Market Report

Quality Pays

JULIE STEPANEK-SHIFLETT, Ph.D.
Juniper Economic Consulting

Feeder lamb prices made an impressive rebound this year, but slaughter lamb prices remained marginally lower in July. The lamb meat complex has weakened since January with an important uptick in July. Whether July’s gain is sustained or an anomaly is yet to be seen, but overall lower prices across the lamb complex raises questions of quality and consistency of quality. 

A strong negative correlation between wholesale lamb prices and the percent of harvest that is yield grade 4 and 5 – increased back fat cover – suggests that lower quality lamb is associated with lower prices. When older lambs head for harvest – as has been the case this summer – they are often heavier and might be stamped yield grade 4 or 5 when yield grade 3 is desirable.

Yield grades estimate the amount of trimmed, boneless retail cuts from the leg, loin, rib and shoulder, and is measured by the amount of external fat in the carcass. Yield grades are 1 through 5 with 1 being the leanest and 5 the fattest. Yield grades 2 and 3 often receive price premiums to yield grades 4, 5 and 1 (being too thin).

Correlation doesn’t imply causality, but suggests an association: 1 represents a strong correlation, 0 represents no correlation. The gross carcass value (wholesale average) and the percent of carcasses stamped with yield grade 5 (increased back fat) is -0.64 indicating that wholesale prices fall when there is increased harvest of yield grade 5 lambs. The correlation coefficient between yield grade 4 and prices is -0.33. 

Perhaps the greatest challenge facing the lamb industry is judging the lamb eating experience from a live animal. Colorado State University has conducted a National Lamb Quality Audit. Two goals include understanding factors contributing to lamb flavor, their impact on consumer satisfaction, and aligning flavor characteristics with target markets. The second goal is how to improve lamb management to hit market-ready targets for product size, composition and eating satisfaction while reducing production costs. It is known that quality and consistency pays: 71 percent of retailers will pay a premium for guaranteed quality.

Feeders Gained

Sixty- to 90-lb. feeders at auction averaged $184.37 per cwt. in July, down 3 percent monthly and 3 percent lower year-on-year. San Angelo (Texas) feeders averaged $182.25 per cwt. and in Sioux Falls (S.D.), $186.48 per cwt.

Feeder lamb prices in direct trade averaged $178.75 per cwt. in July, 4 percent higher monthly and 3 percent higher year-on-year. July’s average was 12 percent higher than its five-year average for the month.

In the past couple of years, feeder lamb prices in direct trade have been noticeably lower than auction feeder prices. This is likely due to an uptick in ethnic demand and perhaps increased competition among the largest packers to secure supplies for efficient slaughter chain volume. 

Through July, 63,900 head of lambs were reported in direct feeder trades, compared to 30,500 head during the same period a year ago. The significant increase in feedlot lambs is now being felt as lambs have backed up.

As slaughter lambs have gotten heavier, the portion of lambs receiving USDA grades has fallen:
61 percent in May, 56 percent in June and 54 percent in July. USDA grades are often associated with price premiums; lamb packers often use private labels on product that is not necessarily graded and may be too mature to be graded as lamb.

According to the Agricultural Marketing Service, most of the California springers finished trading in early July at which time Idaho lambs began trading. It is believed that old crop lambs in western feedlots (born in the first-half of 2016) were still being harvested in late July. The Agricultural Marketing Service reported in early July that Midwest feeders remained current on their weights and were starting to see feeder lambs being sold through the traditional sale barn channels.  

Slaughter Lamb Prices Soften

Slaughter lamb prices at auction averaged $152.62 per cwt. in July, down 1 percent from June and about steady with a year ago. July’s auction average was 9 percent higher than July’s five-year monthly average.

Auction prices averaged $130.33 per cwt., South Dakota averaged $166.08 per cwt., Fort Collins (Colo.) saw $152.50 per cwt., Kalona (Iowa) averaged $155.50 per cwt. Equity Electronic Auction saw $167.25 per cwt. for its one-day sale of 340 head on July 28 in North Dakota at an average 145 lbs.

Live, negotiated slaughter lamb prices averaged $163.26 per cwt., up 9 percent monthly and 2 percent higher year-on-year. Weights of live, negotiated lambs were current at an average 147.70 lbs.; however, negotiated lambs heading to harvest only represented 12 percent of total federally-inspected harvest in July.
Forty-three percent of total federally inspected slaughter in July was packer-owned and formula/grid trades with an unknown weight and unknown value due to lack of reporting due to confidentiality rules.

We don’t have prices for formula trades due to confidentiality rules, but we do know volumes by weight classes. For the past three months, one-third of lambs priced on a formula/grid were 95 lbs. and heavier carcasses (about 190 lbs. live). 

Lamb at Wholesale Stronger

The wholesale lamb market weakened through 2016 with a July uptick. The rack and shoulder posted lower values from a year ago, while the leg and loin helped support the net carcass value with a 1 percent gain from a year ago. 

The net carcass value – composite of wholesale values less processing and packaging – averaged $311.18 per cwt. in July, up 1 percent monthly and 4 percent lower year-on-year.

The rack, 8-rib, medium, averaged $674.54 per cwt. in July, up 1 percent monthly and 8 percent lower year-on-year. The shoulder, square-cut, saw $284.01 per cwt., 3 percent higher monthly and 3 percent lower year-on-year. The loin, trimmed 4×4, averaged $530.51 per cwt., 1 percent higher monthly and 1 percent higher year-on-year. The leg, trotter-off, averaged $346.69 per cwt., 2 percent higher in July and 1 percent stronger year-on-year. Ground lamb averaged $530.69 per cwt. in July, up 1 percent monthly and 6 percent lower year-to-year.

Carcass prices for many trades were not reported in July due to confidentiality concerns. Sixty-five to 75-lb. carcasses averaged $318 per cwt., 7 percent higher monthly and down 1 percent from a year ago. Seventy-five to 85-lb. carcasses averaged $311.22 per cwt., up 9 percent monthly and 2 percent higher year-on-year.

Higher Quality Pelts Strengthened

The U.S. pelt market continues to be depressed, and yet there remains a strong market for the select, highest quality pieces. U.S. pelts were mixed in July with the better quality pieces seeing up to 1 percent higher prices monthly. Packers continued to ask for disposal fees for undesirable pieces.

Supreme pelts brought $8.58 per piece; Premium, $2.73 per pelt; and Standard pelts ranged from -$2.00 to $4.75 per piece.

Estimated Lamb Production Lower

Estimated lamb slaughter was up 1 percent year-on-year through July to 1.13 million head. Lamb production for the year through July was an estimated 79.7 million lbs., down 0.2 percent due to lighter harvest weights, down 1 lb.

Total lamb imports through May were 88.2 million lbs., 23 percent higher year-on-year. Lamb imports from Australian were up 31 percent and 7 percent higher for New Zealand lamb.

Total lamb availability was 150.4 million lbs. through May, up 13 percent year-on-year.

Lamb imports were an estimated 59 percent of total supplies, up from 53 percent during the same period a year ago. However, we don’t really know how much domestic or imported product is actually reaching the consumer. Freezer inventories remain high, with reportedly a significant share of imported product. In July, freezer inventories were 39.2 million lbs., down 13 percent monthly and steady with a year ago.

U.S. Wool Gears up for Export Season

The U.S. wool market was quiet in July as shearing drew to a close and exporters were busy gearing up for fall sales. ASI sponsored three reverse trade missions in the last season which will help support an already strong domestic market. Higher quality wools were in good demand this season by the U.S. hosiery and military markets.  

Australian wool prices ended the 2015-16 season on a high note. Tighter supplies are thought to have helped support Australian prices and likely to contribute to higher prices in the 2016-17 season (WoolNews.net, 7/2016). However, volatile exchange rates and uncertain demand might inject an element of uncertainty in the markets which can mean price volatility.

According to ASI wool consultant Barry Savage, the Australian dollar has been volatile, which negatively impacts U.S. wool growers (7/2016). The Australian dollar used to be equal to $1 USD (parity) prior to 2014, but now trades in the mid-U.S. $0.70s. This means that it takes more U.S. dollars to buy $1 of Australian wool and so Australian wool prices – highly correlated with U.S. wool prices – are pushed downward.

Overall, Australian wool prices in U.S. dollars were higher than analysts first forecasted given exchange rate volatility. In U.S. dollar terms, Australian wool ended its season at 963 U.S. cents per kg clean, up 22 cents year-on-year (WoolNews.net, 7/2016).

This export season we might see peaked interest from Southeast Asian countries such as India, Malaysia and Vietnam as China faces reduced growth, higher labor costs and tightening credit.

The increased competition for U.S. wools internationally can help support prices, but the strong U.S. dollar and relatively high U.S. wool prices might challenge exports.