A ‘Perfect Storm’ Results in Pelts Taking a Big HitBy Julie Stepanek Shiflett, ph.d.
We had a first in June: Packers were charging producers and feeders to get rid of pelts. The U.S. pelt market had fallen so low that it was not worth the packers’ time to salt and market some pelts. Apparently it was also not worth the processing and storage costs to stock pelts until the market improved.
Adrian Knox, director of sheepskin exporter and processor Knox International, commented that the pelt market can be characterized by the “perfect storm”: some Chinese tanneries have closed due to pollution controls, Russia had a mild winter – lowering the demand for lambskin coats – the Russian rouble strengthened and political unrest in the Ukraine, (The Weekly Times, 4/16/14). Mr. Knox added that if demand didn’t rise by June, prices could continue their downward slump – to levels not seen since 1992/93 (The Weekly Times, 4/16/14).
Prices did continue to fall, so much so that by mid-June U.S. packers were charging producers $1 per piece to get rid of some lower-quality pelts. Other pelts were worth nothing.
The U.S. is primarily dependent upon the international export market for its pelt sales and thus vulnerable to reduced international demand and exposed to weakening international pelt prices.
U.S. pelt prices dropped an average 47 percent monthly in June to average $3.04 per piece. Fall Clips pelts averaged $4.25 per pelt in June, down 45 percent monthly and 68 percent lower year-on-year. No. 1 pelts averaged $3.56 per piece, down 42 percent monthly and down 65 percent from a year ago.
In 2013 Fall Clips averaged $12.64 and No. 1s were $10.04 per piece, by comparison.
U.S. pelt quality was also at issue this spring. U.S. suffered from a good supply of pelts that were particularly short, No. 3s and No. 4s (less than 3/8 of an inch of wool). Perhaps this was the sacrifice of timely marketings this spring, lambs in feedlots didn’t have to grow longer pelts. By mid-June the shorter pelts were of distinctly inferior quality and packers charged producers a $1 to dispose the pelts with some paying zero credit.
The U.S. Department of Agriculture Agricultural Marketing Service (AMS) explained that average to lower quality pelts were in large supply and in low demand. Pelt credits given to producers thus continued to fall in June and “struggled to find support,” (USDA/AMS, 6/13/14).
In early July, Meat & Livestock Australia reported, “sheep skin rates remained mostly stable, particularly for those carrying more length, while demand is reportedly still quite subdued for shorter length sheep skin categories,” (7/4/14).
Another factor that didn’t help the U.S. pelt market is anecdotal evidence that Australian pelts are more competitive on international markets.
Weaker pelt prices are particularly painful for some producers because sometimes the pelt is the only profit received on a lamb sale.
This June the pelt value amounted to a mere 2 percent of a lamb’s value compared to 6 percent a year ago.
Feeder Lamb Prices Mixed
In June, feeder lamb prices in direct trade averaged $133 per cwt., 16 percent lower monthly and 37 percent higher year-on-year. At $133 per cwt., June’s average was still 1 percent higher than its 5-year average for the month. However, June’s market was set by only one trade of 6,100 head out of Oregon with 102.5-lb. shorn lambs averaging $135 per cwt. and 105-lb. wooled lambs bringing $131 per cwt. June’s direct trade dropped to less than one-half of its May volume.
The live, auction average of 60-90 lbs. feeder lambs at auction in Colorado, South Dakota and Texas was $196.99 per cwt. in June, 3 percent higher monthly and up 84 percent year-on-year. The San Angelo average was $179.50 per cwt., $186.25 per cwt. in Ft. Collins and $225.22 per cwt. in Sioux Falls.
Slaughter Lamb Prices Higher
Live, auction slaughter lamb prices strengthened into June relative to formula prices. It is hypothesized that packers bid up prices at auction in an effort to secure supplies. Anecdotal evidence suggests that while the number of packers has stabilized, some packers might be slaughtering an increased volume of lambs. This puts pressure on all packers to get lambs committed. To the producers’ benefit, it also can mean increased competition and higher prices.
In June live, auction slaughter lamb prices averaged $156.87 per cwt., 11 percent higher monthly and 44 percent higher year-on-year. June’s average was 19 percent higher than its 5-year average.
San Angelo saw the greatest regional gain with an 18 percent jump to $160.83 per cwt. South Dakota saw prices gain 3 percent to $152.34 per cwt. and Kalona, Iowa weakened marginally by one-half percent to $157.67 per cwt.
At $276.86 per cwt., carcass-based slaughter lamb prices in formula trades fell 2 percent in June yet still 23 percent higher year-on-year. On a live-equivalent basis, prices were $136.70 per cwt.
Prices in live, negotiated trades averaged $142.45 per cwt., down 3 percent and up 21 percent year-on-year.
Wholesale Market Mixed
The carcass market saw a 1 percent gain in June to $312.03 per cwt., 24 percent higher year-on-year. Stronger prices might be seasonal – prices often spike during late spring or early summer – but also a function of Ramadan – the Muslim month of fasting and celebration.
During the first half of 2014, the carcass trade comprised of only 15 percent of federally-inspected slaughter compared to 26 percent five years ago.
At $360.09 per cwt., the wholesale market dropped 2 percent monthly yet was up 27 percent year-on-year. After subtracting estimated processing and packaging costs, the average was $326.34 per cwt. The stronger loin couldn’t support the cutout when the rack, leg and shoulder were weakening.
The loin, trimmed 4x4, was $497.45 per cwt., up 4 percent monthly and up 9 percent year-on-year.
The 8-rib rack, medium, fell 2 percent to $792.95 per cwt., up 54 percent year-on-year. The leg, trotter-off, averaged $354.24 per cwt., down 6 percent monthly and up 14 percent year-on-year. The shoulder, square-cut, fell 2 percent to $291.32 per cwt., up 30 percent year-on-year. Ground lamb stayed mostly steady in June at $526.89 per cwt., down 2 percent year-on-year.
At the beginning of June, lamb and mutton freezer inventory was 25.2 million lbs., down 5 percent monthly and up 27 percent year-on-year.
Ground Lamb Spiked above $8/Lb.
Lamb featuring at retail is highly responsive to U.S. holidays with Easter and December seeing sharply more feature activity, but we also see heightened featuring for Memorial Day and July 4th.
In the month to the first week of June, the number of lamb features more than doubled from about 2,500 to over 5,200. In early June, the U.S. Department of Agriculture Agricultural Marketing service reported “lamb items suitable for the grill were very popular; with racks, rib and loin chops being the key featured items,” (6/6/14). AMS reported that by mid-June, lamb shoulder items were the most popular featured items with 1,300 to 1,700 outlets. By the third week of June, lamb featuring had fallen off by nearly one-half with shoulder items and loin chops remaining the most advertised items. By the time July 4th rolled around, featuring activity was up about 1,000 features with noted more featured for the lamb leg.
With a 43 percent year-on-year gain, ground lamb averaged $7.47 per lb. in June with some weeks hitting a record-high $8.61 per lb.
At $9.75 per lb., lamb loin chops were 6 percent higher in June year-on-year. Shoulder blade chops jumped 12 percent year-on-year to $5.50 per lb. The lamb leg items have remained relatively steady to lower over the past two years and the rack has seen only marginal gains yet the lamb breast, the shoulder roast and lamb and mutton stew meats have been noticeably stronger.
The Daily Livestock Report found that the severe U.S. winter led to pent up meat demand that was revealed in the late spring in higher foodservice sales. The restaurant current conditions index in May was nearly the highest in 5 years. DLR reported, “food service operators are basically saying that current business is as good as they have seen after the major recession of 2008-09,” (7/2/14).
While we know that beef and pork demand increased, we don’t know whether lamb demand followed suit. Higher demand means higher or constant sales volume at higher or constant prices and while we see some higher cut prices at retail, we don’t know how much is actually being sold at retail and foodservice.
On a more positive note, higher consumer incomes could support lamb demand in coming months. The University of Michigan survey recorded the largest proportion of households (40 percent) that reported making financial gains, the highest in nearly seven years (June 2014). After a harsh winter and a first-quarter contraction in the U.S. income, this is good news for the lamb industry.
Australian Imports Higher
In the first-half of the year, lamb imports from Australia were up 16 percent year-on-year to 22,405 tons with a 9 percent increase in fresh product and a 22 percent rise in frozen product over this time.
Meat & Livestock Australia reported that the U.S. remains Australia’s highest-valued export market, significant for its racks, loins, shanks and legs (6/27/14). This year, Meat & Livestock Australia sponsored a lamb campaign in the food service sector in the Greater Miami area. The target was Texas de Brazil, “an authentic Brazilian-American “Churrascaria,” or steakhouse. With locations in 16 states across the U.S. -- including Detroit, Denver and Las Vegas – Texas de Brazil offers lamb racks, leg and loin chops used on skewers – Brazilian charrascaria style.
The Livestock Market Information Center (LMIC) estimated that third-quarter national slaughter lamb prices could range from $310 to $320 per cwt. on a carcass-basis, 33 percent higher year-on-year (about $158 per cwt. on a live basis). Sixty to 90-lb. feeders in direct trade could range from $200 to $210 per cwt., 80 percent higher year-on-year.
There was a concern that the flood of California feeders into Colorado feedlots earlier this year would cause a price-depressing backlog in supply. These worries didn’t materialize (as of June!). Slaughter rates were relatively high and slaughter weights remained within a normal range at 73 lbs. dressed weight. The concern lies in where all these lambs are going. Are they being sold at retail and foodservice or headed to the freezer?
In the coming year, the industry might also face repercussions from the ongoing drought.
Drought might prompt further losses in inventory and more tender and lower yielding wool next year. In early July parts of California and Oklahoma exhibited the highest-ranking exceptional drought as reported by the U.S. Drought Monitor. In seven other states from Kansas to Oregon to Arizona drought was extreme.
Potential Halal Market Growth
There are an estimated 1.6 million American Muslims with $20 billion in food purchases annually (meatingplace.com, 6/14). Adnan Durrani, founder of Saffron Road – GMO-free, all-natural and certified halal – is the first halal brand sold nationally in stores such as Safeway, Kroger and Costco. Its Whole Foods offerings – in all Whole Foods stores – saw two years of volume and sales increases (meatingplace.com, 6/2014). In Ahold, its Saffron Roads frozen foods grew 500 percent in 9 months. Among its 16 frozen entrees, 2 feature lamb.
Mr. Durrani commented that while the U.S. kosher market is mature, U.S. halal sales have great potential to grow in the U.S., perhaps up to $5 billion over the next 10 years (Meatingplace, 6/14).
Halal foods remain important to many Muslims, but the method behind halal foods – the practices of animal welfare and safe handling – appeal to the broader younger generation, Muslim or not. This is why the segment is expected to grow. According to Mr. Durrani, “they are attracted to the values that the premium halal segment brings to the category. Saffron Road offers all-natural, antibiotic-free, organic meat, sourced from humanely raised livestock.
Halal refers to foods that are considered permitted or lawful in the Muslim Qu’ran. These foods, and in this case animals, must be treated with respect and be well cared for. When the animal is harvested, the jugular vein is cut and the blood from the animal is allowed to drain. (Muslims are not allowed to consume blood or blood byproducts.) The animal is also blessed at the time of slaughter.
July was an important month for Muslims for the start of Ramadan and the month of fasting was June 28 this year with Eid ul-Fitr – the festival of fast breaking – on July 29 to 31. Muslim holidays are based on the lunar calendar and thus fall on different dates each year. Muslim holidays typically fall 11 days earlier each year.
What’s in a Price?
Formula, negotiated, packer owned, auction….How does a producer know where to turn to determine the value of his or her lamb? Lamb prices are reported by the U.S. Department of Agriculture Agricultural Marketing Service (AMS) and often by auctions across the country. If local auction prices are not available, national prices are.
However, prudent marketing requires that national prices be recognized for what they do and do not represent.
Over time more feeder and slaughter lamb trades moved out of auctions and into private conference rooms (or through truck windows on the roadside). As more and more prices were determined through formula pricing, packer owned slaughter or other marketing agreements, the open cash market (think auctions) became less valuable as a measure of industry value. Then came Mandatory Price Reporting (MPR). MPR requires reporting of otherwise private trades: that is, packer owned, formula and negotiated slaughter lamb sales.
Another lamb packer is now reporting under Mandatory Price Reporting (MPR) packer owned lambs which resulted in a spike in the volume of packer owned lambs reported in September 2013. Accounting for more lambs in the system is great news, but determining lambs’ worth is still a challenge for industry producers. This year to June, MPR prices represented 57 percent of total federally-inspected slaughter. We don’t necessarily have prices on the other 43 percent. Most are likely auction trades, but we can’t know for certain. The remainder might be packer order buyers buying at auction (no price reported). Or, smaller packers with direct marketing agreements with producers, but that fall under the MPR threshold of 75,000 head per year.
As the volume of packer owned lambs rose, the volume of formula lambs fell from over 60 percent to less than 40 percent of total MPR trades. This means now one in five, instead of one-third of lambs sold nationally was a value-added formula trade.
If we include the other national price series – negotiated sales – national prices are reported on only an estimated 30 percent of federally-inspected lambs, compared to nearly 40 percent 10 months ago.
In sum, the national prices available – either formula or negotiated – currently account for only one-third of national slaughter.
Most of these are sold on a value-added formula for which we do have carcass weights and the remainder are sold on a live basis for which we have average weights.
In June packers prioritized securing supplies (i.e., packer owned) over promoting premiums for quality lambs (i.e., formula). It is not known when formula sales are committed to packers for slaughter – it could be a week or six months out.
According to AMS a formula marketing agreement is as follows: “An advanced commitment of lambs for slaughter using a method for calculating price.
For slaughter lambs the base price is not negotiated, but is based on some other price (such as plant average or weighted average price) or value determining mechanism that may or may not be known at the time the deal is struck. The final net price is determined after application of premiums and discounts.”
What this means is that the ultimate price reported by AMS for formula lambs includes a set of premiums and discounts that is unknown to the public and a formula base price that is also unknown to the public. We do know the net price and carcass weight which are helpful in determining lambs’ value.
It is encouraged that the industry be grateful for the price information it has available, but be an educated and vigilant researcher when negotiating trades.
'Wait and See' as U.S. Wool Season Winds DownAs the wool season draws to a close, industry attention turns to exports. Raw wool clearance was likely very high this spring into June, so now it’s a game of wait and see how preparations for this winter’s apparel season pan out.
In general, Europe tends to return to the Australian market strongly in August following its summer break period, and at the time when planning and production for the northern Raw wool demand was lower this year, but so was wool production. Australian wool production was down an estimated 3 percent in 2013/14, and expected to contract again in 2014/15.
Tight Australian supplies likely provided some price support this year, in Australia and in the U.S. On July 10, the Australian wool market averaged 438 US cents per lb. clean, up 3 percent year-on-year. In June U.S. western wools averaged $3.59 per lb. clean, about 1 percent higher monthly and 12 percent higher year-on-year. Twenty-two micron averaged $4.27 per lb. clean, 23 micron brought $4.08 per lb., 24 micron averaged $3.61 per lb., 25 micron averaged $3.34 per lb. and 26 micron saw $2.65 per lb.
Fleece wools averaged 5 percent higher in June compared to early spring and boasted an 11-percent gain over last year. Twenty-two micron was $4.04 per lb. clean, 23 micron was $3.87 per lb., 24 micron was $3.51 per lb., 25 micron was $3.12 per lb., 26 micron was $2.91 per lb. and 27 micron was $2.43 per lb.
U.S. wool prices fared a little better against Australian wools this season. This might because worldwide and domestically stocks are limited and the number of U.S. buyers has been maintaining. It is also possible that wool preparation and knowledge of producers’ specific clips has improved this margin. Twenty-three microns this year ranked at about 82 percent of Australian wool compared to around 72 percent last spring. As wool supplies worldwide continue to contract it is expected that this margin could narrow further.