strong U.S. dollar boosting imports and record-high freezer inventories could have “negative price consequences down the road,” (DLR, 9/23/15), but hopefully stronger holiday demand will prevail.

That said, the last two months saw the most significant lift in the slaughter lamb market since a year ago. With an eye on holiday sales just around the corner, packers likely stepped up efforts to process fresh product. Fresh supplies are tight: from January through
September, lamb harvest was an estimated 1.4 million head, down 5 percent year-on-year. Lamb production was an estimated 99.3 million lbs., down 3 percent.

In August, slaughter lambs on formula jumped 3 percent and another 3 percent to $306.34 per cwt. in September ($154.39 per cwt. live-equivalent). Live, negotiated price averaged $155.17 per cwt., down 0.5 percent for the month. Auction prices saw a 3 percent gain to $156.48 per cwt.

Despite recent gains, slaughter lamb prices remained depressed relative to last year. The formula/grid price and live, negotiated averages were down 1 percent year-on-year while the auction average was down 3 percent. A softer retail market might be to blame.

On average, featured prices for lamb at retail were down 3 percent in September, year-on-year. Arguably, the comparison is imperfect due to different cuts and quantities between periods, but is a worrisome indicator nonetheless. The lower prices aren’t necessarily a sign that lamb demand has contracted in the short-term, but also doesn’t bode well for long-term growth. It is possible that lamb demand is stable and therefore the lower-priced lamb is necessary to move lamb product – drawing down freezer inventory and keeping current with lamb harvest.

However, it also possible that lamb demand has weakened. Recent reports of lower unemployment and stock market gains mask a troubling undercurrent. According to the U.S. Census Bureau, this is the third consecutive year that medium household income was relatively flat, following two consecutive annual declines. Income in 2014 was 7 percent lower than in 2007, the year before the most recent economic recession, (9/1/615).
An additional concern is that cattle prices have been losing ground. If beef prices are lower going into the holiday season, then this could hurt lamb demand.

Paraphrasing from Glynn Tonsor, associate professor Department of Agricultural Economics, Kansas State University: Making your industry stronger starts with the basic understanding of fundamentals as simple as identifying the correct goal, or basket – as in basketball. Recognizing and grasping demand concepts is a key building block for sustained industry success (In the Cattle Markets, 9/81/15). As Dr. Purcell stressed in 1998, “It is time to do something, time to understand, time to get the product offering moved toward what the modern consumer wants and is willing to pay for,” (In the Cattle Markets, 9/81/15).

Increasing lamb demand is about convincing consumers to buy more lamb at higher prices. It is about conveying a story of value, lamb’s value.

Freezer Inventory Hit New Record

Cold storage stocks continued to climb in September with a 41.9 million lbs. record high, 7 percent higher monthly and 23 percent higher than a year ago. Unfortunately, we don’t know the portion of imported lamb in our freezers.

The stock of frozen product – five times our monthly production – begs the question about what frozen product will do to lamb prices, lamb quality and ultimately, lamb demand.

A New Zealand study found that although there is a price premium between chilled lamb and frozen lamb, there is no evidence to suggest that the eating quality of chilled lamb is superior when the lamb has been correctly aged before freezing (Wiklund, E. et al. 2009). The New Zealand study compared tenderness, juiciness and overall preference of chilled versus frozen loins. The study found that frozen lamb does turn brown faster, however. The authors therefore recommended that frozen lamb be targeted to the hotel and restaurant industry where customers do not see the lamb before preparation. This way, frozen lamb could grab a price premium somewhere between the lower, frozen average and the fresh premium, adding value.

The U.S. Department of Agriculture purchased 920,000 lbs. of lamb in September for its child nutrition and food programs. The purchase of nearly $5 million helps support the U.S. lamb industry by providing an outlet for surplus product.

In its July 17 purchase offer, USDA reported a total of 160,000 lbs. of boneless lamb leg roasts that were not purchased “due to vendor constraints.” In its Sept. 18 offer, USDA reported that 640,000 lbs. of lamb purchases were not fulfilled due to “no offers were received.” A week later, in its Sept. 25 offer, all but 40,000 lbs. were filled – one truckload. It is curious that the industry didn’t fill earlier offers because in the Sept. 25 offer, prices were lower than in earlier awards.  

The Sept. 25 awarded prices for two out of three items were lower than the Sept. 18 award. Frozen boneless leg roasts ranged from
$5.73 to $5.94 per lb., and a week later the same offer was awarded at 10 cents lower at both ends. Frozen shoulder roasts were awarded at $6.04 per lb., but a week later slipped by 20 cents per lb. This year’s program raises a lot of questions. For example, did the industry leave money on the table?

Bids called for frozen or fresh/chilled product, so the lack of graded product can’t be an explanation. A requirement of the bids was that lamb must be USDA graded prime or choice and harvested within the last nine months. Perhaps a lot of domestic lamb in the freezers was harvested after 12 months, wasn’t graded and therefore didn’t qualify for USDA purchases. Or, perhaps, most of the freezer inventory is indeed imported and packers didn’t want to initially commit fresh, domestic product.

The unfulfilled July and September orders point to a broader concern within the sheep industry. Are USDA purchases becoming routine? Isn’t the USDA intended to be the buyer of last resort? Only two packers offered bids this summer and fall. Do other packers not have excessive freezer stock? What is the problem within the industry that repeatedly creates millions of lbs. of freezer stock and why can’t we fix it?

One idea is for the industry to embrace frozen lamb with large freezer inventories being the new norm. Can the industry promote the value of frozen product and ensure consistent quality? Can the industry get product to market without lambs getting overly fat? What the industry gives up in lamb value (due to frozen lambs’ lower price), it might make up for in consistent quality and volume. That said, does anyone have freezers for sale?

Retail Prices Down

In September, shoulder and loin chops, and boneless legs dominated lamb grocery ads. By the end of the month, lamb features lost some ground to veal as retailers advertised for the upcoming Jewish holiday of Chanukah in early December. Overall, advertised prices for lamb in grocery stores were down from a year ago for popular cuts.

In late September, shoulder blade chops averaged $5 per lb. in grocery features, down 9 percent year-on-year and shoulder round blade chops averaged $6.74 per lb., down 13 percent. Loin chops averaged $7.82 per lb., down 21 percent from a year ago. Rib chops averaged $13.56 per lb., down 20 percent.

Wholesale Market Up

The net carcass value, including processing and packaging, edged up 1 percent in September to $325.59 per cwt., yet down 3 percent from a year ago. The upcoming December holidays likely put pressure on the industry to secure fresh product.

At $350.70 per cwt., the leg, trotter-off, was the only primal in September that was higher year-on-year. The leg gains seasonally towards December, but perhaps the USDA leg purchases helped.

The loin, trimmed 4 x 4, softened 2 percent in September to $513.14 per cwt., contradicting the fall strengthening seen during the last two years. The shoulder, square-cut, nearly hit $3, for the first time since February. It averaged $299.98 per cwt. in September, up 1 percent monthly and down 3 percent year-on-year.

The wholesale rack has been down this year compared to 2014’s highs, but sharply higher than 2013’s average. The rack, 8-rib, medium, averaged $729.83 per cwt. in September, up 1 percent monthly and down 10 percent year-on-year.

Feeders Down in Direct Trade

Feeder lambs in direct trade averaged $163.88 per cwt. in September, down 4 percent monthly and down 15 percent from a year ago. Most lambs traded were out of Colorado, Utah and Nevada. In late September, close to 8,000 head of feeder lambs were traded in a Utah pool at $170 per cwt. for 95 to 100 lbs. These lambs earned about 15 percent more – $196 per cwt. – a year ago for lighter 92.5 lb.-feeders.

Through September, 78,200 feeders traded direct, down 57 percent year-on-year and down 64 percent from its five-year average. The USDA Agricultural Marketing Service reported in late September that the availability of grass and lower bid prices continue to push trades later in the year. In September, the average weight of feeder lambs in direct trade was 100.5 lbs., 7 percent heavier than a year ago.

Domestic – Import Price Comparisons

The U.S. dollar is stronger, giving imports a competitive edge. However, it’s not clear how this plays out for domestic lamb market shares at retail and food service. There are several attributes that uniquely define U.S. lamb demand, and for which more competitive imports might not affect. U.S. lamb is generally larger, which might be important for plate coverage in restaurants, for example. Also, many consumers pay extra for local lamb.

Comparing domestic to imported prices is like comparing apples to oranges, tough. In 2015 through August, imported lamb averaged $3.58 per lb., down 9 percent year-on-year. This year 69 percent of lamb imports through August were frozen compared to 70 percent year-on-year.
At $300 per cwt., the U.S. shoulder, square-cut, had a 17 percent price premium to the Australian shoulder at wholesale in September. A year ago, the spread was 6 percent.

The U.S. loin, trimmed 4×4 and the Australian shortloin, 1-Rib, 0x0 are more competitively priced with the U.S. loin averaging $513.14 per cwt. in September at wholesale, down 4 percent from its imported counterpart.

The U.S. rack, frenched averaged $14.43 per lb., 55 percent higher than the Australian rack. The price premium might be partly due to the larger U.S. rack which could be up to 70 percent larger than an Australian rack.  

Wool Market Softened

Australian wool prices softened further in September on the back of lackluster demand. “Most overseas users are continuing with a ‘hand-to-mouth’ approach to purchasing, and exporters are using a ‘just-in-time’ delivery time frame,” (Woolmark Company/AWI, 10/2/15). Stagnant global growth is to blame. Without long-term commitments, Australian prices in the next couple months will largely be a function of larger offered quantities – possibly depressing prices further.

Volatile wool prices reinforce the benefit of adding value to raw wool. Chris Kelly, the president of the Australian Council of Wool Exporters and Processors, encouraged growers to class more of their wool with classed wool receiving up to 10 percent premiums, (WoolNews.net, 10/2015). There is a shortage of classed wool, Kelly continued, such that classed wool can receive 50- to 80-cent premiums per kg at export.

In September, the Australian Eastern Market wool indicator averaged 1,245 ac/clean kg, down 1 percent monthly and 22 percent higher year-on-year.
The price difference between U.S. raw wool prices and imported Australian wool prices has widened over the last couple of years – largely due to exchange rates. This spring U.S. raw wool prices averaged 18 percent lower than imported wool; a year ago, the difference was 15 percent. U.S. raw wool averaged $3.39 per lb. clean this spring, down 4 percent year-on-year.

Australian imported wool is highly correlated with the U.S./Australian exchange rate (0.78 correlation out of 1, with 1 being perfect correlation). When the Australian dollar gets weaker, import prices fall. Similarly, when Australian imported wool prices weaken, so too do U.S. raw wool prices (correlation of 0.70).

Australian wool imported to the U.S. averaged $3.92 per lb. clean in September, down 3.5 percent monthly and down 3 percent year-on-year. Imported prices ranged from $4.35 per lb. clean for 20 micron, $4.10 per lb. for 24 micron to $2.98 per lb. for 30 micron. In September, the Australian dollar weakened by 3 percent to 70 cents U.S. and was down 22 percent from 91 cents a year ago.

Forecasts revealed that the Australian dollar could fall further, down to 60 cents.

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