Market Analysis Without Formula Pricing is Just Guesswork
JULIE STEPANEK SHIFLETT, Ph.D.
Juniper Economic Consulting
After eight years of annual sheep inventory contractions, 2015 saw the second consecutive year of expansion. Some regions saw sustained growth while others continued to contract. Sustained growth is still fragile for the industry as a whole, dependent upon favorable weather and favorable returns. Lack of formula/grid pricing is not helping the industry grow in this unstable period.
Lack of prices reduces negotiating power of producers and feeders. Furthermore, the only risk management tool – LRP-Lamb Insurance – is suspended, further eroding risk management tools. The insurance was offered for sale for the first time three months in early May.
Formula/grid slaughter lamb prices have not been reported since early February. One-third of the federally-inspected market in April didn’t have reported prices. That is, 30 percent of the commercial market was traded using formula/grids (without price reporting) – up 22 percent year-on-year. In the first trimester of 2016, 29 percent of lambs were traded on formulas/grids, compared to 24 percent in 2015 and 20 percent in 2014.
Harvesting more lambs using value-based pricing – rather than weight alone – can lead toward improved lamb quality. However, lack of price reporting significantly reduces its beneficial impact toward growth.
It is impossible to know whether the weaker live, negotiated lamb prices (the other price series that is privately negotiated with packers) in April was due to the lack of formula/grid pricing. There are no quality indicators reported in the live negotiated price series. Live, negotiated and grid prices track closely over time. Auction slaughter lamb prices strengthened in April. Auction prices often start to weaken before formula/grid prices weaken, so higher auction prices suggest the grid market should have strengthened.
However, another factor points to lower live, negotiated and formula/grid markets. It is hypothesized that as yield grade 4s and 5s in harvest increased in the first quarter, formula/grid prices weakened (even though we don’t have prices). In the first quarter, 28 percent of harvested lambs were yield grade 4s and 5s, compared to 22 percent in the fourth quarter of 2015 and 19 percent a year ago. As lambs put on increased back fat, they might cost less up front (due to discounts in grid pricing), but more in trimming and less at sale. Packers might be losing money and therefore offer lower prices for live, negotiated lambs and less at auction.
Live, negotiated slaughter lamb prices averaged $131.16 per cwt. in April, down 3 percent monthly and up 0.4 percent year-on-year.
Slaughter lamb prices at auction averaged $138 per cwt. in April, up 3 percent monthly and 0.32-percent lower year-on-year. The lows and highs in April were set by $135 per cwt. in San Angelo, Texas, and $140 per cwt. in South Dakota.
Ramadan Boosts Lamb Demand
The lamb market is dividing into two main segments – ethnic lamb consumers (representing about 60 percent of consumption) and everyone else, (Williams, G. et al., 1/2011). Within ethnic demand, religious holidays have a significant impact on U.S. lamb demand. Ramadan – the Muslim month of fasting – begins June 6 and ends July 7-9 with Eid ul-Fitr, the Festival of Fast Breaking. Lightweight 60 to 80 lbs. lambs are preferred.
About one-third of the ethnic lamb consumers surveyed reported that they prepare lamb for Ramadan (31 percent) and Eid-al-Fitr (33 percent) (Williams, G. et al., 1/2011). If one-third of U.S. Muslims (about 3.3 million) share a lamb twice during Ramadan, then this totals to nearly three weeks of commercial production, but about half that tonnage due to the demand for a lighterweight lamb.
Feeder Market Higher
Feeder lambs in direct trade jumped 10 percent in April to $156.50 per cwt., 10 percent higher year-on-year. An early-April trade of more than 4,000 lambs out of California at 120 lbs. brought $136 per cwt. Smaller lots of lambs traded at lighter weights (90-102 lbs.) and at $150-$175 per cwt.
Sixty- to 90-lb. feeders at auction – Colorado, South Dakota and Texas – jumped 8 percent in April to $204.86 per cwt., 2 percent higher year-on-year. San Angelo and Sioux Falls, S.D., both saw feeder lamb prices top $210 per cwt. in April.
Increased Frozen Lamb Imports
Australian lamb imports through April were down 17 percent year-on-year. However, it is suspected the industry still has significant lamb imports in the freezers. By April, cold storage stocks were up 18 percent monthly to 40.4 million lbs. and up 9 percent year-on-year.
It is unknown, but hypothesized that the U.S. lamb industry is consuming a greater proportion of frozen product, which helps lower the price point and helps move product, but doesn’t necessarily maximize returns. During the past three years, Australia has increased its proportion and total volume of frozen product.
It is difficult to tell whether the current downturn in some markets is seasonal, due to lack of reported formula prices, lower-priced beef, stagnant incomes or due to the release of cold storage stocks.
The Livestock Marketing Information Center commented that the “elevated” level of freezer inventory is “concerning for the industry as it acts as a price overhang in the market,” (4/7/16). LMIC continued, “Product in cold storage can only be frozen for a certain amount of time before it has to be sold at a steep discount or disposed of,” (4/7/16).
Yield Grades Rise
Can the industry avoid over fat lambs this summer? With wholesale meat prices lower and yield grades 4s and 5s higher through March, it is hypothesized that packers are seeing a push-back at retail. The issue is not necessarily that there is excess supply for a given demand, but that demand is contracting. In Colorado feedlots, the number of lambs on feed in May was 5 percent lower than a year ago and 8 percent lower than its 2010-14 average (USDA/AMS, LMIC).
Harvest weights typically see a peak during Easter, fall off sharply post-Easter only to rise again in the summer when we see the heaviest weights of the year. It is during the summer that packers and feeders struggle to process lambs in feedlots that were born the previous year (old crop lambs) during a relatively low-demand period of the year. It is during this period when lambs can get backed up in feedlots and over fat.
Without formula trades reported it is difficult to determine whether commercial lambs are getting backed up in Colorado feedlots. It is still possible – with lower meat prices and significant cold storage stocks – that old crop lambs could get backed up this summer and prices fall further still.
Pelt Prices Lower
Pelt prices are heavily dependent upon variability in size, length of wool, micron and other quality factors such as presence of discolored fiber, manure, seed and processing defects.
Many pelt types saw lower prices in April. Standard unshorn pelts (8 square feet with some to heavy manure/seed contamination) fell into negative territory: $1.59 per pelt in March to -$2.50 per piece in April. Unshorn Supreme pelts brought $7.55 to $9.75 per piece in April. At the low end, unshorn Damaged/Puller pelts averaged -$2.50 to -$1.00 per piece.
Meat Market Softer Monthly and Year-on-year
In April, the net carcass value (after processing/packaging) slipped 1 percent to $309.30 per cwt., 7 percent lower year-on-year. All primals slumped with the exception of the loins, which gained a marginal 0.52 percent to $518.80 per cwt. The leg slipped one-half percent to $307.54 per cwt., the shoulder, square-cut, fell 3 percent to $271.17 per cwt.
The rack, 8-rib medium, lost 1 percent to $676.48 per cwt., down 12 percent year-on-year. The sub-primal rack cuts performed better than the primal rack. The rack, roast-ready, frenched, averaged $1,351.50 per cwt., up 1 percent monthly and down 1.5 percent year-on-year. The rack, roast-ready, frenched special (cap-off) averaged $1,810.13 per cwt., up 5 percent monthly and down one-half percent year-on-year.
Many carcass trades were not reported due to confidentiality concerns. Sixty five to 75-lb. carcasses averaged $284.85 per cwt., down 1 percent monthly and 12-percent lower year-on-year. Seventy five to 85-lb. carcasses brought $274.98 per cwt., down 1 percent monthly and 10 percent lower year-on-year.
In April, Meat and Livestock Australia reported higher-than-expected ewe numbers which meant revised, higher estimates for 2016 lambs harvested, production and exports.
“Australian lamb exports in 2016 are forecast to be fairly steady with the past two years before gradually growing with production by 2020,” (MLA, 4/2016).
Wool Market Higher
The Australian wool market moved higher in April and early May due to continued strong wool demand (WTiN Wool Market Report, 5/9/16). The Australian Wool Exchange Eastern Market Indicator averaged 1,268 Australian cents per kilo clean on May 5, up 2 percent year-on-year. In U.S. dollars, the EMI was 431 cents per lb., down 4 percent year-on-year.
Since late 2014, wool prices in Australian dollars has seen a strong upward trend; however, this trend is flat when converted to U.S. dollars. The strength of the U.S. dollar has muted – and continues to suppress – some of the rise in wool prices for American growers.
In the Territory States, clean wool prices in the five weeks to May 6 averaged 12 percent higher year-on-year, and – where a comparison could be calculated – about 3 percent higher monthly. Eighteen micron averaged $4.54 per lb. clean, 20 micron was $4.14 per lb., 22 micron as $3.90 per lb., 24 micron averaged $3.23 per lb. and
26 micron brought $2.94 per lb.
Fleece States wool brought about 18 percent more than a year ago in the five weeks through May 6. Twenty-micron averaged $4.17 per lb. clean, 22 micron saw $3.81 per lb. and 24 micron averaged $3.42 per lbs.
In Texas and New Mexico, 18 micron brought $4.14 per lb. clean, 19 micron averaged 4.10 per lb., 20 micron was $4.10 and 21 micron averaged $4.06 per lb. in the five weeks through May 6. Neither monthly nor year-on-year prices were available for comparison.
AMS reported in early May: Much of the wool being traded has seen U.S. prices at 80 to 85 percent of Australia prices (AMS, 5/2016). This is encouraging for U.S. wool, which was often brought in the 60th and 70th percentile in the 2000s (USDA/ERS). AMS continued: Paint free lots received a 2 to 5 cent premium per pound. Higher vegetable matter and shorter length wools fell to only 70 to 75 percent of Australian prices (5/6/16).
In the near future, wool prices are uncertain. Lower wool production worldwide could support prices, but be offset by lower domestic Chinese wool apparel demand, slow income growth internationally and relatively low cotton prices (Wilcox, C., 4/4/16).