Sheep Industry’s End-of-Year Report Card
Julie Stepanek Shiflett, Ph.D.
Juniper Economic Consulting
This year, the industry remained surprisingly resilient (thank you, lamb demand) given record-high freezer inventories, contracted domestic harvest and production, and through September, 3 percent higher lamb imports. Prices for both feeders and slaughter lambs at auction were down about 6 percent year-on-year although formula/grid slaughter lamb prices were up 1 percent. The wholesale market was down 1 percent through October.
Hindsight revealed that perhaps the concern of backed up, heavier lambs last spring and summer was premature. It wasn’t the train wreck some anticipated. Perhaps the industry is doing a better job of managing its fluctuating weights through improved sorting, selection of cuts and marketing. Perhaps, also, tighter supplies and lower imports put pressure on the fresh lamb market.
Slaughter lamb prices and the percent of yield grade 4s and 5s (lower lbs. of expected useable retail cuts) are inversely related because as harvest weights rise, yield grades rise. The percent of yield grades 4s and 5s in total harvest has been around 17 percent, but this year the percent rose to an average 26 percent for the second and third quarters. This is high, but low relative to the 36 percent of 4s and 5s observed in the same period in 2012.
As lambs get heavier, they inevitably also get older. Thus, not only does the amount of retail cuts drop, but also less lamb is available for graded programs. In early July, the amount of lambs in total slaughter was reported as steady, but the percent of lambs actually graded fell to 57 percent, down from an average 71 percent in the first quarter and 62 percent in the second.
Whether a range operator or farm flock producer, whether selling to a large, national packer or to a local restaurant, butcher or neighbor, all producers are unified in the common goal of providing a high-quality eating experience. December is a big month for the lamb industry: Chanukah, Dec. 7-14; Mawlid al-Nabi, Dec. 23; and Western Christmas, Dec. 25. Holiday lamb experiences can determine how lamb figures into 2016 budgets. Each producers’ efforts towards expanding lamb demand can benefit all through reinvestment in infrastructure and research.
Concern over Harvest Weight
By early November, there was some concern within the industry that weekly slaughter rates were too low to keep pace with available market-ready lamb supplies. In October, 32 percent of formula/grid lambs going to market were 85 lbs. and heavier compared to 2 percent a year ago. In general, as lambs get heavier – above roughly 70 per lb. carcass-basis – the amount of useable retail meat falls and lambs are graded 4s and 5s rather than the optimal 2s and 3s.
In late October, the U.S. Department of Agriculture’s Agricultural Marketing Service reported: There are still concerns that a strong U.S. dollar combined with a continually weak Australian dollar could see imports flood the market and cause backups that will lower harvest numbers further. In turn, weights of lambs coming from feedlots may continue getting heavier as we get into the winter months (10/30/15).
In the year through October, lamb harvest was down an estimated 5 percent year-on-year to 1.6 million head, while production was down an estimated 4 percent to 111 million lbs.
Hopefully, holiday sales will pick up into December, curbing a potential problem of over fat lambs in early 2016.
Restaurant Sales Rate Slows
The latest data from the National Restaurant Association Restaurant Performance Index showed that even though the foodservice sector continues to grow, the pace of growth is slower than earlier in the year (DLR, 11/3/15). Restaurant foot traffic has slowed and is close to dropping into contraction territory. The Daily Livestock Report added that slow growth trends could persist into the winter.
The DLR reported higher incomes and employment have been shown to be important drivers in foodservice meat demand (11/3/15). Overall, job growth has been disappointing. DLR commented that we have seen a relatively strong correlation between the number of new jobs added and the restaurant performance index. As consumers secure jobs, they eat out more and spend more eating out.
Forecast for 2016
Lamb demand could see heighted competition next year as substitute proteins see lower prices due to increased production. The latest USDA/World Agricultural Supply and Demand Estimates report forecasted a 3 percent increase in red meat and poultry production in 2016 (10/9/15). Falling prices of substitute proteins can leave lamb relatively less competitive.
USDA/WASDE reported: Cattle prices for 2015 and 2016 are reduced on current large supplies of market-ready cattle, weaker demand and competition from relatively large supplies of competing meats (10/9/15).
That said, 2015 was also a record year for red meat and poultry production, and it appears lamb demand held up fairly well.
In late October, LMIC released forecasts of lamb and mutton production and supplies for 2016. In brief, domestic production could be up 3 percent, imports down 5 percent and total disappearance, or consumption, up 0.3 percent. What this means is that lamb consumption per person could remain virtually unchanged.
LMIC forecasted that freezer stocks heading into the fourth quarter could top 42 million lbs., but be drawn down sharply to 31 million lbs. by the beginning of 2016. If imports remain lower than last December and the industry is able to reduce cold storage stocks then this supply factor alone, could support prices heading into 2016.
Early 2016 forecasts from LMIC report slaughter lamb prices on a direct carcass basis could range from $307-$319 per cwt., up 2 percent year-on-year. Feeder lambs, 60-90 lbs., could range $200-$216 per cwt., up 3 percent year-on-year (11/9/15).
Where are all the Feeders?
The number of feeder lambs sold direct to commercial feedlots in the year through October totaled 83,600 head, down 31 percent from a year ago and 64-percent off its five-year average. The number of feeders isn’t lower, rather the method of procurement changed: fewer direct sales and more auction buys.
The number of Colorado lambs on feed was up in early November. Commercial lambs on feed totaled 274.8 thousand head, up 3 percent from its five-year average for the month and 17 percent higher year-on-year (LMIC from USDA/AMS, 11/2/2015).
Feeder Lamb Prices
In October, feeder lambs in direct trade strengthened while weakening at auction. By early November, AMS reported that feeder lambs that have been trading are noticed to have a weak undertone (11/2/15). Perhaps gaining weights and slower slaughter rates have feeders nervous over expected returns. In general, many lamb feeders lost money in 2014 and had hoped to recoup losses this year.
Feeder lamb prices in direct trade gained 5 percent in October to $172.64 per cwt. for a weighted-average 92.9 lbs., 13 percent lower year-on-year.
At auction, 90-100 lb. feeders averaged $171.83 per cwt., 5 percent lower monthly and 16 percent lower than a year ago. Prices were averaged across Colorado, South Dakota and Texas auctions.
Slaughter Lamb Prices Mixed
In October, slaughter lamb prices at auction generally softened while prices in direct trades (live or on formula/grid) strengthened. Typically, when direct prices rise above auction levels, packers have sufficient contracted supplies in the pipeline and therefore don’t need to pick up the slack at auction.
The share of formula purchases in total federally-inspected slaughter jumped from 17 percent to 22 percent in October. Live, negotiated purchases gained 3 percentage points while estimated auction purchases dropped 8 percentage points to 45 percent.
Slaughter lamb prices at auction brought $151.11 per cwt. in October, down 3 percent monthly and 7 percent lower year-on-year. Centennial auction in Fort Collins, Colo., was the highest reported market in October at $158.13 per cwt. with South Dakota and the Equity Electronic auction close behind at $157 per cwt. Kalona, Iowa, averaged $151 per cwt. while San Angelo, Texas, saw the steepest drop, down to an average $140 per cwt.
At $310.30 per cwt., slaughter lamb prices on a carcass based formula or grid were up 1 percent monthly and down 3 percent year-on-year. The live equivalent was $154.11 per cwt.
The live, negotiated slaughter lamb price averaged $157.79 per cwt., up 2 percent monthly and down 3 percent from a year ago.
October saw higher pelt values in the U.S. as quality generally improved. AMS reported prices 25 to 50 cents higher on quality pelts. In Australia, higher quality pelts also received premiums. Quality helped support prices, but so was another demand factor. The re-opening of some Chinese tanneries following pollution management efforts has “led to some strengthening in the sheepskin market,” (The Sheep Site, 10/21/15).
Previously shorn U.S. fall clips averaged $4.15 per piece in October, up 14 percent monthly and down 17 percent year-on-year. No. 1 pelts held steady at $1 per pelt, down 71 percent year-on-year. Packers continued to ask for disposal fees for the shorter-length No. 2, 3 and 4 pelts. Never-shorn Californian pelts averaged $5.28 per piece, up 11 percent monthly and 8 percent lower than a year ago.
Value-Added Pays
Creating value occurs with actual or perceived value to a customer for a superior product or service (AgMRC). New products and enhanced product characteristics can add value.
Lamb consumers will pay for the added value of consistency, versatility and convenience. The 8-rib rack, medium, averaged $734 per cwt. in October, while the roast-ready, frenched rack was nearly double at $1,431 per cwt., and the rack, roast-ready, frenched, special (cap-off), captured another 29 percent at an average $1,840 per cwt.
In theory, the industry aims to provide a product that captures exactly what everyone is willing to pay for lamb, some a lot, others, not as much. This is impossible, but cuts at different price points help. At $481 per cwt., the leg, trotter-off, partial boneless added 49 percent to the $345 per cwt. leg, trotter-off. The shoulder, square-cut, boneless received 83 percent more per lb. than the $303 per cwt. shoulder square-cut in October.
Wool Market Gained
In late October, Australian wool prices broke a five-week losing streak to lift the AWEX Eastern Market Indicator 36 cents to 1,205 Australian cents clean (Sheep Central, 10/23/15). In U.S. dollars the market lifted to 872 U.S. cents per kg.
Interest from overseas buyers supported the market. Further, a marginal depreciation of the Australian dollar helped those buying in U.S. dollars. Additionally, available wool supplies were about 8 percent less than expected.
In early November, the market was more subdued with buyers more selective and looking only to fill orders as the Australian dollar strengthened again.
Regardless of micron, Australian buyers were looking for quality in October with heavy discounts applied to wool types outside of order specifications, especially those with a high CVH (coefficient of variation of hauteur) (Weekly Wool Market, 11/5/15).
Hauteur is fiber length in the wool top. Hauteur is closely correlated with the average staple length and staple strength of the greasy wool measured prior to processing. By early November, price discounts in Australia were widening for high mid-break wools as mills looked for better performing wools (Techwool, 11/5/15).
AMS reported 43,000 lbs. of confirmed clean wool trades in October (10/30/15). As of late October, AMS reported wool was still being collected from fall shorn lambs for possible November or December trades.
October clean wool sales brought an 8 percent discount from sales this spring, partly due to generally lower-valued wool traded, but also likely due to the 2 percent drop in Australian wool prices. AMS reported that October wool trades saw some resistance from buyers due to the strong U.S. dollar (10/30/15).
In the Territory States (western), 21 micron brought $3.35 per lbs. clean, 23 micron averaged $3.25 per lb. and 25 micron averaged $2.90 per lb.
Wool growers can receive a price advantage if they sell on a clean basis. All farm sales are in the raw, greasy form, but using a clean wool price to derive the greasy price can add value to growers’ wool. Greasy price is equal to the clean price multiplied by yield less transport/handling. Growers can core test their wool for yield or might have a good estimate of yield through past sales. Yield is the amount of clean wool produced from raw (or grease) wool in the scouring process.
A grower might agree with the buyer that the yield is an estimated 50 percent. Second, the buyer and grower can agree on a going clean wool price (Australian imported clean wool can be used as a proxy). Therefore, if the clean wool price is $3.50 per lb. and the estimated yield is 50 percent, then the price paid to the grower is $1.75 per lb. greasy (assume no handling/transport fees).
If the buyer doesn’t offer a clean price basis, then the buyer will still receive the clean wool price at sale of $3.50 per lb. clean, but perhaps only offer the grower $1.65 per lb. greasy, keeping the 10 cents per lb. premium that could have gone to the grower.
In August, total U.S. wool exports increased seasonally as winter fashion orders were confirmed. In the year through August, wool exports were down 15 percent to 1.9 million kgs, sales were down 32 percent to $12 million with a rough estimate of unit value at $6.47 per lb. clean, down 20 percent year-on-year.
U.S. wool may indirectly receive a demand boost under the rising concern over the Australian practice of muesling. In October, Australian auctions witnessed premiums for non-muesled merino wool. Laurence Modiano – director of G Modiano Ltd – said there was significant demand for non-mulesed wool, and he wanted to see pain-relief become mandatory (WoolNews.net, 10/2015).
Mr. Modiano added, “The demand we in Europe have been receiving for Merino wool from non-mulesed sheep has increased by 50 percent in the past six months. Much of it is destined for the USA, home to many of the world’s largest brands, much of it is for Europe. Mulesing is an issue that isn’t going away.”