Mountain States Announces Plans To Purchase JBS USA’s Greeley PlantJULIE STEPANEK SHIFLETT, Ph.D.
Juniper Economic Consulting
In late November, Mountain States Lamb Cooperative announced plans to purchase JBS USA’s Greeley lamb plant. The co-op includes Mountain States Rosen meat marketing. Mountain States currently leases slaughter capacity from JBS while fabricating lambs next door in its own facility.
The acquisition would be the last piece in achieving complete vertical integration from farm to table. Mountain States Vice Chairman Brad Boner said, “This pending acquisition represents a major opportunity for Mountain States to add harvest capabilities, an integral piece of the value chain, to our already vertically integrated business model,” (Meatingplace.com, 11/25/15).
Typically, further consolidation of a lamb packer towards complete vertical integration raises concerns about monopsony pricing – lowering producer prices, but the incentive structure in a producer-owned cooperative is different. The Mountain States acquisition might actually inject some healthy competition into the industry in several ways.
Frank Moore, chairman of the co-op, said the plan is for a seamless transition at the plant, but it also could be a springboard for improvements (The Tribune, 11/24/15). Moore added, “We’ve got some things we want to do to improve products we deliver to the consumer.”
The JBS purchase gives Mountain States ownership in investments that can improve lamb quality. Mountain States Lamb Cooperative provides its members with a value-based pricing formula. Adopting electronic grading – to improve upon the repeatability of current visual inspection by USDA graders – is the natural next step to preserving the value of high-quality lambs. Reportedly, the JBS plant has electronic grading equipment, but it has yet to be certified with USDA. Electronic grading can improve estimation of meat yield and carcass sorting to meet customers’ needs.
Complete vertical integration will also likely spark product development investments at Mountain States. It might have increased flexibility to adapt to changing consumer preferences and expand upon its branded product lines. Improved quality, improved consistency of quality and innovative lamb products can inject healthy competition at retail and foodservice.
What will happen to JBS’s Share?It is likely that Mountain States will absorb JBS’s market share and even expand its share in coming years. It is estimated that Superior holds about 32 percent of the live lamb commercial market, Mountain States holds about 12 percent, JBS accounts for 10 percent and Wolverine is at 8 percent. The combined market share of the four largest sheep and lamb slaughter operations in 2012 (latest available data) was 62 percent (USDA/GIPSA, March 2014).
Who falls into the remaining 38 percent? It is estimated that Strauss Lamb and Veal holds 5 percent, ranking it into the top five. Custom packers (individuals leasing kill/fabrication time) might include another 2 percent with the remaining packers comprised of smaller plants including many halal packers.
There are many smaller, USDA-inspected lamb plants across the U.S. One such facility is Barkaat Foods in Chicago. Barkaat, a USDA facility, and formerly owned by Chiapetti Lamb and Veal, is the last lamb plant in Chicago’s old meat packing district.
Urooj Khan at Barkaat is planning on getting out of the packing business. Khan explained slaughter is down about 37 percent to 1,550 head per week (12/8/15). His custom client, Strauss Lamb and Veal, is also bringing in fewer numbers. Khan’s decision is multi-faceted: lamb is higher-priced and he faces stiffer competition due to increased demand for halal lamb. Six years ago, Khan explained, Barkaat was the only halal slaughterer in the Chicago area and today there are several, including increased halal slaughter by Wolverine in Detroit.
Barkaat Foods meets the threshold of USDA Mandatory Price Reporting (MPR) and therefore participates in establishing national prices trends. However, many packers fall below this threshold and many others operate outside commercial channels entirely. The new USDA MPR threshold of 35,000 head per year, down from 75,000 head will capture more trades, however, it is not known how many.
Comprising an estimated 40 percent of all lamb sales, the nontraditional lamb market is not insignificant. These are lambs that are not captured in federally-inspected or commercial statistics. In 2014, the U.S. lamb crop increased 2.4 percent to 3.44 million head, according to USDA. However, commercial lamb and yearling harvest dropped 1 percent to 1.97 million head (USDA). Even after accounting for an estimated death loss and retained lambs, there was still 1.3 million head of lambs unaccounted for in national data.
In the Commercial MarketSome Colorado feedlots struggled to move market-ready lambs in November. Harvest rates were not sufficiently high to prevent lambs from getting heavier. Contrary to historical trends, slaughter lamb price offers were lowered as carcass and cutout values weakened.
In early December, USDA’s Agricultural Marketing Service reported: Many are concerned that weights will continue to rise as a lot of lambs will reach their market ready weight in the feedlots in early December and harvest facilities will struggle to run enough lambs through with lack of demand and a strong U.S. dollar being major concerns (12/14/15).
Weights of slaughter lambs on formula began to climb into November. In the eight weeks to the end of November, slaughter lambs on formula gained 6 percent to 76.10 lbs. on a carcass basis.
Many consider an ideal carcass to range from 60 to 75 lbs. Heavier slaughter weights means increased back fat and trimming costs. In the four weeks to Nov. 21, the total percentage of yield grade 4s in federally-inspected graded lamb slaughter was 16 percent, up 52 percent from 11 percent in the previous four weeks. In early October, 10 percent of total harvest was yield grades 4s and 5s, but climbed to 25 percent by late November.
Hopefully the December holidays meant ramped up harvest of the heaviest lambs to a more current situation. Hopefully also in December, the holidays moved fresh legs and a significant portion of frozen product, as well. Shortly after the December holidays, the industry gears up to provide fresh legs for Easter.
Feeder Prices SlumpAccording to USDA/AMS, feeder lambs are mostly done trading for the year and have all been moved to either feedlots or alternative feed sources to grow throughout the winter (11/2015).
Feeder lamb prices in direct trade averaged $162 per cwt. in November, down 6 percent monthly and down 12 percent from a year ago. November prices were about even with its five-year average (0.46 percent higher). Sixty- to 90-lb. feeder lambs at Fort Collins (Colo.), San Angelo (Texas) and Sioux Falls (S.D.) auctions averaged $171.38 per cwt., 4 percent lower monthly and 16 percent lower year-on-year.
At 87,200 head, the total volume of feeders trading direct was down 54 percent in 2015 through November compared to the previous year. Total volume was down 63 percent from its five-year average (LMIC from USDA/AMS, 12/3/15).
In 2015, it is believed that a greater proportion of feeder lambs were sourced from auction relative to direct trades with producers.
Slaughter Lambs SoftenedSlaughter lamb prices were lower in November, in part due to competition from lower-priced proteins at retail, but compounded by heavier harvest weights.
Live, slaughter lamb prices at auction averaged $143.47 per cwt. in November, down 5 percent monthly and down 11 percent from a year ago. Prices are at about level (0.24 percent lower) with November’s five-year average.
Slaughter lamb prices on a carcass-based formula/grid averaged $303.93 per cwt. in November, slipping 2 percent monthly and down 7 percent from a year ago.
Live, negotiated slaughter lamb prices averaged $149.33 per cwt., down 5 percent monthly and down 9 percent from a year ago.
Stubbornly high freezer inventories might also be putting the brakes on the live market, but not significantly. It is believed that there is still demand for fresh product and that much of the freezer inventory is imported. At the beginning of November, 40.9 million lbs. of lamb and mutton were in the freezers, down 2 percent monthly and 3 percent higher year-on-year.
Pelts, Byproducts Remain DepressedPreviously shorn No. 1 pelts averaged $1 per pelt, steady with October and 71 percent lower year-on-year. The longer, fall clips averaged $4.06 per piece, down 2 percent in November and 24 percent lower year-on-year. Packers continue to charge producers a disposal fee for some shorter, previously shorn pelts.
The lamb industry is not alone. Steer hides fell 38 percent in a year to $68 per head (DLR, 12/3/15). Tallow and head meat prices are down 50 to 67 percent, as well.
As the Livestock Market Information Center explained, byproducts from the U.S. livestock industry are driven by international demand, as domestic use is relatively low (11/22/15). LMIC explained further that persistent global economic stagnation and the rising value of the U.S. dollar “had an immense impact on the price of byproducts,” (11/22/15). LMIC doesn’t expect further erosion of byproduct values in 2016, and, in fact could see gains with any strengthening of global recovery outside of the U.S.
Meat Market WeakenedThe net carcass value (after processing and packaging estimates) averaged $326.81 per cwt. in November, up 0.4 percent monthly and down 6 percent from a year ago. The loin and leg supported the net carcass value while the rack maintained and shoulder weakened.
The leg, trotter-off, gained 2 percent in November to $350.67 per cwt., down 4 percent year-on-year. The loin, trimmed 4x4, averaged $531.22 per cwt., up 1 percent monthly and 1 percent higher than a year ago.
The rack, medium 8-rib, saw $733.05 per cwt., holding steady monthly (0.07 percent lower) and 11 percent weaker than a year ago. The shoulder, square-cut, saw a 1 percent drop at $298.70 per cwt. and was 5 percent lower year-on-year.
Ground lamb averaged $563.58 per cwt., up 2 percent in November and about steady to a year ago.
The U.S. rack, roast-ready, frenched special (cap-off) gained in November while the imported rack weakened. The rack, roast-ready, frenched averaged $1,405.94 per cwt. in November, down 2 percent monthly and down 8 percent year-on-year. The rack, roast-ready, frenched special (cap-off) was $1,851.25 per cwt., up 1 percent monthly and down 7 percent from a year ago. By comparison, the Australian rack, frenched, cap-off, 28 oz. and up averaged $925.55 per cwt., down 3 percent for November and down 16 percent from a year ago. Recall that the U.S. rack is larger in size than the Australian rack.
The carcass market weakened 1 percent in November to $326.95 per cwt., down 5 percent from a year ago.
Retail Featuring Higher with HolidaysIn the week prior to Thanksgiving, the amount of sampled stores advertising lamb was down 17 percent compared to a year ago with the top featuring leg items bringing generally lower prices from a year ago.
Thanksgiving leg featured prices were up to 10 percent lower than a year ago. The bone-in leg averaged $5.88 per lb., down 10 percent year-on-year while the boneless leg was $7.09 per lb., down 9 percent. The leg, shank/butt, averaged $6.06 per lb., down 1 percent from a year ago. The semi-boneless leg saw the lowest amount of featuring among leg items: it averaged $5.95 per lb., down 4 percent.
Following Thanksgiving, lamb feature activity dropped sharply for the leg while shoulder chops and loin chops rose to dominate lamb features. The shoulder blade chops were $5.24 per lb., down from $5.72 per lb. a year ago. Loins chops averaged $8.63 per lb. down from $9.42 per lb. a year ago.
ForecastsThere are cautionary signals of steady to lower lamb prices in 2016 although LMIC is more optimistic. In early December, LMIC forecasted that 60 to 90-lb. feeder lambs in 2016 could range from 1 to nearly 5 percent higher year-to-year in 2016. Slaughter lamb prices on a carcass basis could range from 0.2 percent lower in the first quarter, but up to 4.3 percent higher year-on-year in the second quarter.
However, lamb demand might face headwinds in 2016. Significantly cheaper meat proteins in 2016 including pork and poultry and increasingly, beef, at retail and foodservice could challenge lamb demand.
The DLR reported: Foodservice foot traffic is also showing some weakness relative to what it was in 2014 and 2015. While the restaurant index was higher in October, the foot traffic indicator is barely growing (DLR, 12/1/15).
If the U.S. dollar strengthens, then increased lamb imports could also challenge lamb demand. In 2015 through September, total lamb imports were up 3 percent year-on-year to 14.2 million lbs., Australian imports were up 10 percent to 10.3 million lbs. and New Zealand lamb imports were down 15 percent year-on-year to 3.7 million lbs.
In 2016, it is expected that the U.S. dollar could move even stronger. The reasoning is that the European Central Bank has pushed its interest rates into negative territory, meaning the demand for U.S. assets will rise, pushing its value higher (DLR, 12/14/15). This means lamb imports will be even more competitive against U.S. lamb and U.S. lamb exports and wool will be more expensive on world markets relative to other world exporters such as Australia.
In retrospect, the U.S. lamb market has held its value relatively well in the face of more competitive imports under the stronger dollar. This is perhaps a reflection of the success of U.S. lamb in carving out a loyal customer base.
Wool Market StrongerIn November, there were 214,763 lbs. of confirmed clean wool trades. USDA/AMS reported that wool was still being collected from fall shorn lambs.
“There is some attempt to trade small amounts of wool at this time, and there has been success, most wool being traded is bringing close to 80 percent of Australian prices across micron ranges,” (11/2015).
In the U.S., 23 micron averaged $3.32 per lb. clean, 24 micron averaged $2.84 per lb., 26 micron was $2.82 per lb., 27 micron hit $2.21 per lb., 28 micron was $2.18 per lb. and 29 micron averaged $2.04 per lb.
The Australian Eastern Market Indicator averaged Australian $1,245 cents per kg clean in November, 3 percent higher monthly and 19 percent higher than a year ago. In October and November, the Australian dollar bounced around 72 cents per USD, 17 percent lower than 86 cents a year ago.
Wool demand held in 2015, reported Chris Wilcox, Executive Director the National Council of Wool Selling Brokers of Australia Inc. (12/4/15). Lower Australian export volumes coupled with higher export values means buyers are paying more for less.
There is a record-high demand, at 33 percent, for non-mulesed and pain-relief wools in Australia. Looking to 2016, any global economic improvements will help support international wool prices.