2018 Lamb Supplies Expand as Demand Struggles
JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting
In 2018, estimated lamb availability was higher as domestic lamb production was up, and so were lamb imports.
Although lamb exports grew an impressive 34 percent through September year-on-year, exports are only a small portion of production and the outlet wasn’t sufficient to keep freezer inventories down, and support live lamb prices. The meat market held steady in 2018, further exacerbating supply issues. Overall, market signals indicate that lamb demand is struggling to support expanded lamb supplies.
Economic signals point to strong lamb demand yet there were signs of softening. Compared to a year ago, restaurant operators reported that in September both same-store sales and customer traffic had declined (Daily Livestock Report, from the National Restaurant Association, 11/1/18). The report followed that restauranteurs’ outlook for the next six months is mixed. An equal percentage of operators – about 24 percent – forecast an improved economic outlook while about 25 percent believe the market could deteriorate.
Lamb Exports ClimbU.S. Meat Export Federation chair Dennis Stiffler reported that lamb exports struggled in 2017, but rebounded this year primarily due to an increase in lamb variety meat shipments to Mexico and access to the Japanese market (AgWeb, 11/7/18). In the nine months through September, lamb exports jumped 34 percent year-on-year to 599,000 lbs. Thirty-six percent of 2018 lamb imports were sent to Mexico. Stiffler reported that the reopening of the Japanese market after 15 years is a “real game-changer. There are now four U.S. plants approved for export to Japan, and USMEF is preparing for its first major lamb event,” Stiffler said (AgWeb, 11/7/18).
Feeder Lambs LowerOctober feeders were about 8 percent lower in 2018, and sharply lower in the second-half of the year, due to marketings lagging behind the supply of market-ready lambs.
Feeders didn’t adhere to seasonal trends this fall. Historically, feeders hit an annual low in September, during the peak supply period, but then climb toward the end of the year. The direct feeder lamb market was slow in October with 1,000 head trading out of Texas for $132 per cwt. for an average 80 lbs., down 9 percent monthly. At the end of October, 60 to 90 lb. feeders at the Billings, Mont., auction traded at $150 to $193 per cwt. By early November, feeders at the St. Onge-Newell, S.D., auction traded at $174 to $203 per cwt.
A histogram is one way to depict price volatility. During 36 percent of the weeks between 2013 and October 2018, feeder prices in direct trade ranged from $161 to $180 per cwt. In 43 percent of the weeks, prices fell lower.
Year-to-year price volatility is the critical measure for producers. In recent years, direct feeder lamb prices in August ranged from $141 per cwt. this year, to a high of $173 per cwt. in August 2016. This difference of $32 per cwt. equals $30 per head for a 95-lb. feeder. For 100 head, this difference is $3,000, squeezing producer returns.
Slaughter Lambs LowerIn an unseasonal move, slaughter lamb prices slumped in October, indicating that packers have ample supplies relative to market demand.
Formula slaughter lamb prices averaged $276.06 per cwt. in October on a carcass basis, down 2 percent monthly and down 9 percent year-on-year. Prices averaged 7 percent lower than October’s five-year average.
There were several indicators that by the end of October lamb demand lagged behind available supplies. At 80 lbs. dressed weight, harvest weights were 7 percent higher year-on-year. Furthermore, the volume of live, negotiated supplies dipped sharply lower, 91 percent lower than a year ago. A live, negotiated sale is a spot market price determined within 14 days of delivery to a packer’s slaughterhouse. The slowdown in negotiated sales means that ample supplies were already available in the pipeline.
Live, negotiated prices averaged $136.87 per cwt. in October, down 3 percent monthly and down 5 percent year-on-year.
Sharply lower pelt credits were a drag on live slaughter lamb prices through the fall. However, pelt values recently saw a welcome lift. Unshorn Supreme pelts jumped from $1.00 in September to $3.75 per piece in October. It is that time of year again when the portion of shorn pelts begins to outpace available unshorn pelts. Reduced availability gives unshorn pelts some price support. October pelts were still sharply lower than the January-October 2018 average of $8 per piece.
Production and TradeSlaughter lamb prices trended lower this fall due to ample supplies of domestic and imported product. Lamb harvest January through October gained 3 percent year-on-year to 1.5 million head. Lamb production was an estimated 108.6 million lbs. through October, up 6 percent. Higher slaughter numbers combined with heavier weights led to increased production.
In the year through September, total lamb imports were up 2 percent year-on-year to 159.3 million lbs. Australian lamb imports were up 6 percent year-on-year and New Zealand lamb imports were down 4 percent.
A monthly breakdown of lamb imports – particularly from Australia – helps explain domestic volatility: imports were up and down compared to last year’s trend. In the first quarter of 2018, lamb imports were down an average 8 percent year-on-year. In the second quarter, Australian lamb imports were up 17 percent year-on-year. In July, imports were up 58 percent year-on-year, and then down 13 percent in August.
Lamb and mutton in cold storage continued to climb by early October, up 3 percent monthly to 40.5 million lbs., and up 29 percent year-on-year. This volume is equivalent to putting all production from July through October into the freezers.
ForecastsIn late October, the Livestock Marketing Information Center forecasted that national direct, slaughter lamb prices in the fourth quarter could average $275 to $279 per cwt. on a carcass basis, down 3 percent year-on-year. Sixty- to 90-lb. feeders could average $156 to $162 per cwt. in the fourth quarter, down 4 percent from a year ago.
Looking forward, 2019 could be a very different year with a 6-percent expected decline in lamb imports, and a 1-percent drop in domestic production supporting prices. Both slaughter numbers and average dressed weights are forecasted to dip lower in 2019.
Rabobank commodity analyst Georgia Twomey reported that “Rabobank’s view is the demand outlook for the coming five years remains strong for the Australian sheep industry and that growth will continue,” (The Standard, 10/25/18).
Meat Market SteadyWhile the live markets have been volatile, the wholesale lamb market has been steadier. The wholesale composite averaged $379.26 per cwt. in October, steady monthly and down 4 percent from a year ago.
All primals were relatively steady in October. The rack, 8-rib medium, held at $864.44 per cwt.; the leg, trotter-off, averaged $363.46 per cwt., steady monthly; the shoulder, square-cut, averaged $286.39 per cwt., down 1 percent monthly; and the loin, trimmed 4x4, averaged $540.11 per cwt., up 1 percent in October.
Among lamb primals, the loins took the largest hit year-on-year compared to a year ago. The loin was down 10 percent, the shoulder, down 9 percent, the leg was down 2 percent, and the rack about steady.
Australian Wool Market Continues SlowdownDuring the week ending Nov. 9, the Australian Eastern Market Indicator averaged 1,776 cents Australian per kg, down 4 percent weekly. Australian Wool Innovation, Ltd. reported “buyer confidence and activity was severely lacking,” (11/9/18). However, the EMI was still 6 percent higher year-on-year.
In U.S. dollars, the EMI averaged $5.86 per lb., down 2 percent weekly and steady with a year ago. In U.S. dollar terms, the market was far more stable. “This is significant given wool is generally traded in U.S. dollar terms, thus giving a truer indication of the movement of the market,” (AWI, 11/2/18).
In the week ending Nov. 9, the Australian–U.S. dollar exchange rate gained 2 percent to 0.73, and was 5 percent lower year-on-year.
AWI explains the current downturn in Australian wool prices, “A tightening of monetary conditions around the world, financial markets in somewhat of a turmoil, in addition to the slowdown in Chinese demand, affects market sentiment and therefore investment and raw material procurement decisions,” (11/9/18).
China is experiencing an economic slowdown, exacerbated by the U.S.-China trade war. Reuters reported in October that China was facing “cooling” domestic demand and manufacturing (11/8/18). What this means for wool is that wool apparel demand by Chinese consumers is down, as is raw wool imports by manufacturers.
A 25-percent tariff on U.S. raw wool exports to China is on track for January. Currently, the rate is 10 percent – already high for the industry – but 25 percent will be a shock. This spring, Chinese buyers in American markets will likely offer prices 25 percent lower than Australian prices.
Barry Savage, ASI international wool marketing consultant, said the 25 percent tariff, “will restrict U.S. exports to China greatly, if not totally eliminate them,” (11/6/18).
According to Sourcing Journal, “The apparel and textile supply chain is being hit by a one-two punch of rising raw material costs and the specter of a 25-percent tariff hike on Chinese imports in the new year, which are bound to cause price increases at all levels,” (11/6/18).
Savage added that ASI is working with exporters to open/expand other countries use of American wool to compensate,” (11/6/18). Diversification of markets will be key to mitigating the adverse effects of the trade war.
Imported Australian wool to the United States averaged $7.16 per lb. for 22 micron in October, down 2 percent monthly; 24 micron average $6.40 per lb., down 4 percent monthly; and 26 micron averaged $4.11 per lb., down 13 percent monthly. Prices are still relatively high year-on-year: 7 percent higher for 26 micron wools to 31 percent higher for 22 micron.