Market Report

Lamb Gets ‘A-OK’ Under New USDA Dietary Guidelines

JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

The meat industry can breathe easy. Recently released U.S. Department of Agriculture dietary guidelines were more favorable toward meat than anticipated. Initially the guidelines were going to encourage Americans to cut back on meat in order to adopt more environmentally-sustainable eating habits. Instead, the guidelines highlighted lean meat as part of a healthy diet.

The guideline is for “A variety of protein foods, including seafood, lean meats and poultry, eggs, legumes (beans and peas), soy products, and nuts and seeds,” according to a USDA News Release. A potential setback was the recommendation that men and teenage boys – half our population – cut back on protein.

The guidelines can help boost lamb demand and the industry can help by telling its story of wholesomeness. How well this story is adopted can directly affect lamb demand and, thus, producer prices. Lamb is lean. Lean meats and poultry contain less than 10 grams of fat, 4.5 grams or less of saturated fats per 100 grams. Domestic lamb has 4.5 grams of fat per 100 grams, of which 1.88 grams is saturated fat. Other qualifying meats include 95 percent lean ground beef, pork tenderloin and skinless chicken or turkey breast.

LMIC Forecasted Lamb Inventory up in 2016

Last year turned out to be a good year for parts of the commercial lamb industry. We’ve seen higher prices, but we’ve also seen much lower values. Under the umbrella of a strong dollar and relatively more competitive imports, the industry was surprisingly strong. It adverted a large backup of over fat lambs that had the potential to be ruinous to price and demand compared to 2014. In part, the industry has USDA to thank for a purchase program that likely helped support prices (or halt the 2015 slide) and move some product out of heavily-stocked freezers.

In December, the Livestock Market Information Center forecasted that the 2016 breeding flock inventory numbers could be up slightly year-over-year. Lower sheep exports and reduced lamb and yearling slaughter point to increased retention. In the year through November, lamb and yearling harvest was down 5 percent year-on-year. This is more than what the lamb crop difference would suggest based on January inventory numbers (LMIC, 12/2/15). Additional evidence for inventory expansion is lower sheep harvest and lower live exports. In the year through November, mature sheep slaughter was down 18 percent and live sheep exports to Mexico were down 76 percent.

Early forecasts predict lower prices in the first quarter. In January, the LMIC forecasted that first-quarter slaughter lamb prices (carcass-based, formula/grid) could range from $276 to $281 per cwt., down 9 percent year-on-year. Sixty- to 90-lb. feeders were forecasted to average $185 to $190, down 10 percent year-on-year. Relatively ample supplies in feedlots and in the freezers might put downward pressure on prices. However, Easter falls in late March, so the earlier timing could lend some support in the first quarter. 

LMIC anticipates slaughter and feeder lamb prices to be lower than 2015 throughout the year. Slaughter lamb prices could be down 7 percent, on average, for the year and feeder prices could be also be down 7 percent. LMIC anticipates that production and imports could move lower, which lowers total available supply for consumption. Typically, tighter supplies boosts – not lowers – prices, but the significant freezer inventory could potentially drag on the industry.

The forecast for potentially lower imports in 2016 might be based upon the Australian forecasts for lower lamb harvest and lower lamb production due to continued dry conditions. Meat & Livestock Australia forecasted that lamb exports in 2016 could be down 3 percent (12/1/2015). From Australia’s perspective, its lamb exports to the U.S. are forecast to remain fairly steady year-on-year, with a slightly stronger upside potential, (12/1/15). The Middle East is also a popular Australian export market, which competes against the U.S. for lamb.

As always, consumer demand for lamb is tough to predict and alone can drive prices up or down. M&LA sees two sources of U.S. growth: “Younger consumers (millennials) showing a willingness to experiment with different international cuisine styles, and the growth of new fast casual restaurant concepts, which can create opportunities for lamb.”

Second, A “fast growing Muslim, Indian (and broader Indian subcontinent), Hispanic and other immigrant population, who traditionally use lamb in their cooking, are expanding the potential buying group for lamb in the U.S.,” (12/1/15).

Feeder Lamb Auction Prices Higher Monthly

By late 2015, most of feeder lamb trade was complete for the year as lambs were moved into feedlots or to alternative feed sources to slow growth.        

In December, feeder lamb prices (60-90 lb.) at auction in Colorado, South Dakota and Texas gained 7 percent to $188.32 per cwt. In 2015, auction feeder lamb prices fell 6 percent to $192.81 per cwt.

No trades were reported in December for feeder lambs in direct trade. For the year, feeders averaged $161.54 per cwt., down 9 percent year-on-year. Last year was on par with its 2011-15 average, but 18 percent lower than the $197 per cwt. record set in 2011.

In early 2016, some feeders traded direct. The USDA Agricultural Marketing Service explained, “The feeder lambs are all old crop pasture lambs that were traded and retained in their current locations on pasture.” Old crop feeders weighing 105-110 lbs. brought $125 in California and New Mexico.

In December, AMS reported concern that many feeders will reach market ready weights early in 2016 and packers will struggle to keep up, preventing a backup of overfat lambs. The fact that January saw more lambs on feed in Colorado feedlots relative to last year and relative to its 2010-14 average lends support to the AMS concern.

December Slaughter Lamb Prices Lower

Slaughter lambs weakened unseasonably in December. AMS reported: The lack of demand and a strong U.S. dollar are currently major concerns, as this is typically one of the peak times for lamb orders during the year and orders were seemingly lower as packers continue to decrease bids (12/18/15).

We don’t have the data yet to confirm, but fresh imports might have tempered American lamb holiday sales, curbing domestic demand. We do know that domestic prices at retail were lower year-to-year suggesting lower demand.

Slaughter lamb prices at auction took a tumble in December, falling 7 percent to $133.56 per cwt. Carcass-based formula prices fell 2 percent in December monthly to $298.16 per cwt. ($150.87 per cwt.). Live, negotiated prices averaged $144.42 per cwt., down 3 percent monthly.

Year’s End Slaughter Lamb Prices

Last year saw auction prices weaken as contracted lambs on a grid, or formula, gained. 

Overall the 2015 live, auction average was down 6 percent to $146.92 per cwt. Last year was an about average year for auction lamb prices – we’ve seen higher and we’ve seen lower. In 2011, we saw $172 per cwt., and last year we averaged $157 per cwt. But remember 2013 when the average was only $119 per cwt?

Slaughter lamb prices on a carcass-based formula softened by 0.43 percent in 2015 to $299.55 per cwt. ($150 per cwt. live weight). The live, negotiated average was $145.63 per cwt. in 2015, down 7 percent year-on-year.

Meat Market Down Unseasonably

The December holidays saw retail featuring more than triple as rack and legs took the spotlight. Leg prices were mixed across cuts, but down 3 percent on average year-to-year. The bone-in leg, for example, was down 68 cents per lb. to $5.57 per lb., but the leg, shank/butt, was up 57 cents per lb. to $6.02 per lb. At $12.98 per lb., the rack was off 4 percent or 55 cents per lb.

In December, carcass values fell 2 percent to $321.25 per cwt. For the year, the carcass value averaged $325.13 per cwt., up nearly 1 percent year-on-year.

In December, the lamb cutout held about steady with November. The net carcass value (after processing and packaging) averaged $327.02 per cwt. in December, 0.07 percent higher monthly and 5 percent lower year-on-year. Apart from the loin, primals were 3 to 9 percent lower in December year-on-year.

In 2015, the net cutout value was $328.26 per cwt., down 2 percent year-on-year. For the year, the loin supported the cutout when all other primals weakened. The rack lost 7 percent, the leg lost 5 percent, shoulders lost 1 percent and loins were up 4 percent. Ground lamb gained 5 percent annually.

The volatile cutout directly affects slaughter lamb prices, which in turn, affects prices for feeders. Price volatility in the rack can cause volatility in the cutout (composite of wholesale cuts). Over the past three years the standard deviation – how widely values are dispersed from the average – of the wholesale rack was $126 per cwt., over four times more volatile than any other primal (shoulder, loins, leg). The leg and shoulder contribute more to the weight of the cutout (32 lbs. and 24 lbs., respectively), but at 10 percent and higher-valued, the rack is an important contributor to the cutout value.

Investigating why rack prices are volatile might enable the industry to mitigate wholesale price volatility – which is a cost to the industry.

Pelt Exports Down

Last year saw sharply lower pelt values and lower exports. In the marketing year ending September 2015, the U.S. exported 1.15 million square meters of pelts, down 11 percent year-on-year. By value, pelt exports totaled $15.5 million, down 36 percent year-on-year and down 49 percent from its 2011-14 average.

The largest pelt export market is China with a 71 percent share, followed by Mexico with 15 percent and Turkey at 5 percent. Although Mexico imported an important share, per unit value to China is more than twice that of selling pelts to Mexico.

In 2015, previously shorn Fall Clips averaged $4.42 per piece, down 34 percent; No. 1 pelts were $1.88 per pelt, down 65 percent; No. 2s and 3s were down 100 to 200 percent to negative territory. Imperial Fall Clips lost 32 percent to $5.83 per piece. December averages did little to support the annual average with longer-wooled pelts seeing lower prices. 

Tighter 2015 Supplies

Total lamb and mutton supplies – including imports – in 2015 through November were down an estimated 6 percent to 267.2 million lbs.

In 2015, lamb harvest was down 4 percent year-on-year to an estimated 1.8 million head, production was down 3 percent to an estimated 131.1 million lbs. Slaughter weights were nearly two lbs. heavier in 2015 at 139 lbs., compensating for lower harvest numbers.

At the beginning of December, 44.7 million lbs. of lamb and mutton were in the freezers, 10 percent higher monthly and 43 percent higher year-on-year. It is not yet known if and when the significant cold storage stocks will impact the market. It is believed that the majority of freezer stocks are imports, but not confirmed. It is anticipated that the product will slowly be sold, hopefully minimizing the impact on fresh lamb prices.

Total lamb and mutton imports were 12 percent higher in the 10 months through October at 173.5 million lbs. Lamb imports were up 10 percent to 145.7 million lbs., of which Australia’s lamb imports were up 8 percent to 103.1 million lbs. and New Zealand’s were up 15 percent to 40.5 million lbs.
 

Limited Late-Year Wool Sales

In December, more than 100,000 lbs. of clean wool sold in some “clean up” sales where “smaller amounts of wool are attempting to be marketed” (USDA/AMS, 12/18/15). Sales were limited, AMS explained, because many growers are likely holding onto their wool expected a spring rally (12/18/15).

In December, Fleece States (mostly Midwest) wool received $3.34 per lb. clean for 22 micron to $2.15 per lb. clean for 27 micron wools. In the Territory States (Western), wools brought $3.41 per lb. clean for 22 micron, $2.84 per lb. for 25 micron and $1.67 per lb. for 30-34 micron.

In 2015, Territory States wool was down 5 percent year-on-year on average. In general, the finer microns saw the steepest 2015 discounts at 11 to 13 percent with 19 and 20 microns in the low $4.00s and high $3.00s. The broader microns (28+) averaged $2.01 per lb. clean and were up 3 percent year-on-year.

In the Fleece States, annual trends were mixed, but in general the finer microns also saw steeper discounts. Twenty-one micron averaged $3.64 per lb., down 7 percent year-on-year. On average, 26 micron was down 1 percent to $2.88 per lb.
Domestic wool production has contracted in the last five years, but overall use has also contracted. The U.S. isn’t importing more wool to meet expanded domestic manufacturing needs.

Compared to five years ago, wool production was down an estimated 9 percent to 14.2 million lbs., imports were down 18 percent to 7 million lbs., domestic mill use was down 25 percent to 15 million lbs (domestic mill use has been estimated since 2013), exports totaled an estimated 8 million lbs., down 17 percent and total use domestically was down 22 percent to 23 million lbs.

About half of the wool used in domestic mills is imported. Again, about half of the processed wool in the U.S. is exported. This means that the U.S. wool industry is heavily dependent upon exchange rates for the competitivness to other country of origin wools. A strong US$ makes wool imports relatively less expensive, however, on the export end, a strong US$ makes our exports less competitive on world markets. Wool processors watch exchange rates closely.

U.S. and international wool prices could move higher in 2016 if forecasts for a tighter Australian clip materialize. According to the Australian Wool Production Forecasting Committee, the forecasted 7 percent contraction reflects both a 5 percent fall in shorn sheep numbers and a 2 percent drop in average fleece weights. The news comes as some surprise as Australian wool production has held steady over the past few years.