- January 2017
JULIE STEPANEK SHIFLETT, Ph.D.
Juniper Economic Consulting
Out with the old, in with the new. A New Year inspires innovative thinking on lamb market dynamics.
Agricultural commodity markets worldwide have become increasingly complex and interconnected. The commercial U.S. lamb market is not an isolated market, but influenced by lamb market undercurrents in Australia and New Zealand, lamb import volumes and prices, and exchange rates.
Record-high prices in 2011 were in part prompted by particularly tight supplies in Australia and New Zealand. When forecasting U.S. prices, domestic and Australian supplies matter. In fact, U.S. live, negotiated slaughter lamb prices and Australian prices for heavy trade lambs (20-22 kg) are highly correlated, moving in the same direction – up or down – 80 percent of the time since 2002. The Australian to U.S. dollar exchange rate is also correlated with domestic prices (68 percent correlation between rates and formula slaughter lamb prices).
We saw this correlation late last year. In the four months through November, slaughter lamb prices at auction lost 16 percent – an unprecedented slide. In the last few months Australian lamb prices also weakened – losing 20 percent. Are U.S. consumers driving both markets?
This interconnectedness might explain why live, negotiated slaughter lamb prices have been increasingly volatile compared to the mid-2000s. Even after the steep run up in prices in 2011 – surpassing $200 per cwt. – and the consequent tumble, prices have been more unpredictable.
Increased volatility coupled with the reduced availability of USDA market information, suspended LRP-Lamb (the industry’s only risk management tool) and growing concentration in the lamb industry can – and is – producing unprecedented price volatility in the lamb market.
Increasing market information at home and overseas can improve coordinated marketing decisions and reduce market hiccups throughout the year in an industry that is already highly seasonal.
In review, 2016 was a good year given that quality was excellent and the over fat problem that so often plagues the industry was somewhat avoided. However, domestic supplies were ample in December, harvest rates slowed and live weights at harvest fell. There was concern that holiday sales would be insufficient to move market-ready lambs. Substitute protein prices were low for the holidays which put additional pressure on the lamb industry. It is possible that lamb weights will creep up, prompting an over heavy problem in early 2017.
The Livestock Market Information Center published 2017 forecasts at the end of November. It is forecasted that domestic production could rise 1 percent in 2017, imports could fall 3 percent with total consumption (or disappearance) falling 5 percent.
Australia forecasted a 2 percent drop in harvest and production in 2017 with the fourth year of year-on-year price gains (MLA, 11/2016). Australian lamb exports are forecasted to contract by 4 percent in 2017 due in part to a strong domestic market. However, ample exports are projected for the first quarter. Exports are expected to fall off sharply by the second and third quarters.
New Zealand’s spring lamb crop 2016 declined 1 percent annually, to 23.7 million head – the smallest spring lamb crop in more than 60 years (Beef + Lamb NZ). New Zealand lamb production is likely to continue to contract in coming years, likely reducing exports to the U.S.
Forecasted tighter lamb supplies in the U.S. in 2017 could support lamb prices if demand remains stable to stronger. However, tighter lamb supplies can lead to lower prices if demand weakens. Relatively lower prices of substitute proteins hurts demand, but higher incomes help.
In late November, LMIC forecasted that slaughter lamb prices could rise in 2017 from the current levels in the low $130s per cwt. live weight to the higher $130s in the first two quarters. In the third and fourth quarters – when the impact of slower imports kicks in, and domestic supplies are seasonally tight – domestic lamb prices could top $140 per cwt.
Sheep industry dynamics are sensitive to exchange rate volatility. Wool and pelt markets are both highly export dependent and about one-half of lamb available domestically is imported. This year might see some continued headwinds if U.S. interest rates increase, appreciating an already strong U.S. dollar, which could slow exports and support imports.
Sixty- to 90-lb. feeder lamb prices at auctions in San Angelo, Texas, and Sioux Falls, S.D., averaged $167.17 per cwt. in November, 12 percent higher monthly and down 5 percent from a year ago. No prices were reported in the direct trade market.
In the three months since August, slaughter lamb prices at auction lost 16 percent from an annual high of more than $156 per cwt. down to $132 per cwt. in November. Not since 2000 have we seen this kind of later-year slide. However, it could be worse: In November 2012, producers were facing prices in the low $90s per cwt.
In November, slaughter lamb prices at auction averaged $132.13 per cwt., 2 percent lower monthly and 8 percent lower year-on-year. Fort Collins (Colo.) and Kalona (Iowa) auctions slipped into the low to mid-$130s and San Angelo and South Dakota tumbled into the $120s.
Slaughter lamb prices in the live, negotiated trade averaged $142.22 per cwt. in November, down 3 percent monthly and down 5 percent year-on-year. Live weights averaged 146 lbs., 2 percent higher monthly and up 3 percent year-on-year.
The U.S. pelt market gained some footing in November. Unshorn Supreme pelts were $6.50 to $8.13 per piece, up about 10 percent monthly. Premium pelts saw a 25 percent jump to -$2.00 to $3.25 per pelt. Pelt gains to producers can offset some of the loss in slaughter lamb value.
The U.S. sheep industry, like so many other commodity markets, faces inherit volatility. First, nature can wreak havoc, be it drought, flood, cold or predator losses. Second, the nature of lamb demand at retail is inelastic, which means that small changes in volume can create proportionally larger swings in prices.
The sheep industry also is burdened with man-made volatility. In mid-November, ASI met with the USDA’s Agriculture Marketing Service to discuss desired changes in Livestock Mandatory Reporting. ASI’s Secretary-Treasurer Benny Cox stated, “Due to USDA/AMS’ interpretation of the LMR statute and regulations, LMR for lamb reporting, especially direct live and carcass sales, are essentially non-existent.
“Price reporting systems cannot, and should not, be so inflexible and intractable that in a dynamic marketplace those systems are rendered ineffectual,” Cox continued.
Formula/grid price reporting on slaughter lambs has not been available since late January. In November, the share of lamb harvested on formulas and packer-owned increased to an estimated 48 percent of all lambs harvested. That is, we do not have price reporting on nearly one-half of the market. Estimated lamb processed through auctions fell to 38 percent with live, negotiated lamb at 12 percent.
In theory, uncertain prices can mean producers are less willing to invest in productivity-raising assets, and this might encourage them to take less than optimal investment decisions in the long term.
Total lamb supplies (domestic plus imported) were up 4 percent to 250.4 million lbs. in the nine months January through September. Through November, estimated lamb and mutton U.S. harvest was up 3 percent year-on-year to 1.7 million head and production was up 1.4 percent to 119.6 million lbs.
At the beginning of November lamb and mutton in cold storage slipped below 30 million lbs., for the first time in 31 months.
The net carcass value (including processing and packaging costs) averaged $320.72 per cwt., steady with October and 2 percent lower year-on-year. Among primals, the leg and loin held steady in November while the shoulder and rack lost 1 and 2 percent, respectively.
The 8-rib rack, medium, lost 4 percent annually to $704.83 per cwt. Further fabrication of the rack can double its value. The rack, roast-ready, frenched averaged $1,384.61 per cwt., up 1 percent monthly and down 2 percent year-on-year. The rack, roast-ready, frenched special (cap-off) averaged $1,730.99 per cwt., down 3 percent for the month and down 7 percent from a year ago.
Sixty-five to 75-lb. carcasses lost about 3 percent monthly to $313.56 per cwt. and down 3 percent year-on-year. Carcass prices were not reported for all weight classes, but from the number of total head published, the November carcass trade represented 9 percent of total lambs harvested.
In November, more than 200,000 lbs. of U.S. wool traded. There were 105,373 pounds of confirmed trades reported on a clean basis. Twenty-two micron average $3.47 per lb. clean; 23 micron was $3.01 to $3.32 per lb.; 24 micron averaged $2.6 per lb.; 27 micron saw $1.71 to $1.97; and 30-34 micron averaged $1.63 per lb. clean. Wools shorn late in the year often receive lower prices than spring wools.
There were 110,779 pounds of greasy wool trades reported in November. Fleece States lamb wool averaged $0.92 per lb. for 28 micron to $1.55 per lb. for 21 micron wool. Ewe wool brought 99 cents for 27 micron. Territory States greasy wool averaged $1.14 per lb. for 23 micron and $1.31 per lb. for 22 micron.
The Australian wool market saw a sometimes bumpy, but upward march since late 2015. On Dec. 1, the Australian market hit a five-year high, but then weakened marginally the following week. On Dec. 1, the Australian Eastern Market Indicator was AU$ 1,378 per kg clean, up 15 cents in a week and 10 percent higher year-on-year. In U.S. dollars, the EMI was 1,378 cents per kg, 12 percent higher year-on-year. Finer wools saw unprecedented gains, pulling up the average in early December while the mid-micron 22 saw a week-to-week loss.
It is forecasted that 2017 will see a lower annual U.S. wool clip. Wool prices have been relatively high and yet continued pressures on producers’ time, shearing and marketing have accelerated the pace of “hair” sheep numbers. Conversely, hair sheep significantly decreases the value of lamb pelts, hair transfer contaminates other wool sheep and hair fibers cannot be used in wool products, rendering hair fibers of little use. LMIC reported that, “By all accounts, those animals represent a growing proportion of the U.S. flock, although definitive break-outs between hair and wool-type sheep are not available,” (11/19/16). A lower wool clip is concern for the long-term viability of the U.S. wool marketing infrastructure, but is advantageous to wool grower margins in the short-term.
The Australian wool market typically sees a significant lift in January, and has done so for the last 15 years, though this upward movement has been less pronounced during the past three years (WTiN Wool Market Report, 12/5/16).