Market Report

Government Shutdown Impedes Sheep Industry Analysis

Juniper Economic Consulting

“The USDA-NASS data used to populate this report is not available,” read the message. To my dismay, the report that gives us weekly lamb slaughter data was unavailable. As of this writing, the federal government shutdown was on day 19. The shutdown continued into day 26 as this issue went to the printer.

Although the Agricultural Marketing Service continued operations in terms of price reporting during the shutdown, AMS relies upon an interagency exchange to collect weekly slaughter activities (for all species) from the National Agricultural Statistic Service. Another noticeably absent NASS report was lamb and mutton in cold storage. Other agriculturally important agencies were also affected. For example, the sheep industry relies upon the shuttered Department of Commerce to report lamb imports and wool exports. 

NASS data is critically important to the American sheep industry. It produces weekly slaughter and production reports in addition to data on harvest weights and the percent of harvest that is lambs versus older sheep. In January through October 2018 (last available import data), total available lamb and mutton supplies were up 3 percent year-on-year. The swell in availability of lambs could help explain some of the weakening in the live lamb market last year. Without production data from NASS, a critical component of economic analysis is missing.

An additional concern for the sheep industry is the much-anticipated sheep inventory data due out in late January by NASS. Data that relies upon livestock producer surveys – such as inventory data – might not be published because either the surveys were not sent, or filled surveys were not collected. The January inventory data is the only record of sheep inventory published all year (the mid-year survey ceased some time ago).

Weekly harvest data – coupled with sheep inventory data – is critical to informing marketing decisions and price expectations. It is how producers, feeders and packers manage risk.

The LRP-Lamb insurance program administered by the U.S. Department of Agriculture Risk Management Agency was also impacted by the government shutdown. As of Jan. 10, it was unknown whether insurance payments would be made in mid- to late January as a trigger point approached. LRP-Lamb has enjoyed broad support by the industry and has reinvested more than $60 million back into the sheep industry since its inception. In years like 2017 – when feeder lambs prices got relatively high – feeder losses were cushioned by LRP-Lamb insurance. It is believed that the program has kept a lot of producers and feeders in business, and made a real difference in the industry.

Feeders Lower in 2018

Feeder lambs in direct trade averaged $166.12 per cwt. in 2018, down 8 percent annually and 1 percent lower than its five-year average. Historically, $1.66 per lb. for a feeder lamb is relatively high. Although feeders hit more than $2 per lb. in 2011 – an atypical year – feeders brought only about $1 per lb. up until 2010.

The volume of direct trades reported was 51,900 head in 2018, up 31 percent annually. The number of lambs captured in direct trade was sharply lower than five years ago when AMS reported more than 200,000 head in direct trade and closer to 1 million head 15 years ago. The structure of the sheep industry has changed.

More feeder lambs are traded under the umbrella of vertically integrated sheep companies, whereby the ownership of lambs stays under one business entity – such as a cooperative – from birth to harvest. If the lambs are not publically traded, then AMS will not pick up the reports.

Slaughter Lambs Down in 2018

Slaughter lambs on formula/grid averaged $272.75 per cwt. in 2018, down 12 percent annually. On a live-equivalent basis, the 2018 average was $137.56 per cwt. On a live, negotiated basis, the annual average was $143.36 per cwt., down 7 percent annually. Some of the price weakness in 2018 can be attributed to heavier weights at slaughter with harvest weights up 1 to 2 percent.

Production & Trade Critical to the Industry

Through November 2018, lamb and mutton harvest totaled 1.86 million head, 7 percent lower year-on-year. Although harvest was down, harvest weights were 3 percent heavier through the year to 137 lbs., pushing production up 5 percent to 139 million lbs. Higher domestic production levels contributed to the lower values of live lamb marketed last year.

Lamb imports through October 2018 – the last available data – totaled 171.1 million lbs., down 0.5 percent year-on-year. Australian imports were up 1 percent in this period to 125.3 million lbs. and New Zealand imports were down 4 percent to 43.6 million lbs.

At the beginning of December 2018, lamb and mutton in cold storage averaged 37.9 million lbs., down 4 percent monthly, yet up 31 percent year-on-year. At 34.3 million lbs., the monthly average freezer inventory in 2018 was up 23 percent year-on-year.

Throughout the year processors harvested market-ready lambs in an attempt to keep lambs current, yet retail demand couldn’t support this flow and extra product ended up in the freezers. However, by some accounts, processors couldn’t harvest lambs fast enough. During the spring and summer of 2018, harvest weights of lambs sold on a formula/grid averaged 175 lbs. This is relatively heavy compared to the federally-inspected slaughter average of 140 lbs. Heavier weights typically mean excess back fat with increased yield grades 4 and 5. In March through July 2018, one-third of lambs harvested were yield grade 4s and 5s,

The live lamb market in 2019 will be dictated by available domestic and imported supplies, and exchange rates. By some accounts, it is anticipated that the Australian dollar could equal 65 U.S. cents by mid-2019, down from the low 70s in early January. If realized, the rate would fall to the lowest level in 10 years. The lower Australian dollar (and relatively stronger U.S. dollar) could make lamb imports more competitive, prompting an increased import volume.

Meat Market Softer

The wholesale composite cutout averaged $376.19 per cwt. in 2018, down 2 percent year-on-year. The heavy shoulder was largely to blame.

The shoulder, square-cut, dropped 10 percent in 2018 to $280.74 per cwt. The loin and leg were also weaker. The loin, trimmed 4×4, softened 5 percent to $542.29 per cwt. The leg, trotter-off, was down 2 percent in 2018 to $364.18 per cwt.

The higher-valued rack helped to partially offset the lower wholesale composite. The rack, 8-rib, medium, gained 4 percent in 2018 to $852.80 per cwt.

Pelt Values Plummeted

In 2018, unshorn supreme pelts averaged $7.25 per piece, down 24 percent annually. The second-highest quality pelt, premium, lost 47 percent to $5.84 per piece. Reported price averages disguise the market crash in the 2018 pelt market. Many pelts dropped into the negative territory, while the better quality pieces brought $1. A negative pelt value means that producers that sell slaughter lambs direct to processors were charged for the pelt disposal. Pelt credits disappeared for many. Only the top quality pelts received any value for most of the year. And, all premium pelts were in negative territory for November and December 2018.

According to the Livestock Marketing Information Center, lower pelt values can be attributed to lower export demand. This is particularly true in China, the No. 1 buyer of American pelts (12/31/18). In 2018, pelt exports to China fell 28 percent (LMIC, 12/31/18). According to LMIC, other countries, such as Turkey, have increased their interest in American pelts, but the actual volume exported was insufficient to offset exports to China.

Wool Textiles Up in 2017-18

Last year was a momentous year for the international wool industry. Propelled by tighter raw wool supplies and uncharted demand, wool prices hit historic highs in 2018. The market has not been without some volatility, however.

The Australian Wool Market Weekly Report explained: “Although the price gains have taken a wavering path, by the end of 2018 prices have generally been on the rise since 2012,” (12/14/18).

In mid-January, after a three-week recess, the Australian market resumed with strong demand and abundant supply due to recent shearing. The Eastern Market Indicator averaging Australian wool, was 1,910 Australian cents per kg clean on Jan. 10, up 5 percent year-on-year. In U.S. dollars, the EMI averaged 422 U.S. cents per lb. clean ($4.22 per lb.), down 4 percent year-on-year due to exchange rate movements.

Of note at the Australian auction were premiums paid for the highest quality wools and severe discounts to wools with high mid-breaks.

In retrospect, 2018 was an excellent year for the American wool market. Raw wool prices were record high and many American wools received prices comparable to high-quality Australian wools. The United States-China trade dispute cast a shadow over the industry in the second-half of 2018, but fortunately after most of the American wool clip had been traded, and most of the wool shipments overseas completed.

As with raw wool, total wool textiles were up 7 percent in the 2017-18 marketing year to 81.2 million lbs. Wool apparel exports were up 26 percent to 32.3 million lbs. and wool floor covering were up 3 percent to 18.5 million lbs. Wool yarn, thread and fabric was down 6 percent to 29.4 million lbs., and wool home furnishings were down 8 percent to 804,000 lbs.

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