What’s in a Price?
JULIE STEPANEK SHIFLETT
Juniper Economic Consulting
What’s in a price? A lot, actually. Prices help guide efficient production decisions. If the industry produces too much lamb – more than consumers want – prices fall and the industry cuts back. If the industry produces too little – consumers want more – prices rise, giving producers an incentive to produce more. Sounds simple, right? Of course, it’s not that easy. It never is.
There are several factors that challenge this idyllic picture. Some domestic packers are also importers and imported lamb accounts for one-half of our market. It is hypothesized that global lamb supplies – not just U.S. production – affect domestic prices. Thus, domestic prices are not necessarily a function of consumer demand and domestic supply.
Second, lamb prices are not reported for nearly one-half of the market. So, when we speak of prices guiding efficient domestic production decisions, what prices are we talking about? Prices at auction? Imported lamb prices? Prices received by some producers for formula/grid purchases that are not reported?
Price discovery – buyers and sellers coming together to negotiate price based upon current and expected demand and supply – is fading in the lamb industry. What does this mean for producer returns? For investments in the lamb industry?
Feeder Lambs Lower in August
Feeders in direct trade averaged $172.50 per cwt. in August, down 4 percent monthly and 2 percent higher year-on-year. Prices were
11 percent higher than the 2011-15 average for August.
Sixty- to 90-lb. feeders at auction averaged $178.65 per cwt. in August, down 4 percent for the month and 3 percent lower year-on-year. In San Angelo (Texas) feeders averaged $190.50 per cwt.; $164 per cwt. in Fort Collins (Colo.) and $181.46 per cwt. in Sioux Falls (S.D.). The number of head and feeder weights were not necessarily the same across markets.
In late August, 3,700 feeders traded out of Idaho. Lambs weighing 101.95 lbs. brought $162.68 per cwt.; 110-lb. feeders averaged $165 per cwt. delivered, (USDA/AMS, 8/26/16).
In late August, the Northern Livestock Sheep Video Auction in Montana saw the sale of more than 29,000 head. Feeders for September and October delivery received $172-$180.25 per cwt. for 80-88 lbs.; $165-$172 per cwt. for 90-95 lbs., and $163.25-$169.50 per cwt. for 100-105 lbs.
Colorado Lambs on Feed Lower
At 96.22 thousand head, lambs on feed in Colorado were down 7 percent in early September year-on-year and down 28 percent from its monthly five-year average (LMIC from USDA/AMS, 9/2016).
Feeders in direct trade were also lower in 2015, and significantly lower than past years. In the eight months through August, the total volume of lambs placed on feed was 68,550 head, down 61 percent from its five-year average for the period.
Where are all the feeders? Feeders might increasingly be sold direct to nontraditional markets.
Slaughter Lamb Prices Moved Higher
Slaughter lamb prices at auction averaged $156.59 per cwt. in August, up 3 percent monthly and 3 percent higher year-on-year. Prices were 14 percent higher than its five-year average for the month.
Prices averaged higher in most markets, but were depressed somewhat by a lower average in San Angelo. In South Dakota prices averaged $162.50 per cwt., $161.92 per cwt. in Fort Collins, $162.06 per cwt. in Kalona (Iowa), and $167.75 per cwt. in one-day Equity Electronic Auction sale.
Slaughter lambs averaged $139.50 per cwt. in San Angelo for commercial lambs weighing more than 130 lbs. Is it possible that San Angelo no longer represents the price-leader for the industry? A shift to hair sheep in Texas also means a shift to lambs finishing at lighter weights.
Prices were not reported for slaughter lambs on formula/grid in August. Only two weeks of prices have been reported since January. In August, 35,000 head were traded on formula, down 6 percent monthly and 37 percent higher year-on-year.
For the year through August, an estimated 26 percent of commercial lambs were traded on formula with another 20 percent packer-owned. Thus, the commercial sector does not have prices reported for nearly one-half of its trades this year.
In the live, negotiated trade slaughter lambs averaged $163.39 per cwt., steady monthly and 5 percent higher year-on-year. Weights were current at 142.75 lbs., down 3 percent monthly.
Meat Market Gained
Lamb primals saw a modest lift in August, which boosted the wholesale average (net carcass value) by 3 percent to $321.67 per cwt., steady with a year ago. After slipping below $7 per lb. in March, the 8-rib rack, medium, rebounded to $700.96 per cwt. in August. The shoulder, loin and leg all saw 2- to 5-percent gains in August.
Lamb carcass reporting was slim during August, with volumes trading in the 65-85 lbs. range seeing the most press. Seventy-five to 85-lb. carcasses averaged $326.25 per cwt., 5 percent higher monthly and 4 percent higher year-on-year.
August pelt prices weakened. The Agricultural Marketing Service reported that demand for pelts has decreased, with many pelts receiving minimal pelt credits or negative value for producers (8/26/16). Among unshorn pelts, Premium pieces averaged $5.75 per pelt, down 33 percent monthly; Premium pelts averaged $1, down 63 percent; Standard pelts brought -$2.50 per piece, steady monthly; and Fair pelts averaged -50 cents, down from 38 cents.
In Australia, new season lamb pelts are starting to hit the market, hopefully the better quality skins outweighs the potential price-depressing effect of increased supplies.
Lamb Supplies Increase
Estimated lamb production in 2016 through August was an estimated 88.8 million lbs., down 1 percent year-on-year. Slaughter was up a modest 0.3 percent and live weights at harvest were down nearly 2 percent to 140 lbs.
Lamb imports from Australia more than compensated for lower domestic production. Chilled and frozen lamb imports from Australia through August totaled 34,370 tons, 11 percent higher year-on-year (Australian Government, Department of Agriculture and Water Resources, 9/2016).
Lamb and mutton in cold storage averaged 41 million lbs. at the beginning of August, up 4 percent monthly and 2 percent lower year-on-year.
Although domestic production is lower, which typically means higher prices, available lamb supplies in the U.S. this year grew. That can have a price depressing effect. In the first-half of the year, lamb availability (domestic and imports) was an estimated 177.9 million lbs. (not including cold storage stocks), 8 percent higher year-on-year.
Lamb demand is challenged: Supply has increased, incomes are sluggish and the price of substitute beef is lower. Due to increased supplies, fresh beef prices were down 6 percent from a year ago ($5.75 per lb. in July), chicken prices were down 3 percent and pork prices were mostly unchanged (LMIC, 8/26/16).
Lamb demand is also challenged due to inconsistency in product quality. Every summer for the last few years, the portion of harvest that yield grade 4 and 5 with increased back fat and lower portion of saleable product increases (and then drops off in the winter). This year, the share of 4s and 5s hit a new high, more than 35 percent of total harvest. Is it possible to use this product variation to the industry’s advantage? Perhaps develop even more SKUs – defined product cuts – to cater to a wider consumer base? Perhaps a frozen product for a new market: lamb meal kits at lower price points, sufficiently exotic and convenient to capture the interest of time-starved moms and dads?
In late August, the Livestock Market Information Center forecasted that fourth quarter national slaughter lamb prices on a carcass-basis could inch up 1 percent quarterly to average $281.50 per cwt. (about $141 per cwt.). This forecast puts lamb prices 7 percent lower than a year ago. Sixty- to 90-lb. feeders could hold mostly steady quarterly to $176.50 per cwt., 2 percent lower year-on-year.
LMIC’s forecast might be conservative for slaughter lamb prices moved higher into late August; however, LMIC recognizes that the sizable freezer inventory and increased imports are not conducive to higher price points in a market challenged by lower beef and lackluster incomes.
National lamb prices at retail have been steady to lower in the past year. In the 52 weeks ending July 10, lamb at retail averaged $7.04 per lb., down 2 percent from $7.16 per lb. a year ago (IRI/FreshLook Marketing from ALB, 7/2016).
However, averages don’t do the lamb market justice. It is hypothesized that providing national market analysis, in general, is often challenging because the lamb industry is increasingly segmented, with expanding niche markets.
The downside is that the one risk management tool, LRP-Lamb, is based upon a national price (which is currently not reported and thus the program is non operational).
During the past year, the Buffalo/Rochester (N.Y.) market was one of the top valued lamb markets with an average of $8.92 per lb., seeing a 7 percent gain year-on-year. There are likely pockets of growth across retail markets and at the producer level that we don’t necessarily see in national data. By comparison, one of the lowest-valued markets was Spokane (Wash.), falling 9 percent year-on-year to $5.80 per lb., on average.
Wool Market Higher Year-on-year
On Sept. 8, the Australian Eastern Market Indicator lost ground weekly to land at 1,305 Australian cents per kg., up 4 percent year-on-year. In U.S. dollars, the EMI averaged 1,002 U.S. cents per kg ($4.54 per lb.), 14 percent higher year-on-year.
Australian wool production in 2016-17 is forecasted to remain unchanged at 325 million kgs greasy. “While opening sheep numbers and the number of sheep shorn are likely to be lower in 2016-17 than in the recent years, an improvement in average wool cut per head is expected as a result of far better seasonal conditions, thereby keeping wool production unchanged,” according to Australian Wool Innovation Ltd. (8/2016).
Forecasts for steady wool supplies in 2016-17 in Australia means demand will have to do the heavy lifting. Further recovery in incomes worldwide and increased demand can have a significant positive impact on global wool prices. Conservatively, however, if the industry maintains current levels, prices are still stronger than in recent years.
Australian wool price forecasts for March 2017 and May 2017 hold prices about steady to slightly lower than current levels (AWI Market Intelligence, 8/2016).
Imported Australian wool prices can serve as a tool for price determination for those U.S. growers planning to shear this fall. According the AMS, prices calculated at 75 to 85 percent of Australian imported prices can be used as an estimate of clean domestic prices (before delivery or other marketing charges are subtracted). These are only estimates, however, and don’t account for growers’ wool yield, strength, length, colored fiber content, poly contamination and other market conditions. Some U.S. wool brings 90 to 95 percent of Australian prices, depending on quality.
Apart from the coarsest wools, Australian imported wools to the U.S. in August saw 10 to 14 percent price gains. Twenty-one micron averaged $4.62 per lb. clean, 22 micron averaged $4.58 per lb., 23 micron saw $4.52 per lb., 25 micron averaged $3.95 per lb., 26 micron brought $3.72 per lb., and 27 micron averaged $3.19 per lb. clean.