JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting
In June 2020, Mountain States Rosen – one of the largest lamb packers – filed for Chapter 11 bankruptcy and on July 31 closed its doors in a sale of its Greeley, Colo., plant to JBS USA and Pilgrim’s. MSR is a producer-owned and operated fully-integrated lamb and veal company. MSR not only purchases lambs, but slaughters and fabricates lambs for sale through its in-house retailer.
The American lamb industry will enter a period of adjustment as supply and demand work back into balance. For many, the short-term and potentially longer-term effects will be devastating. For many, market-ready lambs are without a slaughter date. In the short-term, sheep producers will search for alternative slaughter arrangements.
Colorado Lamb Processors – a new slaughter facility in Brush, Colo. – will hopefully be able to open its doors soon, but it is not as large as MSR and it only has slaughter, not fabrication, capabilities. In the interim, lamb quality could suffer.
The culmination of COVID-19 and the MSR closure means inventory backups and heavier than normal market-ready lambs available for slaughter. The demand side of the MSR loss might pose a greater challenge as MSR’s long-standing retail and foodservice accounts now need to look for new suppliers.
The Economic Fallout of MSR
MSR had an important economic and employment role of supporting local, rural economies across the West. An economic impact analysis can give an estimate of the potential benefit that can be attributed to MSR’s role in the American sheep industry, and the American economy as a whole.
Before filing for bankruptcy, Mountain States Rosen handled at least 350,000 head per year (Greeley Tribune, 8/5/20). This equates to a rough estimate of $75.60 million per year in lamb sales by sheep producers (assuming $144/cwt. and 150 lbs.). These sales support backward-linked industries – indirect industries – such as feed, fencing supplies and pharmaceuticals, as well as induced industries – industries supported by household spending by those in the sheep industry.
Economic multipliers can capture the total benefit of MSR operations in the West by calculating the direct effect of lamb sales by sheep producers, the indirect and induced effects. The Type I multiplier effect captures the indirect effect, representing the sum of local business-to-business purchases per dollar of output. The Type I multiplier for lamb production is 1.74.
This means that $1 of lamb produced by a producer yields an additional $0.74 in business-to-business purchases. That is, lamb sales to MSR yields an additional economic stimulus of demand for veterinary and feed supplies, and livestock equipment, for example. The estimate value of lamb sales to MSR of $75.60 million generated an additional estimated $55.94 million in indirect sales.
The Type SAM multiplier is the sum of the direct, indirect and induced effects. The induced effect represents the sum of local household purchases per dollar of output, or lamb produced. The Type SAM multiplier is 2.46, which means that for every $1 of lamb produced, $1.46 is spent by lamb producers and employees getting haircuts or buying jeans, in addition to the indirect effect. Thus, the indirect and induced effect is an estimated $110.4 million.
Employment Impact from MSR Closure
Reportedly, MSR laid off more than 200 employees by the end of July (Greeley Tribune, 7/24/20). Jobs lost include “executive-level such as the company president to those in sales, packers, baggers, livestock handler and customer service.”
These employees had an important role in supporting their respective local economies through spending that is now disrupted in a transition to new employment.
MSR lamb purchases supported a minimum of 145 active producer members. Jobs will also likely be lost on sheep ranches, farms and feedlots.
For every sheep rancher or farmer, an estimated 0.31 jobs is created in indirect, backward-linked industries such as in feed supplies. For every sheep rancher, and estimated 0.67 jobs are created in indirect and induced jobs, nearly one full-time position.
Lamb Industry Concentration Increases
The bankruptcy of MSR will leave behind a lamb industry that is even more concentrated. MSR was one of the three largest lamb packers in the United States, accounting for about 20 percent of American lamb slaughter.
American lamb industry packers act as oligopsonists. This is a market structure whereby only a small number of buyers exist for a product. The nature of this market means that it “allows the buyers to exert a great deal of control over the sellers and can effectively drive down prices,” (Investopedia.com). The lamb industry is not alone, many agricultural industries act as oligopsonies. Consumers face this concentrated market structure as well. An oligopoly, by comparison, is where a few large firms sell most products in a particular market, such as Coca-Cola or Pepsi.
MSR Closure Affects USDA Price Reporting
As the American lamb industry loses a significant packer, the United States Department of Agriculture price and volume reporting will become increasingly thin due to the inability of the industry to meet USDA thresholds for reporting.
According to the Livestock Marketing Information Center, “The closure of this facility has wide sweeping implications for price reporting. It is possible these prices will remain unreportable indefinitely,” (8/7/20).
According to the USDA Agricultural Marketing Service Confidentiality Guideline, a sufficient number of entries need to be in the market for a minimum number of days, and no one entity can provide more than a specific percentage of the data for a report on the most recent 60-day period. What this guideline means for the lamb industry is that going forward, the industry will not likely see pelt prices reported, national, formula/grid slaughter lamb prices or live, negotiated slaughter lamb prices. The only remaining slaughter lamb price series available are those reported under the voluntary reporting program such as the Equity Cooperative Livestock Sales Association and regional sheep auctions, which do not necessarily represent the heavier commercial lamb market.
AMS livestock prices are only to be reported to the public “in a manner that protects the identity of reporting entities and preserves the confidentiality of proprietary transactions.” But, what this means in practice for the lamb industry – as it consolidates further – is that less and less market information is available for independent sheep producers to make informed market decisions and gain bargaining power, or leverage, in negotiating trades.
LMIC reported that when Colorado Lamb Processors comes online later this year, this doesn’t necessarily mean all price reporting will resume.
“It should be noted that the opening of the new plant in Brush will not automatically guarantee prices are reported again. Confidentiality guidelines will need to be met each week on each item,” (8/7/20). Fortunately, there are more players on the meat side such that wholesale lamb cuts prices are still reported at this time.
Slaughter Lamb Prices Lower, Feeders Up
In July, slaughter lamb prices on formula/grid averaged $207.79 per cwt., up 1 percent monthly and down 30 percent year year-on-year. The July live-weight equivalent was $104.50 per cwt. The American lamb industry has not seen prices this low since 2009 – amid the Great Recession when incomes fell 6 percent in one year. Comprehensive information slaughter lamb prices (formula and live, negotiated) averaged $219.81 per cwt. in July, up 3 percent monthly and down 28 percent year-on-year. The live-equivalent prices for comprehensive prices was $110.53 per cwt.
In the first week of August, Equity Cooperative Livestock Sales Association, wooled and shorn lambs brought $112.50 per cwt. for 145 lbs. Reportedly, sheep producers require about $140 to $145 per cwt. to break even.
Sixty- to 90-lb. feeder lamb prices averaged $183.17 per cwt. at auction in San Angelo, Texas, up 9 percent monthly and up 6 percent year-on-year. In Sioux Falls, S.D., feeders at auction averaged $180.95 per cwt., up 9 percent monthly and up 10 percent year-on-year.
Meat Prices Soften Marginally
In April of this year, the wholesale lamb composite hit a record high at $430.77 per cwt. Since then, prices have moderated somewhat. By July, the wholesale composite had come down 4 percent since April, yet remained 10 percent higher than July’s five-year average. The wholesale composite averaged $412.33 per cwt. in July, steady with June and 4 percent higher than a year ago. After processing and packaging costs are deducted, the net cutout value was $353.33 per cwt.
The shoulder and loin were the two primals that saw a July price increase while the rack and leg weakened. The loin, trimmed 4×4, averaged $565.24 per cwt., 3 percent higher monthly. The shoulder, square-cut, steadied in July at $330.76 per cwt. The rack, 8-rib medium, averaged $818.09 per cwt., down 2 percent monthly. The leg, trotter-off, averaged $372.79 per cwt., down 2 percent monthly.
The shoulder and loin both saw July prices 7 percent higher year-on-year. The rack was down 7 percent from a year ago. The leg lost 4 percent annually. As food purchases for home cooking increase and hotter temperature prompt outside grilling, ground lamb prices saw a summer boost. Ground lamb averaged $552.78 per cwt. in July, up 8 percent monthly and down 4 percent year-on-year.
Pelt reports are no longer being released by the Agricultural Marketing Service, for “there is not enough participants to protect confidentiality,” (8/7/20).
Production & Trade Down
Lamb slaughter January through the second week of August was an estimated 1,095,151 head, down 6 percent year-on-year. Estimated lamb production was an estimated 53.1 million lbs., down 8 percent. With MSR going out of business, lamb harvest is expected to drop off further.
July’s count of lambs in Colorado feedlots was the lowest on record at 45,821 head. This is down 34 percent in five years and down 48 percent in 10 years. This year, the largest lamb feeders in Colorado were far below capacity in July due to the COVID-19 demand shock, but also due to the closure of MSR. Reportedly, one Colorado feedlot would typically run 30,000 head in July, but this year was down to 8,000 head with empty pens (Greeley Tribune, 8/4/20).
In early July, 46.5 million lbs. of lamb and mutton were in cold storage, down 3 percent monthly yet 16 percent higher year-on-year. As slaughter has come down in recent months, the portion in freezers has increased.
Lamb imports January to June totaled 107.2 million lbs., which was down 16 percent year-on-year. Imports from Australia were down 14 percent year-on-year to 81.0 million lbs. and imports from New Zealand were down 24 percent to 25.0 million lbs.
Wool Prices Remained Depressed
American clean wool prices in July averaged 57 percent lower year-on-year. In general, the finer microns saw prices move lower in July compared to June, but mid-micron and coarser wools saw a modest monthly lift. It is believed that wool buyers are saturated with the higher-demanded finer wools and thus July demand tapered off.
Overall, wool prices are expected to remain low for some time, especially due the tremendous stock of 2019 wool and the growing 2020 inventory. However, if there is any glimmer of hope at the retail end, buyers will likely be back in the market at these lower price levels.
Nineteen micron averaged $3.36 per lb. clean, down 3 percent monthly in July. Twenty micron averaged $2.78 per lb., down 17 percent; 21 micron averaged $2.79 per lb., down 13 percent; 22 micron averaged $2.87 per lb., down 2 percent; 23 micron averaged $2.63 per lb., up 2 percent; 24 micron averaged $2.18 per lb., up 8 percent; 25 micron averaged $2.06 per lb. clean, up 28 percent; and 26 micron averaged $1.59 per lb., up 4 percent.
After a three-week recess in Australia, wool prices at auction were soberingly low. On Aug. 5, the Australian Eastern Market Indicator averaged Australian 1,006 cents per kg clean, down 40 percent year-on-year. In U.S. dollars, the EMI averaged $3.28 per lb. clean, down 36 percent from a year ago.
Elders Wool sales manager Alice Wilsdon said, “We know the retail sector has been hugely impacted by COVID, and the great unknown is how long this is going to go on for. Now we’re getting blockages down the line. We’ve got fabric orders and garments sitting in the system. We’ve also got a buildup of stocks when it comes to greasy fibers, whether on the farm or on store, and it’s a continual blockade. Until we can move something on the retail front, we won’t see anything at the other end,” (Australia ABC Rural, 8/6/2).
American wool growers are encouraged to take advantage of the USDA nonrecourse marketing assistance loans and loan deficiency payments for wool and lambskins. The ASI website link with LDP information is Sheepusa.org/issues-governmentprograms-woolldp.