Market Report

Pockets of Growth Within a Broader Sheep Contraction

JULIE STEPANEK SHIFLETT, Ph.D.
Juniper Economic Consulting

After a 1 percent expansion in 2014, the U.S. ewe inventory saw its second year of breeding ewe contractions in 2016. Breeding ewe inventory was 3.110 million head in 2014, dropped to 3.105 million head in 2015, and contracted again by 2.3 percent in 2016 to 3.035 million head.

In total, the sheep and lamb inventory saw gains in 2014 and 2015, but dropped 2 percent to 5.2 million head in 2016. 

However, in 2016, eight states saw breeding ewe inventory expand, gaining 28,000 head of breeding ewes year-to-year. Nevada saw the greatest growth of 8 percent to 43,000 head. Indiana, Nebraska, Michigan, Wyoming, Minnesota, California and New Mexico also saw growth.

In 2016, the 10 largest sheep producing states by breeding ewes accounted for 1.943 million head – or 65 percent – of the total U.S. breeding ewe inventory. Among the 10 largest sheep states, two expanded ewe numbers, two maintained and six contracted. The largest sheep state, Texas, saw a 2 percent drop to 435,000 breeding ewes. California saw a 2 percent gain (5,000 head) to 270,000 head and Wyoming saw a 5 percent gain (10,000 head) to 225,000 head. Utah dropped 5 percent to 205,000 head, and Colorado saw a 13 percent drop to 160,000 head.

Oregon, Montana, Kansas, Oklahoma and Pennsylvania are the five states that maintained breeding ewe inventory in 2016.

In the past 10 years, lamb consumption has stabilized at around 1 lb. per person with the inclusion of imported product. While as much as two-thirds of Americans do not eat lamb at all, lamb lovers eat upwards of 2 lbs. per person. Niche lamb markets are expanding with a growing demand from ethnic groups and foodies.

Multiple factors can explain lower inventory numbers – retirement, predation, lack of market access, more profitable competing enterprises, regulatory changes and prices. Any factor that squeezes producer margins can negatively affect sheep numbers. Lower numbers in Texas could be due to pressing predation problems or relative profitability of hunting. An increase in H-2A sheepherder wages is another factor, raising labor costs in western states. Some operations lost grazing permits on national land – also raising costs. If the cost of production rises, and slaughter lamb prices are falling or stagnant, producers might preserve margins by cutting back on production.

The Livestock Marketing Information Center reported in early February that “looking at slaughter data from USDA indicates that producers were very cautious in 2016 and lacked optimism to hold onto ewe lambs to become breeding stock.” In 2015 and into 2016, estimated lamb slaughter increased. If producers were holding back lambs, then we would likely have seen a downward trend in lamb harvest. “At the forefront (to the contraction) were government policy/regulations regarding larger operations to maintain hired shepherds to manage flocks,” (2/2017).

In late 2015, the U.S. Department of Labor released a revised ruling increasing shepherd pay from $750 per month to $1,200 per month, and rising to $1,500 by 2018. Some states were unaffected because they already offer higher wages, but the new policy was an abrupt increase for others. It is possible that sheep cuts in Utah, Colorado, Idaho and South Dakota can be explained by rising labor costs.

Last year saw the third consecutive year of lamb price declines. This factor alone can explain lower inventory numbers. Live, slaughter lamb prices at auction slipped 3 percent annually to $143.16 per cwt. Live, negotiated prices averaged $145.34 per cwt., down 0.3 percent. Feeder lamb prices at auction were down 4 percent to $184.95 per cwt.

Preliminary analysis at retail revealed that between 2015 and 2016, leg demand contracted while demand changes for the loin, rib and shoulder were indeterminate. It is hypothesized that lower retail beef prices can explain possible lower lamb demand. In July 2015, the all-fresh beef price at retail hit a record high of $615 per cwt., but tumbled by 11 percent by December 2016. According to a 2015 American Lamb Board lamb demand study, a 10 percent drop in beef prices at retail leads to a 27 percent contraction in lamb consumption. 

Feeder Lamb Prices Gained Sharply

Feeder lambs at auction in San Angelo, Texas, averaged $186 per cwt. in January, up 4 percent monthly and down 5 percent from a year ago. In Sioux Falls, S.D., prices averaged $223.99 per cwt., up 19 percent monthly and up 1 percent year-on-year. In early January, a U.S. Department of Agriculture report out of Sioux Falls commented that a long string of high quality, western origin feeder lambs sold with very good demand. Prices ranged from $232 per cwt. for 71 lb. feeders to $244 per cwt. for 60 lb. feeders. 

No feeder lamb trades were made in direct sales in January. However, in coming weeks, more lambs will likely be trading out of the Imperial Valley in California.

Slaughter Lamb Prices Gained

In January, slaughter lamb prices at auction jumped 5 percent to $143.15 per cwt., nearly 1 percent higher than a year ago.

Prices varied across markets. At a low was San Angelo at $138 per cwt., $141.67 per cwt. in South Dakota and $150 in both Ft. Collins, Colo., and Kalona, Iowa.
In the live, negotiated slaughter lamb trade, prices averaged $139.77 per cwt., up one-half percent monthly and up 1 percent year-on-year. Harvest weights crept up to 153 lbs., 2 percent higher monthly and annually.

National slaughter lamb prices on a carcass-based formula, or grid, have not been reported for one year. At the ASI Annual Convention, Erica Sanko reported that “without LMR (livestock mandatory reporting) market data, ASI cannot advocate on behalf of your sheep industry. It cannot establish insurance contracts, indemnity loss payment determination or economic, market, trade and policy analysis.”

Higher pelt values may have contributed to higher slaughter lamb prices. The highest quality unshorn Supreme pelts saw some lift in January, up 1 percent monthly to $8.94 per piece.

Overall, lamb harvest in January was perhaps lower than available market-ready supplies and harvest weights began to creep up.

Wholesale Lower in January

The wholesale composite after processing and packaging (net carcass value) dropped 4 percent in January to $306.26 per cwt., 6 percent lower year-on-year. All primals dropped. On a positive note, the expansion in beef supplies at retail slowed sharply in January, thus perhaps giving beef prices some support – helping lamb demand.

2016 Wool Production Down

According to USDA, shorn wool production in the United States during 2016 was 25.7 million pounds, down 5 percent from 2015. Sheep and lambs shorn totaled 3.56 million head, down 3 percent from 2015. In 2016, California was the largest wool producing state at 2.7 million lbs. greasy followed closely by Wyoming, Utah and Colorado. Texas ranked seventh.

The average price paid for wool sold in 2016 was $1.45 per lb. greasy for a total value of $37.2 million, down 5 percent from $39.2 million in 2015. In 2016, the average clean wool price hit a three-year high at $3.54 per lb., up 13 percent annually. Fleece States wools (the Midwest and some Californian wools) averaged $3.26 per lb. clean, Territory States in the West averaged $3.57 per lb., and finer wools in Texas and New Mexico averaged $4.09 per lb.

The U.S. wool market has been quiet, but some areas are gearing up for March shearing. U.S. wool prices look very favorable this spring. Australian wool prices have been increasing gradually and consistently since 2012, according to WoolNews.net (2/20017). Given the historically high forward markets for wool, the short to medium term future for wool appears optimistic for wool growers, (WoolNews.net, 2/2017).

In context, the 2017 prices should give some confidence to growers given these levels have not yet exhausted previous highs, and there is further capacity to build on the prices locally, especially when expressed in U.S. dollar terms (the currency wool is bought in).

On Feb. 9, the Australian Eastern Market Indicator averaged U.S. $1,096 cents, up 9 cents weekly and 20 percent higher year-on-year. The USDA proxy for U.S. wools for 21 micron was $3.72-$4.21 per lb. clean for the first five weeks of Australia’s 2017 market, up 3 percent from the previous five weeks and up 9 percent year-on-year. For 25 micron, prices were $2.78-$3.16 per lb. clean, down 3 percent from the previous period and up 5 percent year-on-year.

This wool season higher-quality and well-prepared wools should attract price premiums. According to the U.S. Sheep Industry Research, Development and Education Priorities, the top wool buyer/processor challenges include: 1. Contamination, 2. Availability/supply of U.S. wool, and 3. Quality (June 2016). While availability is out of our hands this spring, we can do something about contamination.