Market Report

Texas Sheep Numbers Up 6 Percent

JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

At 16 percent of the total number of United States ewes, any sheep inventory change in Texas makes headlines. According to the U.S. Department of Agriculture, Texas reported 465,000 ewes in 2017, up 6 percent – or 25,000 ewes – annually. Last year’s gain was a rebound from the 1 percent drop in 2016.

The second largest sheep state, California, saw a 5-percent drop in ewe inventory in 2017, down from a 4-percent expansion in 2016. Texas and California represent 24 percent of all United States ewes.

Last year was the 12th consecutive year of year-on-year contractions in ewe numbers, averaging 1.6 percent per year – well within the survey margin of error. The last time we saw ewe inventory expansion was in 2005, and again in 2006.

At nearly two million ewes, the top 10 sheep states accounted for 65 percent of the nation’s ewes in 2107. Among this group, Texas and South Dakota were the only two to expand ewe numbers. Overall, the top 10 sheep states contracted by 1.5 percent between 2016 and 2017 – losing 29,000 ewes.

Eight states saw ewe numbers increase, including: New York and Pennsylvania in the East; Ohio, Illinois and Indiana in the Midwest; and Oklahoma and Texas in the Southern Plains. Another eight states saw ewe numbers maintain.

What perhaps the USDA sheep report doesn’t tell us is that even though total ewes numbers declined annually, the industry is seeing pockets of growth. Jim Robb, director of the Livestock Market Information Center, calls this transition “segmenting markets,” (1/2018).  

Segmentation is more than product diversification, it means recognizing different consumer needs as unique and adjusting production and marketing efforts accordingly (from Wendell R. Smith, American Marketing Management, 1995). For many years, manufacturers in all industries maintained relatively homogeneous production and instead spent advertising dollars trying to convince buyers that the products in their markets were custom-tailored. Today’s lamb packers and producers alter production – products meeting different consumer groups really are different – from harvest weights, harvest dates, breeds of lamb and production practices.

Today’s sheep industry consists of at least three distinct markets: There are many large-scale operators in the West that typically run wool breeds for commercial packers; an increasing number of  mid- to large-scale operations that market direct to grocers and food service; and smaller operations that run wool or hair breeds geared for the non-traditional market.

Replacement Ewe Prices Mixed

Producers looking to rebuild flocks will retain lambs this year, which could potentially curb production in 2019, but provide long-term growth to the industry.

Average replacement lamb prices for the third quarter of 2017 were as follows: $234.58 per head for 12-24 yearling ewes, $171.75 per head for young ewes 2-4 years old, $133.22 per head for middle aged 5-6 year old ewes, and $81.73 per head for aged ewes more than 6 years old.

Overall, yearling ewes saw 13 percent higher prices in 2017, but older ewes saw prices contract by 2 percent year-to-year.

Feeders Up; Slaughter Lambs Mixed

Feeder lamb prices at the San Angelo, Texas, auction averaged $207.50 per cwt., up 8 percent monthly and up 10 percent year-on-year. Feeders were not well tested in other markets.

Slaughter lamb prices on a formula/grid fell 3 percent in January to $261.90 per cwt., or $131.95 per cwt. on a live-weight equivalent for a 164-lb. lamb. No prices were available in January 2017 for comparison.

Live, negotiated slaughter lamb prices averaged $132.10 per cwt., up 1 percent in January for a 158.25 lb. average. Prices were 5 percent lower year-on-year.

At an averaged $136.46 per cwt., slaughter lamb prices at auction were at a four-year low. Prices were 2 percent higher monthly and 5 percent lower year-on-year. South Dakota posted the highest average among reporting auctions at $142.83 per cwt. San Angelo, Fort Collins (Colo.), Kalona (Iowa) and Equity Electronic Auction all posted averages in the $130s per cwt. Slaughter lambs sold at auction markets are a minority component of today’s supplies.

By some anecdotal accounts, a minimum of about $140 per cwt. is desired to break even.

Meat Market Cooled

The wholesale lamb composite averaged $368.85 per cwt. in January, down 4 percent for the month and 6 percent higher year-on-year. After three years of year-on-year declines from 2014-2016, the 2017 meat market made an abrupt departure, gaining $96 per cwt. – or 29 percent – in four months. A rise that sharp and that fast is unprecedented in the meat market since data collection began in 2001.

Lamb market fundamentals support strong meat prices in 2018. However, we might see continued market correction after overheating in mid-2017 before prices stabilize. U.S. job growth and wage growth are strong, both factors important to supporting strong lamb demand.

Forecasts

In early February, LMIC estimated first-quarter prices for national slaughter lambs at $278-$281 per cwt. on a carcass basis, up 2 percent year-on-year. Sixty- to 90-lb. feeders were estimated at $206-$211 per cwt., down 2 percent. According to LMIC, the first quarter could see expanded domestic production compared to a year ago.

In January, LMIC made 2018 forecasts. For the year, domestic production could be higher, imports lower, lamb exports higher, and lower total supplies. These market dynamics support higher prices, but a sharp draw-down in freezer inventories will mean more lamb in front of American consumers and perhaps little change in live lamb prices from 2017.

Any United States lamb market analysis would be remiss not to include a discussion of Australia’s market. The Australian industry is seeing continued flock rebuilding, which is forecasted to stabilize production in 2018, given reduced harvest coupled with carcass weight gains (Meat & Livestock Australia, 1/23/18). In 2019, lamb production is expected to expand. MLA Market Intelligence Manager Scott Tolmie reported, “With flat to declining production forecast this year, combined with strong, ongoing international demand, lamb and mutton prices should continue to see strong support this year,” (MLA, 1/23/18). Australia saw record-high lamb exports in 2017. Mr. Tolmie continued that lamb exports could fall slightly in 2018, but still maintain a level that is 4 percent higher than its five-year average.

LMIC forecasted in late January that 2018 United States lamb imports could fall 2 percent annually. 

Wool Market Steadied

The Australian wool market made impressive gains since late 2015, but with periodic corrections along the way. A recent downturn in the market is likely another such blip on an otherwise strong trend and not an indicator of any major change in market fundamentals.

After two weeks of softer prices, the market steadied in early February. On Feb. 8, the Australian Wool Exchange Eastern Market Indicator gained 80 cents weekly to close at 1,818 Australian cents per kg clean. In U.S. dollar terms, the market jumped 11 cents at 645 U.S. cents per lb. (AWEX, 2/8/18). Clean wool prices were up 27 to 30 percent year-on-year, depending upon currency.

Australian wool reports that buyers are increasingly selective of wools with fine- and mid-micron wools, but also wools with specific qualities that help inform buyers about processing performance. Australian wools labeled “FNF” (Free to Nearly Free – less than 1 percent vegetable matter) saw recent price premiums, as did wools with low mid-micron breaks, and wools with a low Coefficient of Variation of Hauteur (fiber length in wool top). The lower the cvh, the longer the fiber length when the wool is processed or combed into wool top.

In February, Australian wool sales at auction were expected to be lower than a year ago, likely supporting high current price levels.

This coming American wool season, fewer wooled sheep and a transition by some operators to hair breeds will likely continue to negatively impact the wool clip. That said, ongoing domestic improvements in wool preparation and tighter global wool supplies will likely support grower wool returns and prices in 2018.

The USDA reported in January 2018 that 2017 U.S. shorn wool production was 24.7 million lbs., down 5 percent from 2016. Sheep and lambs shorn totaled 3.44 million head, down 4 percent from 2016. The average greasy price paid for wool sold in 2017 was $1.47 per lbs. for a total value of $36.4 million, down 3 percent from $37.7 million in 2016.