JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting
COVID-19 has had an immediate impact on lamb markets: Prices are down and industry slaughter capacity has slowed. Similarly for wool. Domestic wool trade is at a standstill, and international markets have slowed. The longer-term outlook is even more worrisome.
The Coronavirus lamb story is mixed. In the short-run, fresh meat sales spiked because of widespread panic in which shoppers stocked their pantries and freezers. In the week ending March 22, meat sales were up 91 percent year-to-year and volume was up 78 percent (IRI, from Supermarket News, 3/31/20). During this period, lamb was up 55 percent in sales. Exotic meat sales such as duck and bison more than doubled from a year ago.
In the long-run, an uptick in at-home lamb preparation might be sustained if consumers are able to find lamb in the meat cases at competitive prices. However, consumers’ freezers might be stocked for some time now. Further, grocery sales are often lower-priced cuts such as the shoulder and ground lamb, so grocery sales will not likely support the entire industry.
COVID-19 will have a significant longer-term effect on lamb markets, more so than other proteins. This is because more than half of lamb sales are sold in foodservice. With restaurants resorting to take-out only service, lamb sales are down. Lamb is known for its high-end cuts sold in fine-dining establishments – a service that doesn’t translate easily to take-out.
Reportedly, the sale of higher-priced middle meats such as the rack are at a standstill. Early reports revealed that some retail and foodservice lamb accounts are being cancelled entirely, for large and small processors alike. As of early April, cancelled orders were already seeing an effect on live slaughter lamb markets.
Easter Sales Uncertainty
A Texas A&M University webinar explained that the effect of COVID-19 might be particularly significant for the lamb industry because a hefty portion of annual sales occur during Easter (4/1/20). During Easter, the sales of legs by volume is 359 percent higher than non-Easter weeks. Total lamb expenditures rise sharply during Easter, from an average of $6.5 million weekly to $23.9 million (2009-2014 FreshLook retail outlet data).
Another factor adding stress to the lamb markets is that Mountain States Rosen – the second largest lamb processor after Superior Farms – filed for Chapter 11 bankruptcy protection on March 19 (Capital Press, 3/31/20). Reportedly, the cancellation of foodservice accounts was the straw that broke the camel’s back. Reportedly, as of early April, MSR’s harvest was down about 80 percent from its typical pre-Easter numbers.
Given that Easter is the largest demand period for the lamb industry, there might be a significant backlog of slaughter lambs in the system. Some estimates put the delay of up to five to six weeks, which will result in overfat market-ready lambs.
A new processing plant – Colorado Lamb Processors, LLC – plans to start operation this summer in Colorado. It is a smaller-scaled plant compared to MSR, and it doesn’t plan to fabricate. Thus, disruptions in weekly slaughter are likely in the next few months.
Consumer Expectations Drive the Market
What happens in the lamb markets is a function of consumer expectations. If the outlook is positive, markets will respond positively, keeping slaughter current and prices high. COVID-19, however, is a profound negative shock to the lamb market. According to Dr. David Anderson, professor and extension economist at Texas A&M, “A significant demand destruction is expected, because consumers fear we are slipping into a recession.”
In March, the Index of Consumer Expectations by the University of Michigan was down 14 percent monthly and down 10 percent year-on-year. According to the University of Michigan, March saw the fourth largest monthly downturn in consumer confidence after 1980 and 2008 recessions and Hurricane Katrina.
University of Michigan Surveys of Consumers Chief Economist Richard Curtin commented that stabilizing confidence in April will be a challenge given rising unemployment and deteriorating household incomes. Curtin added, “The extent of additional declines in April will depend on the success in curtailing the spread of the virus and how quickly households receive funds to relieve their financial hardships.”
One redeeming factor looking forward is that lamb markets were in good shape prior to COVID-19 (Texas A&M, 4/1/20). Prices were relatively high, reflecting a current inventory with tight supplies.
On a more positive note, American consumers might be discovering or rediscovering lamb in home-cooked meals. Megan Wortman, executive director of the American Lamb Board, commented that ALB food bloggers are continuing with lamb video tutorials and blog posts for the hundreds of thousands of followers, according to an article in The Fence Post.
Feeder Lamb Prices Lower
In the direct feeder lamb report, 1,500 head of new crop lambs traded out of Texas in mid-March at $206 per cwt. for a 93-lb. lamb. Prices for March were 22-percent higher than the March five-year average.
Many feeders off of Californian pastures were ready for sale in early April, but faced reduced marketing options.
Sixty- to 90-lb. commercial feeders in Sioux Falls, S.D., averaged $223.25 per cwt. in March, down 1 percent monthly and steady with a year ago.
By the second week of April, feeder lambs were seeing a sharp drop in prices due to the COVID-19 demand fallout. Sixty- to 90-lb. feeders in Sioux Falls saw a 32-percent drop in prices from March to the first two weeks of April, from $223.25 per cwt. to $150.85 per cwt. Sixty- to 90-lb. feeders in Fort Collins, Colo., saw a 19-percent drop in the same period to $174.08 per cwt.
Slaughter Lamb Prices Higher,… then Lower
Slaughter lamb prices on a formula basis averaged $299.22 per cwt. in March, up 1 percent monthly and 11 percent higher year-on-year. The live-weight equivalent in March was $147.14 per cwt. Live weights at harvest averaged 170 lbs., up 5 percent monthly and up 5 percent year-on-year.
Overall, the impacts from the Chapter 11 bankruptcy filing combined with suspension of operations at some processing plants and reductions in lamb slaughter are preventing USDA-AMS from reporting market price data under Mandatory Price Reporting. In the first week of April, confidentiality guidelines were not met for either the live, negotiated slaughter lamb price or the slaughter lamb price on formula. However, between the two, the combined comprehensive series was reported.
Comprehensive slaughter lambs averaged $304.52 per cwt. in March, but fell 9 percent to $278.64 per cwt. in the first two weeks of April. Prices fell to $138.31 per cwt. on a live weight basis.
At auction, slaughter lambs at Sioux Falls averaged $161.88 per cwt. in March and then fell 31 percent to $111.55 per cwt. in the first two weeks of April (for Choice and Prime, 100 to 150 lbs. lambs).
Early April forecasts are that both feeder and slaughter lamb prices will move lower before bouncing back. Once the United States economy gets back on track, the lamb industry recovery might lag behind other markets.
Rack Holds Steady,…For Now
As of the second week of April, feeder and slaughter lamb prices were weakening, but the wholesale composite was holding steady. This is expected to be a short-term disconnect with expectations that cutout prices are to decline. Much market uncertainty prevails as of this writing.
The wholesale lamb composite averaged $429.97 per cwt. in March, the highest monthly average on record since August 2001, when price reporting began. Higher lamb prices can be attributed to year-on-year gains in income, and higher lamb demand. On average, since the 2008 recession, incomes have been rising, making the higher-priced protein more attractive.
The 8-rib rack, medium, averaged $901.95 per cwt. in March, up 3 percent monthly. The rack has only twice before seen $9 per lb., in mid-2011 and in mid-2017. While the rack and shoulder were strong, other primals weakened in March. The shoulder, square-cut, averaged $332.25 per cwt., up 2 percent monthly. The loin, trimmed 4×4, average $524.74 per cwt. in March, down 2 percent monthly. The leg, trotter-off, averaged $400.12 per cwt., down 8 percent monthly.
The shoulder was up an unprecedented 20 percent year-on-year in March. The leg was also higher, up 10 percent year-on-year. The rack, 8-rib, medium, was up 3 percent year-on-year. The loin remained steady from a year ago.
Production and Trade Down
In the first quarter, estimated lamb harvest was 443,817 head, down 4 percent year-on-year. Estimated lamb harvest was down 6 percent year-on-year to 21.8 million lbs.
In January and February, the portion of federally-inspected harvest that graded yield grade 4 and 5 was 27 percent, down from 30 percent in January and February 2019. Harvest weights in the first quarter were 135 lbs. live weight, or 68 lbs. dressed weight, down about 2 percent year-on-year.
At the beginning of April, a reported 134,618 head of lambs were counted in Colorado feedlots, up 15 percent monthly and up 8 percent year-on-year, but 7 percent lower than April’s five-year average.
If grocery stores sales continue at an accelerated pace, freezer inventory can supply the heightened demand for some time. At the beginning of March, the amount of lamb and mutton in cold storage was 37.9 million lbs., up 3 percent monthly and up 7 percent year-on-year. Recall that the portion of imported product in the freezers is unknown.
In January and February, lamb imports were down 19 percent year-on-year to 33.5 million lbs. Imports from Australia were down 18 percent to 26.1 million lbs. and New Zealand lamb was down 23 percent to 7.0 million lbs.
Reportedly Australian lamb exports to the United States have slowed due to COVID-19. This might give domestic producers some relief as maintaining American lamb’s market share in this crisis will be a challenge.
American Wool Market: “Sit and Wait”
The American wool market was at a standstill in early April. Accelerating COVID-19 cases led to suspended wool sales from warehouses. While the testing at New Zealand Wool Testing Authority was temporarily closed due to COVID-19, it was scheduled to reopen on April 23. NZWTA is the wool lab testing for American wool while the new Texas A&M lab is being expanded to begin commercial wool testing in 2021.
Fortunately, wool can be stored for later sales. Reportedly, most warehouses are accepting wool for storage, although there is some carryover from last year’s clip. If wool is not taken to a warehouse, it should be stored in a covered space to be kept dry for future sale. Wool preparation continues to be crucial.
Growers are reminded to consider using the government wool Loan Deficiency Payment or Marketing Assistance Loan programs. More information about these programs are on page 24 of this issue of the magazine. To view loan rates and payments (updated weekly), visit SheepUSA.org/issues-governmentprograms-woolldp.
In early April, the Australian wool market hit a four-year low. Australian wool auctions were still running in early April, but sales were disrupted due to the COVID-19 virus. Markets were closed in India and Italy due to border closures on top of the factory closures in China. As of this writing, there were limited markets available to sell Australian wool. A few of the major wool markets were effectively – either fully or partially – closed to wool. The industry has serious constraints facing the international wool market.
The Australian wool auction price averaged 1,301 AUD cents per kg. clean on April 8, down 33 percent year-on-year. In U.S. dollars, the value was 797 U.S. cents per kg, or $3.62 per lb. clean, down 43 percent year-on-year. The buyers that were present in Australian wool auctions were cautious and sales to China were slow.
The loss of the American wool market in part in 2019 and again in 2020 can depress incomes across the marketing channel – from growers to brokers to processors. However, the loss of an export market also has a multiplier effect that can depress rural incomes. The U.S. Department of Agriculture Economic Research Service estimates that in 2018 each dollar of agricultural exports stimulated another $1.17 in business activity. This means that for every $1 of wool that is not exported, $1.17 is lost in additional income in rural areas and beyond.
In coming months, there is concern that lower discretionary spending will mean lower demand for wool apparel.