JULIE STEPANEK-SHIFLETT, Ph.D.
Juniper Economic Consulting
July was a momentous month for lamb. The wholesale composite – gross carcass value – hit a record high of $428.96 per cwt., exceeding the last record set in November 2011 of $409.76 per cwt. In March, the wholesale market did an abrupt turnaround, posting month-to-month gains after two years to trending downward. It is very possible that the lamb market has reached a new level of maturity, securing a higher level of demand for a high-quality, luxury offering.
However, we should keep our optimism in check: We’ve seen highs and lows before.
The net carcass value – after processing and packaging – was $384.11 per cwt., up 5 percent monthly and up 23 percent year-on-year. All primals were higher, with the stronger rack leading the way. The rack, 8-rib, medium, averaged $922.53 per cwt., up 6 percent monthly and up 37 percent year-on-year. The shoulder, square-cut, averaged $354.95 per cwt., up 2 percent monthly and up 25 percent year-on-year. The loin, trimmed 4×4, was $616.41 per cwt., up 4 percent monthly and up 16 percent year-on-year. The leg, trotter-off, saw $416.16 per cwt., up 4 percent monthly and up 20 percent year-on-year.
Feeder and slaughter lamb prices softened somewhat in July, yet were higher than their respective five-year averages. Feeder lamb prices in direct trade gained $23 per cwt. within six months this year, but gained only $2 per cwt. during this period two years ago and lost $37 per cwt. in 2014. Price volatility is a cost to the industry: It can hinder investment and growth. Fortunately, producers are good at diversifying sources of income and take advantage of the insurance program, LRP-Lamb.
Live, slaughter lamb prices at the San Angelo (Texas), Sioux Falls (S.D.), Fort Collins (Colo.) and Kalona (Iowa) auctions display pronounced seasonality: high during May and June and lowest in August and September. Seasonal price patterns will change in a given year based upon supply and demand changes, and changes in market structure.
The accompanying seasonal index graph is an index of how monthly prices compare to the average in a given year. In the first quarter of the year, prices are 0.4 percent lower than the annual average; in the second quarter, 5 percent higher; 1 percent lower in the third quarter; and 3 percent lower than the annual average in the fourth quarter. Slaughter lamb prices and prices for lambs on formula track each other historically.
Standard deviations are commonly used to measure market volatility, but depend upon the price points being distributed normally, as in a bell curve. If prices are not necessarily distributed normally, then a histogram of live, slaughter lamb prices at auction is a good way to show how often prices lay within different price ranges.
Prices are volatile, but according to the accompanying graph, during the past few years, 36 percent of the months saw prices fall in the $151-$160 per cwt. range. The next most popular price range was $141-$150 per cwt. with 26 percent of the monthly averages. Since 2014, we’ve seen prices top $161 per cwt. 17 percent of the 43 months reported.
Slaughter lamb prices in the $140s per cwt. is reportedly an acceptable level to cover costs; however, prices in the $150s might be the new normal with global supplies shrinking and strong domestic demand.
Estimated lamb harvest in the year through July was 1.05 million head, down 4 percent year-on-year. Estimated lamb production was 72.8 million lbs., down 5 percent from a year ago. Dressed weights averaged 69 lbs. this year, down from 70 lbs. a year ago, which challenges production goals.
Lamb imports were up 2 percent year-on-year through May with Australian lamb steady with a year ago and New Zealand lamb up 9 percent.
At 30.5 million lbs., mutton imports saw a sharp turnaround, up 67 percent through May year-on-year. Australian mutton imports were up 43 percent to 20.8 million lbs. and New Zealand imports were up 160 percent to 9.6 million lbs.
Lamb import volume was up 2 percent through May, yet its value was down 5 percent to $263,307 – which suggests the imports were of lower-valued cuts and/or exchange rate effects. This year, the Australian-U.S. dollar exchange rate was 3 percent stronger at $1 AUD equals 78 U.S. cents, which means it takes more Australian dollars to buy one USD.
After four months of increases, lamb and mutton in cold storage contracted by 12 percent in July to 26.2 million lbs. Freezer inventories are down sharply from recent years, down 34 percent year-on-year in July.
In July, only one trade set the direct feeder lamb market. Four thousand lambs traded out of Idaho for 130 lbs. at $168 per cwt. The trade brought the July average down 25 percent monthly, down 6 percent from a year ago, yet up 12 percent from its five-year average.
Feeder lamb prices at auction averaged $183.34 per cwt. in July, down 12 percent monthly and down 2 percent year-on-year. Prices were averaged across the San Angelo, Fort Collins and Sioux Falls auctions.
Slaughter lamb prices followed suit, and softened in spite of stronger signals from the meat market.
Live, slaughter lamb prices at auction averaged $159.32 per cwt. in July, 14 percent lower monthly, and 4 percent higher year-on-year. July’s average was 18 percent higher than the five-year average for the month. Prices were averaged across auctions in San Angelo, Sioux Falls, Fort Collins and Kalona.
Lambs on formula averaged $338.53 per cwt. in July, down 0.2 percent monthly. Dressed weights were up 6 percent to 89.65 lbs., which put the live equivalent price at $172.10 per cwt.
Live, negotiated slaughter lamb prices averaged $181.82 per cwt., down 2 percent monthly, and up 11 percent from a year ago. Weights averaged 156 lbs.
Comprehensive report (live, negotiated and formula) prices averaged $346.14 per cwt., up 0.5 percent monthly. On a live equivalent basis, prices averaged $176.73 per cwt.
The highest quality unshorn supreme lamb pelts averaged $8 per piece in July, down 95 cents from June and 7 percent lower year-on-year. The highest quality shorn pelts – supreme – averaged $4.13 per piece in July, down about 20 cents monthly and down from $5.58 per piece a year ago.
Looking forward, strong lamb demand is this industry’s growth driver. The cost of food at grocery stores has trended lower in the last few years while the cost of eating out has continued to climb. This means that promotional activity at retail will likely be an effective means to move lamb, while competition at food service might be tight.
Foot traffic at large chain restaurants is down, but this doesn’t account for many new restaurants – independents and smaller regional chains (significant for the lamb industry) – that could be growing (Daily Livestock Report, 8/3/17).
Overall, the fundamentals for strong lamb demand are present: income growth is good and employment is high.
The Livestock Market Information Center forecasted in early August that national, direct slaughter lamb prices on a carcass basis could average $290-$295 per cwt. in the fourth quarter, down 2 percent from a year ago. LMIC also forecasted that 60-90 lb. feeders could be $190-$198 per cwt. in the fourth quarter, up 16 percent year-on-year.
In July, the U.S. wool market was quiet and the Australian wool market went on its three-week summer recess. In the last month before its break, the Australian wool market averaged Australian cents 1,522 per kg clean (U.S. 532 cents per lb.), up 16 percent year-on-year. During the second week of August, Australian wool markets reopened. Sales were strong with processors catching up from the three-week recess.
Producers can track the Australian/U.S. exchange rate in order to forecast Australian wool prices in U.S. dollars. During the break, the Australian dollar gained nearly 3 cents to AUD 78.8 cents per USD, which led to an “impressive” 37 cents gain in Australian wool prices in U.S. dollars, to U.S. 554 cents per lb. (Weekly Wool Market Report, 8/10/17).
The forecast for wool is strong.
“Wool farmers are benefiting from the best prices for their product in two decades with market analysts tipping that the market would remain strong,” (China Daily, 8/1/17). China imports about 75 percent of Australia’s wool and much of it remains in China, a testament of higher Chinese incomes and demand growth. “There’s been new-found wealth in Asia, but particularly in China where most of our wool is processed and then exported,” commented Geoff Power, president of Livestock South Australia.
Looking forward, the supply situation in three key countries will affect Australian (and hence global) wool prices. Australia has the largest wool production worldwide when wool is measured on a clean wool basis, China is second and New Zealand is third. Other international wool growers only produce about one-fourth of New Zealand’s production.
The American Wool Council rolled out AmericanWool.org, educating consumers about the merits of wool. Demand, which pushes wool prices higher under a situation of fixed supply, is directly related to promotional wool efforts. Wool faces stiff competition from synthetic fibers, but has seen recent gains domestically, especially in the hosiery market. Still, some U.S. sock makers use imported wool. Wool prices are record high, but importantly world supply is also declining. Increased demand is key to investing in wool and keeping prices high while increasing wool production.