Market Report

Government Shutdown the Lamb Market

JULIE STEPANEK SHIFLETT, PH.D., Juniper Economic Consulting

Early October headlines provided ample choice words to describe how the government shutdown affected agriculture: ‘Hobbles,’ ‘disrupts,’ ‘threatens’ and ‘thwarted.’ My favorite is “spawns a vacuum in market information.”

The government shutdown occurred at a time in the lamb market when there was a lot of optimism with increased feeder lamb sales and stronger prices of feeders and slaughter lambs. What will happen to the market as the shutdown persists is unknown and warrants speculation.

Hopefully by the time you read this article the shutdown is a fading memory. As of this publishing, the shutdown had just come to a close, leaving some markets untouched and potentially costing other segments.

A couple of the largest sheep auctions in the Midwest and West reported that business was usual with continued sales and steady volume. Most auctions produce internal price reports broken down by weight classes which can help producers decide whether and when to sell. Furthermore, the Muslim holiday Eid ul-Adha, the Festival of Sacrifice, was in mid-October and the number of buyers and volume was likely unaffected.

During the government shutdown, national sheep and lamb market reports were not been reported. The sheep industry relies heavily upon U.S. Department of Agriculture (USDA) Agricultural Marketing Service (AMS) and USDA’s National Agricultural Statistical Service (NASS) for price, slaughter and production reports to maximize decision-making abilities by buyers and sellers. The reports are published in a timely manner and describe details of market trades, including lamb weights and prices. Producers use these reports to help them to determine the timing of sales and to give them more information in price negotiations.

Where the lamb industry was definitely affected was in the shutdown of the insurance program, LRP-Lamb, and the absence of the reports of slaughter lambs priced on formula and other specified information. As of Oct. 1, all livestock insurance programs shut down including sales and ending values for indemnities.

Although feeder lamb trades will slow seasonally, slaughter lamb trades must march on to keep production steady in a very current market. In the year through August, the percent of yield grade 1 (YG1) lambs was at a four-year high at 8 percent of total slaughter tons which indicates minimal back fat. In July and August, the percent of YG1 was 10.5 percent.

In the Markets

While feeder and slaughter lamb prices saw significant gains in September, the wholesale and carcass markets gained less than 1 percent.

In 2010 we saw higher feeder, slaughter and wholesale markets push up retail prices. It was a seemingly seamless ripple across sectors. In early 2010 when slaughter lamb prices began their record 19-month ascent the wholesale market was also climbing, and at a faster clip. The retail market didn’t seem to mind, passing rising wholesale prices onto the consumer in steady month-to-month increases.

But now, things are different. Feeder and slaughter lamb prices are up while the wholesale market is flat, bouncing around less than 10 cents per lb. month to month. Lower feed costs in coming months will support feeder and producer returns and there is the possibility that the very current slaughter lamb supply will force wholesale values higher. There is a concern, however, that the retail market will not support a higher wholesale market.

Feeder Lambs Up

The sheep industry is fortunate it traded many fall feeders before the government shutdown. At 83,075 head, September’s volume of feeders in direct trade was three times higher than August and 40-percent higher than a year ago. In direct trade, feeder lambs averaged $120.33 per cwt. in September – 13-percent higher monthly and 36 percent above last year’s value.

Some of the largest direct trades in September included 16,200 head of Utah feeders at 97.5 lbs. going for $127.50 per cwt. and 17,700 head of 82.5-lb. Wyoming feeders that averaged $125 per cwt. for October delivery. In September, 13,100 lambs traded out of Colorado at 95 lbs. and $123.50 per cwt.

Sixty- to 90-lb. feeders at auction in Colorado, South Dakota and Texas brought $121.06 per cwt. in September, up 12 percent monthly and up 28 percent year-on-year. The three-market high was Sioux Falls at $125.63 per cwt. and the low was San Angelo at $116.50 per cwt. Ft. Collins had insufficient trades in September.

Corn Futures Hit Three-Year Low

As corn harvest progressed through September, the futures markets took notice. Promising yield reports and word that September corn stocks were higher than expected sent the December corn contract down to $4.35 per bu. on Oct. 2. December corn futures dropped $1.20 per bu. since July as crop reports came in and harvest commenced. “Farmers harvested 12 percent of corn crop in the main U.S. growing areas as of Sept. 29, USDA data show, easing concern cold or dry weather will hurt output this year,” (Bloomberg, 10/2/13).

The Livestock Market Information Center (LMIC) forecasts that the 2013/2014 marketing year average corn price received by producers could average $4.50 per bu. (10/3/13). LMIC added that corn prices have been aggressively falling since mid-July, which saw the last reported $7 corn price. The early-October Omaha corn prices moved into the $4 per bu. range, the lowest for any week since early October 2010.

The government shutdown might mean even lower corn. Bloomberg reported that corn fell as the USDA suspended crop and livestock data reporting during the federal government’s partial shutdown (10/2/13). The lack of crop inspections and market prices could adversely affect export demand, putting downward pressure on prices.

At $194 per ton, alfalfa was down 3 percent monthly and down 6 percent year-on-year.

Muslim Festival of Sacrifice Boosts Auctions

Eid ul-Adha, the Muslim Festival of Sacrifice, is probably the most important Muslim holiday for the sheep and lamb industry. A family or families will sacrifice a goat or sheep – if able – or visit local butcher shops in holiday preparation. Farm, backyard and even bathtub slaughter is common during this period.

Sheep auctions see an increased number of buyers in the few weeks before Eid ul-Adha which reportedly helps boost prices. This year, the holiday was Oct. 15, but the date falls about 12 days earlier each year according to the Muslim lunar calendar. In the lunar Islamic calendar, Eid al-Adha falls on the 10th day of the month of Dhul Hijjah.

Double-Digit, Year-on-Year Slaughter Lamb Price Gains

The slaughter lamb auction market rallied in September. Auction markets averaged $117.37 per cwt., 9-percent higher monthly and 9-percent higher than its 2013 average. Most telling is the 34-percent gain over September 2012. September 2013 was even higher than its five-year average for the month, 0.35-percent higher.

One of the highest-valued markets was the Equity Electronic September auction average at $124.56 per cwt., 4-percent higher monthly. On Oct. 3, Equity posted a sale averaging $137 per cwt. South Dakota was also high at $123.08 per cwt., 5-percent higher monthly.

Slaughter lamb prices on a carcass-based formula averaged $238.24 per cwt. in September, up 4 percent monthly and up 2 percent year-on-year. The live-equivalent price was $118.65 per cwt.

The number of head traded in formula sales in September was down 31 percent monthly at 40,900 head and down 8 percent year-on-year. Reduced slaughter and lower weights meant reduced production. At 72.33 lbs., dressed weights were down 10 percent from August and down 21 percent from a year ago.

The number of lambs traded in negotiated sales was also down at 19,400 head. Prices averaged $119.62 per cwt., up 2 percent monthly and up 13 percent from a year ago. Live weight in negotiated trades was 126.25 lbs., down 7 percent monthly and down 15 percent year-on-year.

Production and Trade Up

Over the past two years, lamb and mutton production bounced around month to month, but held relatively steady. In the nine months through September, estimated lamb slaughter was up 8 percent and lamb production was up 1 percent year-on-year.

During this period, live slaughter weights fell so increased slaughter was necessary to maintain production. In September, dressed slaughter weights averaged 67 lbs., down 8 percent from 72.5 lbs. a year ago.

Like we need more lamb lovers, we need more sheep if we are going to grow this industry. Tight supplies and good retail movement are likely keeping lambs in feedlots very current. Maintaining production levels with more sheep at lighter weights is a concern. It’s a balancing act: The industry doesn’t want over-fat lambs, but it also doesn’t want to leave money on the table.

It appears packers were bidding up prices in September to secure holiday supplies. The freezer inventory of lamb and mutton at the beginning of September was 22 million lbs., down 6 percent monthly and 9-percent lower than a year ago. Freezer inventories are still high, but falling and likely reduced further by the USDA lamb purchase deliveries this fall.

Mutton slaughter was down 11 percent while mutton production was down an estimated 17 percent. Typically, reduced sheep slaughter might be a sign that the industry is holding on to its ewes for flock rebuilding. However, this might not be the case this time. It is more likely that the sheep slaughter has shifted to nontraditional markets for which we have little data.

Mutton exports were down 20 percent in the year through July at 4.5 million lbs. while lamb exports were up 110 percent to 350,000 lbs.

Live sheep exports were down 16 percent in the year through July to 22,522 head. Live sheep exports to Canada were down, but up to Mexico. Zero sheep were exported to Mexico last year, but 16,090 head this year.

Lamb and mutton imports were up 21 percent through July compared to the first seven months of 2012. Lamb imports were up 16 percent to 88.7 million lbs. and mutton imports were up 56 percent to 18.2 million lbs.

Australian lamb exports were higher to most markets in its 2012/2013 year with China and the Middle East taking record volumes for the year– up 24 percent and 37 percent year-on-year, respectively. Most other major markets took large volumes of lamb, with U.S. exports up 8 percent year-on-year and the European Union up 3 percent (Meat & Livestock Australia (MLA), 9/6/13).

Increased mutton imports might have reduced the demand for domestic sheep and contributed to lower sheep prices. Cull ewe prices were at a four-year low through 2013. At $32.91 per cwt., cull ewe prices averaged 25-percent lower in September year-on-year and 15-percent lower than its five-year average. Producers might have no choice but to sell lower or hold onto their ewes.

Forecasts

LMIC forecasted that tight supplies will likely support prices in the fourth quarter. LMIC forecasted in late September that commercial production could be 5-percent lower in the fourth quarter, year-on-year, and imports could fall 2 percent leaving total supply down 7 percent.

In late September, LMIC forecasted that fourth-quarter national slaughter lambs by carcass weight in direct trade could range from $245 to $250 per cwt. – 11-percent higher year-on-year. Sixty- to 90-lb., three-market feeder lambs could range from $130 to $140 per cwt. – 32 percent higher.

September Wholesale Market at Four-Year Low

While the feeder and slaughter lamb market saw significant September gains, the meat market was sluggish with the cutout and carcass markets gaining only 1 percent.

The gross carcass value (wholesale lamb) averaged $280.42 per cwt. in September, up 1 percent monthly and down 11 percent year-on-year. The rack, leg, shoulder and ground lamb posted September gains while the loins weakened. The net carcass value — subtracting processing and packaging costs— was $248.92 per cwt., 1-percent higher monthly and down 12 percent from a year ago.

The eight-rib rack, medium, saw the largest jump in September with a 4-percent gain to $516.75 per cwt., but was still 8-percent lower than a year ago. Ground lamb was $522.90 per cwt., 2-percent higher monthly and down 5 percent from a year ago. The leg, trotter-off, was $301.29 per cwt. in September, up 1 percent monthly and down 12 percent year-on-year. The shoulder, square-cut, averaged $227.37 per cwt., up a marginal 0.3 percent and down 5 percent from a year ago.

The loins, trimmed 4×4, were $443.60 per cwt., down 3-percent monthly and down 17 percent from a year ago.

The rack, roast-ready, frenched averaged $1,079.43 per cwt. in September, 4-percent higher monthly and down 9 percent year-on-year. The leg, trotter-off, partial boneless was $422.37 per cwt. in September, up 3 percent monthly and 8-percent lower year-on-year.

We typically see the loins weaken toward the December holidays, but we should see some lift in leg, rack and shoulder prices in the fourth quarter.

As the U.S. economy struggles out of its recession, lower-valued lamb cuts performed relatively well. The wholesale shoulder has been relatively stable and shoulder chops have been a popular featured item at retail. Surprisingly, ground lamb has also been popular, staying above $5 per lb. over the past few years. By contrast, the rack lost 42 percent since its peak.

This phenomena of trying to offer savings at retail can be seen in lamb imports as well. MLA explained, “Exports of lamb assorted cuts (mostly chilled, bone-in and bone12 less) were up more than 10 times on a year ago and the highest volume on record, while shipments of individual primal cuts, such as rack, shortloin and shoulder fell from 23 to 33 percent,” (MLA, 3/2013).

The carcass market averaged $261.57 per cwt. in September, up 1 percent monthly and 3-percent lower year-on-year. Carcass prices vary by weight with the lightest weight carcasses receiving up to $348 per cwt. and carcasses 85 lbs. and up receiving $239 per cwt.

Food Service Growth Sluggish

Economic recovery of the U.S. restaurant sector is crucial for expanded sheep industry growth for a reported 65 percent of the industry’s value is attributed to the food service sector.

The National Restaurant Association’s Restaurant Performance Index (RPI) fell for the third straight month in August, yet was still above the expansionary 100 mark for the sixth straight month (Daily Livestock Report, 10/2/2013).

Restaurant operators reported improvements in restaurant traffic and same-store sales. In 2013 the restaurant industry added more than 250,000 new jobs and 22,000 new jobs in August alone (National Restaurant Association, 9/2013). However, restaurant operators’ expectations for the future were down. As the United States climbs out of a recession, many protein features on menus have held steady and some have fallen (Dataessential, 7/2013).

As the restaurant sector expands, the incidence of lamb on menus and lamb’s penetration (percent of restaurants featuring lamb) will rise. Lamb appears on 61 percent of fine dining entrée menus, more than lobster or crab, and slightly less than popular proteins like shrimp, pork and scallops (Dataessential, 7/2013). However by early 2013, lamb was found on 2-percent fewer menus, along with other top proteins like tuna, crab, duck and veal. Proteins such as pork, beef and lobster experienced slight growth over the last year.

Over 70 percent of lamb entrées at fine dining are from an unidentified origin. However, this year, more restaurant operators are identifying lamb’s origin on menus. Twenty-one percent of lamb entrees are specified on menus as being domestic in origin.

Lamb is one of the highest priced entrée proteins at fine dining with an average of almost $34 per plate, only lobster and filet mignon are higher priced. When the country of origin is identified, U.S. lamb is 24-percent higher than imported lamb.

In restaurants characterized as chains and independents, lamb demands one of the highest prices on average by protein, averaging about $14 per plate. Only veal and lobster are priced higher.

The percent of restaurants featuring lamb in African and Indian restaurants (chains and independents) was higher than that in fine dining steakhouses. As the U.S. population grows in ethnicity we will only see more ethnic restaurants (and more lamb featured, but at a lower price point).

AU Wool Market Strengthened

Australian wool averaged Australian 1,106 cents per kg clean in September, up 8 percent monthly and 17-percent higher than a year ago. In 2013 alone the market climbed 11 percent since its 9-month low in March.

The U.S. wool market was quiet in September, but October and November will likely see some shearing accompanied by warehouse sales of newly sheared clips and stored inventory.

Imported Australian wool ranged from $5.20 per kg clean for 21 micron to $5.10 per kg for 23 micron, to $3.72 per kg for 26 micron and $2.82 per for 30 micron.

Fourth-quarter market optimism abounds. “The consensus view of the market outlook among traders is fairly positive, owing to the belief that stocks of wool in China are low and that further replenishment of inventories will be required before the year-end,” (WTiN Wool Market Report, 10/3/13). Higher prices and increased year-to-year Australian wool exports leaves many producers optimistic for the next couple months. However, the retail wool market is still struggling which ultimately drives sustained raw-wool stocking by Chinese buyers.

Looking further out, tight wool supplies and sustained economic recovery will likely lend continued price support during the spring of 2014. The Australian Wool Production Forecasting Committee (AWPFC) forecasted that Australian wool production could drop by 1.4 percent in its 2013/2014 season due to increased sheep slaughter in early 2013, a consequent reduced sheep inventory and lower expected fleece weights due to the dry conditions in the first-half of 2013, (WoolNews.net, 10/2013).

U.S. raw-wool exports were up 51 percent between January and July year-to-year. With close to 6 million lbs. exported, the volume was closer to 2011’s exports so the year posted a solid rebound on 2012’s low. At 1.3 million lbs., wool-top exports were more than six-times higher in the first seven months of 2013 compared to a year earlier.

Total wool-textile exports were down 31 percent between January and July year-on-year. Of the total 35.4 million lbs. exported, the largest share went to wool floor coverings at 14.3 million lbs. followed by wool yarn, thread and fabric at 12.7 million lbs. Total wool apparel was also down, to 7.6 million lbs. as was wool home furnishings at 647,000 lbs.

Through June, the value of U.S. wool exports was up 120 percent to $18 million (more up to date data was not available). Increased wool-export value was a good sign given the strong U.S. dollar which makes U.S. exports relatively more expensive on international markets. It is also a good sign because the export value of Chinese wool imports was down in this period. During the first eight month of 2013, China’s accumulative wool imports were 18-percent higher than the same period of 2012, however, the average price shrank 11 percent from the corresponding timeframe of last year (WTiN Wool Market Report, 10/3/13).

The U.S./Australian dollar exchange rate saw a 3-percent jump in September after a 14 percent slide between January and August. The stronger U.S. dollar versus the Australian dollar through August gave lamb importers a competitive edge because it took fewer U.S. dollars to buy the same kg of imported lamb. On the export side, the stronger U.S. dollar means exports were less competitive.