Market Report

• December 2014
  • President’s Notes
  • Market Report
  • ASI Awarded MAP and FMD Funds; LRP Resolution Update
  • Sheep News in Brief
  • Trade Talk: Orwick Tells Industry’s Story
  • USDA to Survey Sheep and Goat Operations

The lamb industry has good reason to be optimistic heading into the holiday season. Lamb quality is excellent, prices are higher and domestic fresh lamb supplies are good. Furthermore, spending on meat, protein demand and consumer optimism is up. 

Drs. Meyer and Steiner of the Daily Livestock Report (DLR) commented that demand for beef, pork and poultry demand was “outstanding” over the past 12 months (11/614), an applaudable feat given higher protein prices. Consumers are paying these higher meat prices, which contributes to growth of all protein sectors from producers to processors. It is likely that lamb demand is also holding strong given higher prices at retail and increased total supplies on the market.  

Another measure of a strong meat sector is that inflation-adjusted per capita expenditures for beef, pork, poultry and turkeys hit a 10-year high of $49.24 per person. Lamb’s share of red meat expenditures is about 1 percent and 0.4 percent of red meat and poultry combined. The DLR reported that strong demand and increased spending on meat is attributed to a shift to proteins in diets (and a concern about carbohydrates) (11/6/14). There is also a sentiment that the negative press regarding saturated fats in animal proteins is slowly being retracted (DLR, 11/6/14).  

Another reason to rejoice is that measures of consumer confidence of the economy are the highest since October 2007 – far before the Great Recession. Recent consumer surveys also found that the outlook for 2015 is also the highest in seven years. Positive economic outlook is significant for lamb and wool demand. This holiday season and in the year to come, lamb’s excellent quality, rising incomes and high-priced beef will serve the lamb industry well.

Feeder lambs in direct trade slowed sharply in October from over 47,000 head in September to 7,800 head. The most significant October trade was 3,900 head from New Mexico at $200 per cwt. for 80 lbs. Feeder lambs averaged $197.50 per cwt. in direct trade, up 2 percent monthly and up 19 percent year-on-year.

Sixty- to 90-lb. feeder lambs at auction averaged $205.01 per cwt. in October, down 2 percent monthly and up 13 percent year-on-year. In San Angelo feeders averaged $207.17 per cwt.; in Ft. Collins, they brought $193 per cwt. and in Sioux Falls feeders brought $214.85 per cwt. Feeder prices in Sioux Falls jumped 22 percent from a year ago. 

 

On Oct. 17, the Livestock Market Information Center (LMIC) reported that pasture and range conditions across the U.S. are the best since 1996. LMIC reported that the percentage of pasture and rangeland rated in very poor and poor condition was reported at 18 percent as of Oct. 22, compared to 28 percent last year and 35 percent for the five-year average.

However, the Western Region hasn’t fared as well. California ranks in the most severe drought category and parts of Oregon, Nevada and New Mexico fall into the second-worst drought category. 

Although pastures were good, feeder lamb prices were higher – due in part to cheaper corn – and feeder lamb weights were a couple lbs. lighter this fall compared to last. 

In October, the U.S. Department of Agriculture (USDA) estimated a record-large corn crop of 14.5 million bu.  If realized, prices for the 2014/15 season could average $3.40 per bushel, which would be the lowest since 2006/07 (USDA/ERS, 10/15/14). 

Lower corn translates directly to a drop in the cost of gain in lamb feedlots. This can help improve feeder margins, given relatively high slaughter lamb prices, but it also means it is relatively cheap to continue feeding lambs. This means that in spite of lower slaughter numbers in coming months, we might see heavier slaughter weights and an increase in production next year. Many producers and feeders are paid on a live weight basis, so the heavier the animal, the greater its value. 

The estimated cost of gain in Colorado feedlots dropped below $1 per lb. by October and could fall to as low as 75 cents per lb. with the bumper corn harvest. At $3.28 per bu., corn fell 6 percent in October and was 29 percent lower year-on-year.

In September, alfalfa averaged $197 per ton, down 6 percent monthly but up 2 percent from a year ago. 

 

Slaughter lamb prices at auction averaged $163.10 per cwt. in October, up 1 percent monthly. Prices averaged $159.90 per cwt. at San Angelo, $163.65 per cwt. in South Dakota, $165 per cwt. in Ft. Collins, $162.81 per cwt. in Kalona, Iowa and $167.33 per cwt. at the Equity Cooperative Livestock Sales Association auction.

In general, Equity received the highest prices across auctions. It is believed that this was achieved by continued strong competition in the market. In a given sale, all large packers are present with active bidding setting prices. 

In the first week of November at an Equity auction, wooled slaughter lambs for 125 lbs. received $175 per cwt., 135 lbs. brought $171 per cwt. and 140 lbs. averaged $163 per cwt. 

Slaughter lamb prices on a carcass-based formula averaged $319.86 per cwt. (live-equivalent of $161.66 per cwt.), 3 percent higher monthly. Slaughter lamb prices on a live, negotiated basis hit $163.05 per cwt., up 4 percent monthly. 

Overall, 2014 proved to be a good year for the slaughter lamb sector with prices up 8 percent at auction, 16-percent higher prices in the live, negotiated trade and up to a 26 percent increase in formula sale prices. 

On November 5, LMIC forecasted that national, slaughter lamb prices on a carcass basis could fall modestly to $303 to $308 per cwt. in the fourth quarter, but up 11 percent year-on-year. Sixty to 90-lb. feeders could also fall marginally to $192 to $198 per cwt. in the fourth quarter, up 4 percent annually. 

 

Flock rebuilding efforts might be underway in the industry given relatively high slaughter lamb prices and very good pasture conditions this summer and fall. This fall, replacement ewe prices were the highest in two and half years. 

Early October saw the first good trade in replacement ewes for the fall. Across classes, replacement ewes averaged $201.09 per head in October, 63 percent higher year-on-year. In October, 12-24 month ewes averaged $282.39 per head, 2-4 years averaged $256.79 per head, 5-6 years brought $157.29 per head and over 6 years saw $107.87 per head.

In early November, Medium and Large 1-2 running age replacement ewes (2-4 years) and to begin lambing in November for current delivery ranged from 180 to 200 lbs. brought $250 to $270 per head. 

 

This December could be the test we’ve been waiting for. The December holidays will hopefully see good movement in legs and racks, clearing some inventory. Cold storage stocks hit 39.7 million lbs. at the beginning of November, down 1 percent monthly and up 69 percent year-on-year. If the cold storage report comes in sharply lower in January, it might be a relief to those forming 2015 price expectations. 

December holiday sales are also significant for Easter planning. The two largest lamb consumption periods are first, Easter, and second, December. In data collected by USDA-AMS and compiled by LMIC, 235,800 head of lambs were on feed in Colorado, 8 percent higher year-on-year, but down 14 percent from its 5 year average for the month. Will this be enough to fill Easter orders? Given that very few feeders are traded in direct trades between now and Easter, we need to stretch out supply and/or fill needs at auctions. At our current capacity and current slaughter rates we have about a 6-week supply. 

 

The gross carcass value (wholesale composite) was $376.51 per cwt. in October, 2-percent higher monthly and 23 percent year-on-year. When we subtract out an estimated $33.75 per cwt. processing and packaging cost, the net carcass value was $342.76 per cwt. 

All primals were higher monthly and sharply higher from a year ago with the rack leading the charge.  

After Easter, the December holidays are a popular time for legs. At retail, the leg, semi boneless, receives over 4,000 feature ads across U.S. grocers, about 45 percent less than at Easter. This year, the feature-weighted semi boneless leg was $5.99 per lb. in the four weeks through mid-November, compared to $6.04 per lb. during the same period a year ago.  

October was too early for leg featuring. Instead, the monthly ad space flip-flopped between the economical shank and stew meat and the premium racks and loin chops. The shoulder blade chop also continued to receive feature ad space as it has for the entire year (USDA/AMS, 10/2014). 

Heading into December, the leg at wholesale was at a 3-year high. The leg, trotter-off, was $357.40 per cwt., up 2 percent monthly and up 8 percent from a year ago. The U.S. leg , trotter-off, partial boneless averaged $494 per cwt. in October, 6 percent higher monthly while the fresh Australian leg, semi boneless was lower at $411.26 per cwt., down 5 percent for the month.

In October, the rack was 48 percent higher year-on-year. Since the market slumped in 2012, the rack is the one primal that has seen the most impressive rebound. The 8-rib rack, medium, average $818.46 per cwt., up 1 percent monthly. 

The shoulder, square-cut, averaged $314.97 per cwt. in October, up 2 percent monthly and up 28 percent from a year ago. The loin, trimmed 4×4, at $524.55 per cwt., saw a 1-percent gain in October and was up 12 percent year-on-year. 

The domestic rack continued to command a premium to the imported rack in October. Both domestic and imported racks lost about 1 percent value in October, but remained sharply higher than a year ago. The domestic rack, roast-ready, frenched averaged $1,524.61 per cwt., while the rack, roast-ready, frenched, special (cap-off) averaged $1,985.82 per cwt. By comparison, the Australian fresh rack, frenched, cap-off, 28 oz. and up averaged $1,134.62 per cwt. in October, down 1 percent monthly. 

 

According to Meat & Livestock Australia, sheepskin prices saw some lift and steady demand in October as better quality new season lamb skins began to hit the market; however, skins carrying burr and seed still received heavy discounts (10/2014). 

In the U.S. Fall Clips received $5 per piece, up 4 percent; Imperial Fall Clips held at $6.25 per pelt; No. 1s held at $3.50 and No. 2s were worth 25 cents. No. 3s and 4s faced a fee of 50 cents per piece for disposal.

 

The American Lamb Board’s (ALB) Roadmap project has prioritized increasing awareness and use of value-based pricing to better target and fulfilling consumers’ demands. It is a challenging effort, however, because, unlike beef, it is more difficult to measure a quality lamb eating experience. 

The use of value-based pricing has fallen in the lamb industry: From about 49 percent in the early 2000s to about 39 percent in 2012 (USDA/GIPSA, 3/2014). Current estimates put its use even lower at around 29 percent. By comparison, value-based pricing sets prices for 63 percent of cattle and 76 percent of hogs. The use of USDA quality grades and yield grades do help improve lamb’s quality, to a certain extent. Yield grade determination is positively correlated with heavier slaughter lambs and the deposit of back fat.  

Some packers target yield grade 2 as the ideal yield grade, providing lower price premiums for yield grade 3s compared to yield grade 2s and discounts for yield grades 4 and 5 (ALB, 8/2014). It is agreed that, in general, consumers prefer yield grades 2s and 3s over grades 4s and 5s. Roughly 35 percent of lambs that are yield graded currently receive yield grades 2 with another 38 percent receiving yield grades 3. 

The average yield grade has increased over time (indicating a trend toward more yield grades 4s and 5s) from under 2.5 in the 1990s to around 2.8 over the last 12 months. 

Quality grades are less helpful in targeting consumer preferences for lamb. In the beef industry, the message is clear and quantifiable: Survey results showed that consumers preferred Prime (over 90 percent favorable) compared to Select (30 percent favorable) (ALB, 10/2014). In the lamb industry, over 90 percent of lambs grade Choice, which is great, but within this 90 percent we have differing flavor profiles. There appears to be a disconnect between consumers’ lamb eating experience and the ability of the industry to design a value-based pricing contract to target and reward those attributes that consumers are looking for. Grades are important at processing, but less so in defining lamb’s flavor and tenderness. As the ALB reports, “USDA grades for lamb carcasses have not been effectively used by the industry to differentiate value of either the live animal or the lamb product. 

The lamb industry cannot design a pricing scheme to reward “best-tasting” lamb because it is not clear what management style, feed, age, breed or sex produces the “best” lamb. Part of the problem is that what defines excellent lamb may differ consumer to consumer. More fundamentally, we know that some lambs have a bad or gamey taste and yet we don’t know, where, along the production chain, “bad” taste develops (ALB, 8/2014). 

The bottom line is that the industry has the means to manage fat, but is less able to manage flavor. 

Imagine a system whereby consumers could peel off a label from their retail lamb and enter a survey online. Did you enjoy your lamb? Yes or no? Would you buy your lamb again? Yes or no? Imagine the survey adds to a growing national database that could track consumers (his or her location, age, income group and ethnicity) and what cut he or she bought and a ranking of preferences. Imagine also that each online survey entry was coded by producer, processor, breaker and retailer. We could then connect the eating experience to how the lamb was raised and processed. We might learn something about consumers and lamb preferences that could then be worked into value-based pricing schemes.

The industry already has a system in place that can track consumer demand: The traceability system in place for animal health, public health and food safety interests. The system is already likely utilized by packers and processors to monitor consumer preferences. If lamb in one market sells like hotcakes, but is stagnant in another, the processor would probably ask whether this is a function of the consumer profile of the area or perhaps differences in lamb quality. 

According to USDA’s Animal and Plant Health Inspection Service (APHIS) traceability is the ability to follow an item or a group of items – be it animal, plant, food product or ingredient – from one point in the supply chain to another, either backwards or forwards. 

 

By November, the Australian dollar had fallen below 86 U.S. cents for the first time in four years. Reports are mixed, but it’s possible that the Australian dollar could fall further, to 85 or 80 U.S. cents. The weaker Australian dollar is good for its exports, making Australian lamb more competitive on global markets. 

Similarly, U.S. exports (pelts, wool, and lamb) become more expensive for foreigners as the dollar strengthens. However, the stronger dollar is good for imports (lamb) into the U.S. because they become cheaper for Americans.