Industry Sees Inventory GainsJulie Stepanek Shiflett, Ph.D.
Juniper Economic Consulting
After eight years of inventory contractions, 2016 witnessed the second consecutive year of industry expansion. According to the USDA National Agricultural Statistical Service, the total number of breeding ewes, 1 year and older, was 3.125 million head, up 0.5 percent year-on-year. Inventory of total sheep and lambs was 5.32 million head, up 0.8 percent year-on-year. This year we saw 35,000 more ewes than in 2014.
Increased lamb demand is critical for industry growth. Since 1990, there has been a positive correlation between annual sheep inventory growth/contraction and the American Lamb Board’s Demand Index. As lamb demand expands, it drives consumer spending at the consumer level, and higher producer prices follow. Increased producer prices then boost margins and spark flock rebuilding efforts.
In turn, every ewe, ram and lamb maintained or gained in flock expansion supports critical sheep infrastructure, bringing costs down, which again, boosts margins. The robustness of existing slaughter/processing facilities, auctions, feedlots, transport and market price information systems all depend upon a stable and growing industry.
U.S. lamb processing companies are instrumental in lifting lamb demand and supporting industry growth. For example, both Mountain States Rosen and Superior Farms offer vertically-integrated production and reward programs that can help boost lamb demand through higher-quality, more consistent lamb production. Producer pricing programs are designed by processors to provide incentives for producers to meet consumer demands.
Pockets of GrowthThe U.S. saw inventory growth in some regions, while other areas contracted. The largest state in terms of sheep inventory is Texas with 735,000 head in early 2016. Its inventory grew 2 percent year-on-year. North Dakota and Kentucky were two states that saw double-digit growth. However, the second largest sheep state, California – with 575,000 head – saw inventory contract 4 percent annually.
Six out of eight ASI regions saw growth in breeding ewe inventory in 2016. The greatest annual growth in breeding ewes was the Texas region (4.6 percent) followed by the Mid-Atlantic region (4 percent). Two regions, region six Mountain/Desert (-1.3 percent) and region eight, the West (-3 percent), saw breeding numbers decline.
Feeder Market MixedThere was limited feeder lamb trading in direct sales in January. For the month, 19,000 head traded at an average $125 per cwt., no comparison to December for lack of trades, but 23 percent lower than 2015’s average. The USDA’s Agricultural Marketing Service reported that these feeders were not moving into feedlots, but “were all old crop pasture lambs that were traded and retained in their current locations on pasture,” (1/8/16).
In direct sales, 8,000 feeders from Texas averaged $125 per cwt. for 120 lbs.; 6,000 head from California traded at $125 per cwt. and 105 lbs.; and 5,000 head traded out of New Mexico at $125 per cwt. for 110 lbs.
Feeder lambs (90-110 lbs.) averaged $163.85 per cwt. at Colorado, South Dakota and Texas auctions. January’s average was 3 percent higher monthly and lower annually by 5 percent.
Slaughter Lamb Market MixedAMS reported that there “are growing concerns about the weights of lambs being harvested getting too high too quickly,” (1/29/16). Many fat lambs in feedlots were finishing before harvest, while at the same time “feeders are looking for a home in a harvest facility, where there is not enough room or time to be able to run them through,” (1/29/16). AMS continued: “Lack of demand is still a concern, though the largest looming factor at this time is currency and readily available supplies of imported product,” (1/29/16).
Reduced demand at retail is likely putting a damper on slaughter numbers, which in turn makes the market increasingly thin. As a consequence, prices were not reported for some weight classes of formula/grid slaughter lambs and carcasses in early February. Public price reporting helps level the playing field for all involved, enhancing competition in the market.
San Angelo and South Dakota were the most active sheep auctions in January with slaughter lamb prices in San Angelo averaging $149.38 per cwt., up 5 percent monthly and 4 percent lower year-on-year. South Dakota saw a 7 percent monthly gain at $137.83 per cwt. and 1 percent lower year-on-year.
Slaughter lambs on a carcass-based formula or grid averaged $288.67 per cwt. in January, down 3 percent monthly and down 9 percent year-on-year. The January live equivalent was $145.34 per cwt. Carcass weights were up 3 percent monthly in January to 79.08 lbs. (157.05 lbs. live-equivalent).
In live, negotiated trade, prices averaged $138.60 per cwt., down 4 percent monthly and down 8 percent year-on-year.
Meat Market Lower MonthlyLamb carcasses and the wholesale composite (gross carcass value) weakened in January. Further, January levels were lower than a year ago giving pause to the potential robustness of Easter markets and beyond.
In January, the net carcass value – less processing and packaging – was $324.99 per cwt., down 1 percent monthly and down 5 percent year-on-year.
The rack, 8-rib, medium, saw the greatest weakening in January, falling 2 percent to $719.46 per cwt., 13 percent lower year-on-year. The shoulder, square-cut, was also weaker, down 0.3 percent to $295.41 per cwt. and down 3 percent from a year ago. The leg, trotter-off, was $345.51 per cwt., up 1 percent monthly and down 1 percent year-on-year.
The loin, trimmed 4x4, was the only primal to see higher prices year-on-year. It averaged $528.54 per cwt., down 0.08 percent monthly and 1 percent higher year-on-year.
Ground lamb saw a 0.4-percent drop to $553.89 per cwt., down 3 percent year-on-year. Lamb carcasses average $313.58 per cwt. in the first four weeks of the year, down 2 percent monthly and down 7 percent year-on-year.
New Format for Pelt ReportingIn 2013, ASI recommended that AMS “add a pelt price category under LMR (Livestock Mandatory Reporting) that reflects the value paid by packers to producers for slaughter lambs purchased on a negotiated, formula or contracted basis,” (4/1/2013). USDA listened. In January AMS rolled out a newly-formatted pelt report.
Prices are still reported based upon shorn and unshorn pelts, but revised industry-defined categories for both included Supreme, Premiums, Standard, Fair, Mixed class, Damage/Pullers.
For each new category, the square footage, degree of discolored fiber, manure/seed free status, staple length, micron and processing defects is specified. For example, a Supreme pelt is nine square feet or larger, carries no discolored fiber, is free of manure or seed, has a one- to three-inch staple length, is 22 to 26 micron and carries minimal processing defects.
Micron lengths are not applicable for Fair, Mixed Class, and Damaged/Pulled pelts. The AMS report is NW_LS443 out of St. Joseph, Mo.
Some of the within category price ranges published in the report’s inaugural weeks were larger than perhaps expected. For example, Standard unshorn pelts ranged from -$2 to $6.25 per piece in early February. This spread exists because there is some overlap in specific quality attributes, such as square footage. Overall, pelt marketing is complex with a wide range and varied quality attributes. It is expected, however, that efforts borne by AMS have narrowed descriptors with improved predictability of prices.
Superior Farms Adopts Electronic GradingSuperior Farms launched a new producer program to reward those producing to Superior’s production and sheep raising practices expectations. The success of this value-based venture hinges on the recent move by Superior to install an electronic grading system that can accurately sort carcasses based on quality and yield.
“Electronic grading is very new to everyone in the industry,” said Lesa Eidman, Superior Farms director of producer relations and sustainability (Feedstuffs, 1/20/16). “In sharing the data generated from electronic grading, producers will be able to make production and genetic changes to their flocks to meet the standards of lamb quality demanded by our customers.”
Only with an accurate electronic grading system that can assesses value “on which packers and producers/feeders can agree and trust” – according to the 2008 National Academies study – can the industry build a value-based pricing system that can promote high quality lambs and provide effective feedback to producers.
Estimates see Growth in Nontraditional MarketThe recent USDA/NASS inventory report also covered the 2015 lamb crop, a key element in estimating the size of the nontraditional lamb market. Determining the size of the nontraditional market is difficult because the lambs are not necessarily processed in federally inspected plants, and counted in USDA reporting. The nontraditional market is often characterized by a lighter-weight lamb, around 100 lbs., but very variable depending upon customer. Nontraditional market lambs are often sold direct to consumers.
In 2015, the nontraditional market was an estimated 30 percent of the commercial and nontraditional market combined, up from 27 percent in 2014. While the commercial market contracted, the nontraditional market expanded. Reported differently, for every lamb harvested in the commercial market .43 head of lambs are harvested in the nontraditional market.
ForecastsThe Livestock Market Information Center reported that in 2016, grocery and especially restaurant sales will remain key indicators of U.S. consumer demand for beef. The same goes for lamb. As LMIC revealed, as consumers feel wealthier with gainful employment and lower gas prices, they are willing to spend more on relatively high-priced animal proteins and show this by eating out more often (1/24/16).
Food Service and restaurant retail sales in December jumped 8 percent year-on-year and grocery sales were up 2 percent (LMIC, 1/24/16).
While higher incomes should translate into strong lamb demand, increased fresh supplies and perhaps a surge in heavier product coupled with ample frozen stocks could put a damper on the market.
At the beginning of January, lamb and mutton in cold storage reached 41.462 million lbs., down 7 percent monthly, yet up 22 percent from a year ago.
Already in early 2016, we saw that the meat market was softening. Softer meat prices can weaken live lamb price offers. However, LMIC forecasted lower lamb imports in every quarter of this year compared to 2015, which could lend some price support to markets.
LMIC forecasted that in the second quarter, carcass-based slaughter lambs on formula/grid could range from $272 to $278 per cwt., down 5 percent year-on-year. Sixty- to 90-lb. feeder lamb prices could range from $173 to $181 per cwt., down 10 percent year-on-year (2/1/2016).
U.S. Wool Production UpAccording to USDA/NASS, shorn wool production in the U.S. during 2015 was 27.1 million pounds, up 1 percent annually. Sheep and lambs shorn totaled 3.68 million head, unchanged from 2014. The average price paid for wool sold in 2015 was $1.45 per lb. greasy for a total greasy value of $39.3 million dollars, up 1 percent from $38.9 million dollars in 2014.
The average fleece weight in 2016 was 7.4 lbs., 0.1 lbs. heavier than a year ago. Fleece weights differ across sheep breeds with some of the heavier fleece weights exceeding 10 lbs. in Merino, Rambouillet, Columbian and Targhee breeds, and relatively lower fleece weights in Hampshire and Suffolk, for example.
This year’s inventory report suggests that wool production will expand in coming years. The net sheep and lamb growth in the top 10 wool producing states was 7 percent. Key wool producers such as Colorado, Montana, Wyoming and Texas reported inventory gains. Sheep and lamb growth in Texas and the estimated parallel growth in hair breeds in Texas, suggests that wool production from strictly wool flocks might contract, reducing its overall wool production.
In the Wool MarketBy the end of January, there was solid demand for Australian wools, particularly of interest given the increased supply at auction. For a couple weeks in mid-January the Australian dollar dropped below 70 cents U.S., strengthening 2 percent against major trading currencies. Consequently, the Eastern Market Indicator decreased 16 Australian cents/clean per kg, or 1.23 percent lower, to close at 1,280 Australian cents/clean kg by the last week of January. Importantly, the EMI when expressed in U.S. dollars gained 7 U.S. cents/clean kg to 902 U.S. cents/clean per kg.
Exchange rates, perhaps more so than the broader economic climate, affect how aggressive wool buyers are at auction. International buyers – particularly the Chinese – are sensitive to changes in the Australian-U.S. exchange rate. By comparison, global economic turmoil and stock exchange volatility doesn’t seem to impact the Australian wool market as profoundly.
“The wool market seems to have a habit of resisting the trajectory and severity of reactions of the major traded financial and commodity products,” (WoolNews.net, February 2016).
As shearing begins across the U.S., growers and buyers will be closely watching exchange rates. It is forecasted that the Australian dollar will stay low, around 70 cents U.S., but could drop to 69 cents by the year’s end (Bloomberg, 1/31/2016). As the Australian dollar weakened in recent years, Australian wool prices rose in Australian dollars, but weakened in U.S. dollars. It is the lower, U.S.-dollar denominated price that drives the U.S. market.