December Holidays Upbeat and 2015 Looking Good
By Julie Stepanek Shiflett, Ph.D.
The December holidays proved to be average to good for the lamb industry with significant product movement and competitive pricing. Importantly, the industry was able to clear out a lot of inventory which sets the stage for a successful Easter just a few weeks away.
December sales were good for another reason: The industry does a good job of offering American consumers choice. Offering product at different price points (domestic and imported), offering different sized portions and ease of preparation are all important value-added attributes of our lamb market. The bone-in, semi-boneless and boneless legs cater to distinct consumer needs.
A concern moving forward is that there is a lot of lambs on feed in the commercial pipeline for Easter. With relatively cheap corn, live weight pricing and heavy imports there is a worry that domestic lambs could get over fat. A take away message from 2014 is that excellent quality was rewarded with higher prices across all sectors.
Many believe American lamb is a superior product. Coupling excellent quality with desirable packaging and cut size can be the impetus for increased demand. “The Daily Livestock Report” (DLR) reported that: “What is remarkable (about strong meat demand) is that the preference issues apparently trumped income in the demand formula for all of 2013 and at least the first part of 2014,” (12/31/14).
Strong Lamb Demand Outloo
Strong lamb demand can mean even higher prices in 2015. The Daily Livestock Report” (DLR) stressed that strong demand pushed price levels in the meat complex higher than tight supplies would indicate. The DLR added: “U.S. consumers have revealed an almost unprecedented willingness to pay for meat/poultry proteins,” (1/7/15). The lamb industry didn’t necessarily have sharp supply constraints last year, but it definitely saw higher price levels indicative of stronger demand.
DLR reported that the U.S.’s steady post-recession growth is a good sign meat demand will stay strong through 2015. It cautioned that although unemployment is down, wages are up and gas prices are lower, take-home incomes have been slow to recover. Any increases in incomes (and the prospects are good) can benefit meat demand.
On December 31, the Livestock Market Information Center (LMIC) estimated that total sheep and lamb consumption (disappearance) including imports, ending stocks and exports totaled 327.30 million lbs., an estimated 1-percent higher annually. Between 2013 and 2014, domestic production remained nearly unchanged, but imports jumped 7 percent. Increased product on the market and higher prices is a good sign that lamb demand could have increased in 2014.
Live, slaughter lamb prices at auction saw a 31-percent jump in 2014 to $156.63 per cwt. and 13-percent higher than its 5-year average. Across auctions prices ranged from $156.20 in South Dakota, $156.40 per cwt. in San Angelo, $156.93 per cwt. in Kalona, Iowa and $165.87 per cwt. in Ft. Collins. Equity Electronic Auction averaged $159.41 per cwt.
Slaughter lamb prices on a carcass-based formula gained 26 percent in 2014 to $300.86 per cwt. ($151.10 per cwt. live). Negotiated, live slaughter lamb prices averaged $156.06, up 24 percent annually.
Sixty- to 90-lb. feeder lambs at Colorado, South Dakota and Texas auctions saw a 45-percent gain annually to $205.11 per cwt. with Sioux Falls averaging $216.82 per cwt. Feeder lambs in direct trade rallied 43 percent to $177.24 per cwt., 15-percent higher than its 5-year average. The lamb meat complex saw a 25 percent gain in 2014. Carcass prices gained 24 percent in 2014 to $322.71 per cwt. The heaviest carcasses -- over 85 lbs. -- saw the greatest percentage increase at 31 percent which was perhaps indicative of the very current supply and lean carcass numbers.
The net carcass value – the carcass composite less processing and packaging costs – averaged $335.62 per cwt. in 2014, 26-percent higher annually. The carcass composite was likely pulled up by the 47-percent gain in the 8-rib, rack, medium which averaged $810.34 per cwt.
The loin, trimmed 4 x 4 gained 9 percent to $501.71 per cwt., the leg, trotter-off, averaged $365.07 per cwt, 13-percent higher and the shoulder, square-cut saw a 25 percent jump to $300.80 per cwt.
Imported lamb at wholesale also saw some annual gains. The imported shoulder jumped 19 percent to $2.55 per lb., the leg gained 3 percent to $3.76 per lb. and the loin averaged $5.09 per lb., gaining 3 percent.
In lamb features at retail, sale prices gained 7 percent annually from $6.55 per lb. to $6.97 per lb. in 2014. The mix of items in features is not the same year-to-year, but the average gives us a rough idea of price levels. In mid-December, the featured rack was $13.58 per lb., up 7 percent year-on-year. The bone-in leg average was $6.25 per lb. (up 0.5 percent year-on-year), the boneless leg was $6.68 per lb. (up 4 percent) and the semi-boneless leg was $6.08 per lb. (up 20 percent).
In December, the leg typically sees the most feature activity, followed by the rack, but the loin also sees increased featuring. The loin chop average was $9.25 per lb., up 10 percent annually.
Frozen Lamb Makes Headway
Lamb imports account for one-half of our domestic market. Understanding the composition of imports can improve our ability to successfully position American lamb in the marketplace.
By volume and value, frozen lamb has increased its share of all lamb imports over the past ten years. Between 2004 and the first three quarters of 2014, frozen lamb imports increased from 44 percent to 51 percent of all lamb imports. By value, frozen product jumped from 38 percent to 44 percent over the same period.
An increase in frozen, boneless product also points to more added-value and convenience offerings. The volume of frozen, boneless lamb increased by 77 percent in volume from 2004 to 2013. In the first three quarters of 2014, frozen boneless lamb increased 13 percent year-on-year to 8.3 metric tons (18.3 million lbs.).
In the ten years to 2013, the volume of all frozen lamb including the leg, loin, shoulder and carcasses and half-carcasses trended downward marginally before rebounding in 2012 and 2013. Between 2004 and 2013, its volume increased 13 percent. In the first three quarters of 2014, frozen lamb increased 15 percent year-on-year to 26,788.10 MT.
Reportedly, much of the lamb in freezers is imported product so continued strong imports is curious. In the ten months through October, lamb imports were up 11 percent year-on-year to 131.9 million lbs. By year’s end, cold storage stocks averaged 31.4 million lbs., down 19 percent monthly, but up 44 percent year-on-year. Strong imports might be a sign of our times: the U.S. remains one of the strongest consumer markets worldwide and the strong U.S. dollar makes imports even more attractive.
By comparison, the volume of all fresh lamb product totaled 25,269.90 MT in the first three quarters of 2014, 6 percent lower than the frozen volume total. Its volume fell 14 percent between 2004 and 2013, but was up 7 percent in the first three quarters of 2014, year-on-year.
By value, the largest two classifications of imported lamb are also the frozen categories, accounting for 42 percent of all lamb imported in the first three quarters of last year.
One interpretation of growing frozen import categories is that American and imported lamb might not compete in the same markets given that domestic lamb has historically been primarily a fresh market product.
Fresh leg imports have contracted at a greater rate than either frozen legs or the total lamb volume. It is possible that the American leg is more competitive and more popular than imported legs.
In the first three quarters of 2014, the average price of frozen wholesale lamb jumped 33 cents per lb. year-on-year to $3.78 per lb. compared to a 25-cent gain to $5.03 per lb. for fresh product. Is the price premium for fresh imported lamb narrowing? Is the demand for frozen lamb increasing relative to the fresh product demand? The ratio of the unit price of frozen to fresh lamb was an average 78 percent in 2004, increased to 82 percent in 2009 then backed down to 72 percent in 2013. In 2014 through October, the ratio averaged 75 percent, up from 72 percent during the same period a year earlier.
Gearing up for Easter
As the December holiday rush is now a distant memory, the industry is gearing up for Easter. Packers and feeders are putting pen to paper: counting heads and measuring weights.
It looks like the industry is in good shape. An estimated 177,610 head of sheep and lamb were available in Colorado feedlots in January 2015, which was an estimated 6-percent lower than the 5-year average for the month, but 15-percent higher year-on-year (LMIC, 1/2015). There is a good supply of lambs that should be ready for Easter.
The concern remains whether the domestic supply is too good in view of imported supplies. Can the industry move sufficient domestic lambs at Easter without having lambs getting backed up in feedlots?
It is unclear whether a favorable supply situation could depress prices. If economic factors improve – particularly consumer incomes – then the industry could be in good shape and prices will remain high. The Livestock Market Information Center (LMIC) estimated on January 6 that in the first quarter of 2015, the number of sheep and lamb slaughtered could total 553,000 head, up nearly 3 percent year-on-year, slaughter weights could be marginally lower at 69 lbs., and total production could be up 2 percent year-on-year to 37.9 million lbs. At 46.5 million lbs., LMIC estimated that imports in the first quarter could be 3.3 percent higher year-on-year (1/6/2015).
LMIC estimated in early January that slaughter lamb prices on a carcass bases could range from $307 to $312 per cwt., up 3.3 percent year-on-year. Sixty- to 90-lb. feeder lamb prices, by contrast, could be down 4.4 percent year-on-year at $210 to $217 per cwt.
Easter is reportedly the one time of year where consumers demand particularly lightweight lambs, particularly in ethnic markets. Western (Roman) Easter lands on April 5 this year, the Greek (Eastern) Orthodox Easter falls a week later on April 12 and Passover (Pesach) occurs from April 4 to 11. In observance of these holidays, Cornell University reports that some consumers are looking specifically for lambs weighing 30 to 55 lbs., milk fed and fat.
Price premiums can be realized for the especially lightweight lambs. Last year, the Western Easter was on March 31, but the Eastern Easter was not until May 5. During this period, 40- to 50-lb. lambs sold for an average $172 per cwt. at the nontraditional auction at New Holland, Pennsylvania. During the same time in the commercial market, lambs received $148 per cwt. for an average 160 lbs.
2014 Pelt Market Depressed
The international pelt market took a hit in 2014 due to the double-whammy of reduced demand for lambskin products and rising processing costs. Environmental regulations have tightened in China – the largest importer of skins worldwide -- to reduce water and air pollution resulting from the skin processing process. Many tanneries have shut down altogether or invested in pricey pollution controls which cut into margins.
Exacerbating the processing challenges, the international demand has also been lackluster, particularly from the primary importer of lambskin products, Russia. The weakening Russian rouble has made lambskins more expensive to purchase, reducing its quantity demanded. Further, international bans on Russian farm exports due to the Ukraine crises means there are more Russian lambskin in its domestic market (The Australian Business Review, 1/7/2015).
In the U.S., Fall Clips (with longest wool) saw a 47-percent drop annually to $6.75 per piece in 2014, while Imperial Fall Clips saw an average $8.53 per pelt, 39-percent lower. No. 1 pelts averaged $5.34 per pelt, also 47-percent lower. No. 3s and 4s were the hardest hit with prices falling up to 76 percent to $1.01 per pelt for No. 4s.
Reportedly, Australian lambskin prices were down 85 percent last year and New Zealand’s skins were down around 40 percent (The Australian Business Review, 1/7/2015).
2015 Wool Forecasts
According to the Australian Wool Exchange Ltd. (AWEX), after its three-week Christmas break the Australian wool market opened in January on a lower note. All the main Micron Price Guides in the Merino Fleece category closed in negative territory after a gradual drift lower over the course of the week, mostly ending 5 to 15 cents below pre-Christmas levels (1/8/15). In early January, the Eastern market Indicator (EMI) averaged 1,059 Australian cents per kg, down 6 percent year-on-year. In U.S. dollars, the EMI was 389 U.S. cents per kg, down 15 percent year-on-year.
Lower prices in the first week of the New Year were disappointing, but don’t negate the general optimism for the remainder of the month and months to come. The Australian wool market saw some strengthening in December. Reportedly, the upturn might have been because buyers were looking to fulfill January shipping orders. Alternatively, “observers said that buyers may have been keen to do business before January, especially given that in 12 out of the last 15 years the market has picked up in January, although in January 2014 it dropped,” (WTiN Wool Market Report, 12/1514).
Looking to 2015, Mr. Ackroyd, International Wool Textile Organisation president, reminded us that the 2014 wool market did not rally as had anticipated. Many Chinese producers expected the Eurozone wool market to rebound but this didn’t materialize. Furthermore, Chinese wool consumption slowed which has led to the current “somewhat stagnant situation,” (2014). However, “the combination of lower wool production in Australia and a pick-up in raw wool demand could bring a solid rise in apparel wool prices towards the end of 2014 and into 2015,” (IWTO Market Information, 2014). The 2014 IWTO Market Information report maintains that worldwide, “even moderate improvement in retail sales of clothing would generate a most welcome boost in wool demand,” (2014).
Wool demand in 2015 depends a lot upon China. According to the U.S. Agricultural Development Council, China’s consumer spending growth is set to slow in 2015, despite the government’s efforts to promote a consumer-led economy. Slower spending in China – coupled with slow growth in Japan and the Eurozone -- can mean lower retail demand and down the pipeline, reduced raw wool purchases.
However, after this period of economic transition in China, it is likely that the Chinese consumer will see higher real wages and become a consumer powerhouse unlike we’ve seen thus far. “Chinese consumers will reach a new level of sophistication and maturity,” (U.S. Agricultural Development Council, 1/2015). This mature purchasing power is exactly what a niche market like wool needs.
In early January, Chinese raw wool buyers paid about 81 cents U.S. for every Australian dollar, down from 94 cents six months ago. This means international offer prices for Australian wool might be supported, in part, by the strong U.S. dollar. That is, Australian wool prices might be higher than they would have been if the two exchange rates were more equal. This, in turn, means higher prices for Australian wool growers which could potentially stimulate Australian flock expansion efforts.
It is anticipated that further weakening of the Australian dollar could lower wool prices in U.S. currency, but support prices in Austrian dollars. The Reserve Bank of Australia has recently speculated the Australian dollar may fall to as low as U.S. 75 cents, (AWEX, 12/2014).
In sum, 2015 wool market forecasts involves a tangled web of supplies, income growth, and, don’t forget, ever fickle fashion trends. As livestock economists Steiner and Meyer remarked, preferences can trump income in the demand formula (12/31/14).