Will Tighter Supplies Push Prices Higher?JULIE STEPANEK-SHIFLETT, PH.D.
Juniper Economic Consulting
There are few givens in life: What goes up must come down; what goes around, comes around; and history tends to repeat itself. In recent weeks we’ve seen some familiar market dynamics.
Imports and domestic production are relatively tight, inciting week-to-week price gains and thus the market looks a lot like 2011 when we saw record-high prices and reduced lamb availability. However, this year is different.
Domestic production and lamb imports were down this year, but the extent of the squeeze is likely shorter-lived than in 2011 and future price gains uncertain. By late 2011 and early 2012, we had four consecutive quarters when total available lamb supplies (including imports) were less than 100 million lbs. This long stretch of tighter supplies pushed prices to record highs.
In early June, the Livestock Market Information Center forecasted that the third quarter lamb supply will drop below 100 million lbs., but then supplies will rebound, as a result of a resurgence of imports.
For nearly five years now, Australian lamb has accounted for about half of the U.S. commercial lamb market, and thus any divergence from that trend can inject an element of uncertainty and volatility in the U.S. market. A broader perspective reveals that total lamb supplies in the United States have been expanding since the 2011 record-high prices and prices have held fairly well, a testament to the strength of American lamb demand.
After five years of steady growth, lamb imports from Australia were down 9 percent year-on-year January through May (Department of Agriculture and Water Resources, accessed 6/5/17).
Not only was total volume down, but the composition of lamb imports from Australia was different, putting pressure on specific markets. For the January to April period, the share of higher value chilled Australian lamb exports dropped to 40 percent of the total – the lowest level for this period since 2012. This was predominantly underpinned by lower chilled exports to the U.S. and the Middle East, and increased tonnage of frozen product to Asia. Additionally, through April, the leg, shank and short loin were all lower to the United States, while rack and shoulder exports were higher year-on-year (Meat & Livestock Australia, 5/4/17).
In 2011, when the United States saw record-high lamb prices, Australia was on its fifth consecutive year of sheep inventory contractions. This time around, Australia has seen three years of contractions (2014-16) with an expansion forecasted for 2017 and 2018.
MLA reported, “This pattern is alike what occurred after 2010 when there were similar market conditions, although this time it may not be quite as responsive (sheep rebuilding efforts), based on the slightly higher expected slaughter this time,” (MLA, 4/2017). Thus, available supplies currently are not as tight globally compared to 2010/11.
U.S. lamb prices could move higher this summer as Australian supplies tighten further in the short-term and U.S. beef prices continue to strengthen, but the gains might be short-termed. Australian lamb prices this year have already exceeded previous 2011-12 records and 2016 highs. The ability of the U.S. commercial market to attract supplies from the non-traditional market (about one-third total supplies) is a wild card, and could prove to soften domestic prices somewhat.
In the first five months of the year, the number of U.S. commercial lambs harvested was an estimated 735,430, down 9 percent year-on-year. Lamb production was an estimated 51.7 million lbs., also down 9 percent. Through the year, dressed weights got lighter, from about 71.5 lbs. to 69 lbs. Harvest weights typically get heavier through Easter, but then drop off sharply. This year, weights got lighter, but markedly lighter than either of the last two years.
At the beginning of May, lamb and mutton in freezers was 28.6 million lbs., 11 percent higher monthly and 28 percent lower year-on-year.
Wholesale Market Near 2011 Record HighBoosted by higher primal cuts, the cutout value – less processing and packaging costs – averaged $355.31 per cwt. in May, up 14 percent monthly and 15 percent higher than a year ago. The gross carcass value posted price levels 98 percent of 2011 record highs.
The 8-rib rack medium boasted an $850.83 per cwt. in May, 14 percent higher in May and 25 percent higher year-on-year. The loin, trimmed 4 x 4 averaged $571.19 per cwt., 7 percent higher monthly and 10 percent higher year-on-year.
The leg, trotter-off, averaged $391.57 per cwt., 10 percent higher monthly and 14 percent higher from a year ago. The shoulder, square-cut, averaged $333.31 per cwt., 16 percent higher monthly and 21 percent higher year-on-year.
By the end of May the rack, roast-ready, frenched averaged $1,612.38 per cwt. and the rack, roast-ready, frenched, special averaged $1,894.19 per cwt.
In May, only carcass prices less than 45 lbs. were reported, due to confidentiality concerns.
Feeder Lamb Prices Move HigherFeeder lamb prices in direct trade averaged $215 per cwt. in May, 9 percent higher monthly and 36 percent above a year ago.
Direct feeder lamb sales through May totaled 20,300 head, down 42 percent year-on-year. Volume was down in part due to 19,000 head influx of feeders that traded in January 2016.
Two established feeder lamb price series at auction saw $241.94 per cwt. in May, up 5 percent for the month and 26 percent higher year-on-year. Sioux Falls (S.D.) prices averaged $254.37 per cwt. and San Angelo (Texas) averaged $229.50 per cwt.
Slaughter Lamb Prices Top $2 per Lb.Live, auction slaughter lamb prices averaged $186.76 per cwt. in May, up 9 percent monthly and 26 percent higher year-on-year.
At $208.17 per cwt., South Dakota saw auction prices surpass $2 per lb. Kalona (Iowa) also saw prices move higher than $2 at $203.63 per cwt.
Harvest weights of lambs on formula came down in May, indicating a more current harvest with tight supplies.
In formula sales, the May average was $319.01 per cwt. ($159.23 per cwt. live-weight basis), up 13 percent monthly. Dressed weights were down 3 percent to 84.88 lbs. monthly (170 per lb. live).
In the Comprehensive Information report (live, negotiated and formula sales), prices averaged $318.63 per cwt. in May, up 9 percent monthly. Dressed weights were down 7 percent monthly to 78.93 lbs.
Live, negotiated harvest lambs averaged $161.61 per cwt. in May, up 3 percent monthly and up 18 percent year-on-year. Harvest weights averaged 175 lbs., 4 percent heavier monthly and 17 percent higher from a year ago.
In May, 10,500 head of lambs traded on a live, negotiated basis, 39 percent fewer monthly. Volumes of formula lambs are no longer reported due to confidentiality concerns.
In the past 12 months, the commercial lambskin market produced an average 64 percent shorn pelts and 36 percent unshorn pelts. The highest quality unshorn pelts – Supreme – averaged $9 per piece in May, up 6 percent monthly and 2 percent higher year-on-year. By contrast, the highest quality shorn pelt brought $4.38 per piece in May, 3 percent higher monthly, but 26 percent lower year-on-year.
Forecasted Harvest Lower Year-on-YearLamb production is expected to be down sharply in the third quarter, according to the LMIC. Third quarter harvest is forecasted to be down 6 percent year-on-year to 524,000 head, and dressed weights a three-year low to 64 lbs. (down 6 percent from a year ago). The combination of lower harvest and lower weights mean sharply lower production at 33.4 million lbs., down 7 percent from a year ago.
LMIC forecasted that 60-90 lb. feeders could see $211-$217 per cwt. in the third quarter, up 20 percent year-on-year. Slaughter lambs could see high $200s per cwt. – down marginally from May levels.
U.S. Wool Market HigherMore than 700,000 lbs. of wool traded clean in the U.S. in May and more than 300,000 lbs. greasy (typically shorter wools). Clean wool in the Territory States (western and some Californian wools) averaged 79 to 84 percent of Australian wools depending upon micron, a signal of high quality.
In the Territory States, May prices averaged 2 percent higher monthly and 8 percent higher year-on-year. Eighteen micron averaged $5.85 per lb. clean, up 32 percent year-on-year; 20 micron was $4.56 per lb., up 8 percent annually; 22 micron averaged $4.15 per lb., up 3 percent; and 24 micron saw $3.66 per lb., up 8 percent year-on-year.
In the Fleece States (mostly Midwest), prices averaged 10 percent higher than a year ago. Clean wool averaged $4.00 per lb. for 22 micron wool and $3.60 per lb. for 24 micron wool. In the Fleece States, 24 micron ewe wool brought $1.52 per lb. greasy . In the Territory States, it brought $1.85 per lb. greasy.
During the first week of June, Australian wool prices saw their fourth week of retreat on the back of an 18-month upward trajectory. In general, finer wools saw the greatest price softening, but medium wools coarser than 21 micron gained (WTiN Wool Report, 5/30/17).
By June 8, Australian wool prices were about 16 to 18 percent higher than a year ago in both Australian and U.S. dollars. The Australian Eastern Market Indicator was 1,478 Australian cents per kg and 506 U.S. cents per lb. ($5.06 per lb.).
The stronger Australian dollar played its part in weakening prices through May, but quality was also at issue and thus better-prepared U.S. wools could have an advantage in a global marketplace. Australian wool analysts reported that a large proportion of wools at auction had high levels of vegetable matter.
“AWEX reported that best style lots with excellent test results continued to see high demand and performed relatively strongly, but that wools showing even small impurities or slightly unfavorable length and strength results were quickly discounted,” according to the WTiN Wool Report (6/5/17).
Another concern with recent Australian wool sales was shorter wools coming to market, due to the eagerness by some growers to cash in on higher prices.
By early June, Australian wool sales had dropped sharply and were forecasted to remain tight through at least late June because many Australian growers sold, taking advantage of the high market. Late May and June U.S. sheep shearing could face an unexpected tight global supply and thus stronger prices.