Market Report

Dry Western Summer Challenges Fall & Winter Feed

JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

“Drought is one of the most costly natural hazards in the United States each year,” the U.S. Department of Agriculture explained in its launch of the Drought Monitor in the 1990s. Much of the West is experiencing an abnormally dry to moderate drought according to the Drought Monitor in early July.

The sharp exception is the four-corner region of Utah, Colorado, New Mexico and Arizona that is classified as extreme to exceptional drought. According to the U.S Drought Monitor for July 3, 80 percent of Colorado fell into the highest drought categories compared to 14 percent a year ago. These four states accounted for 16 percent of all American ewes in 2017 and could struggle with feed come fall.

Lamb Imports Higher

In the first-half of 2018 domestic lamb production is up, as are imports. Ample supply is helping to depress domestic prices, but the stronger United States dollar relative to the Australian dollar is keeping import prices high.

In the first half of the year, estimated lamb harvest was up 4 percent year-on-year to 949,047 head. A six-year high for feeder lamb prices last summer prompted increased supplies in late 2017 and early 2018. Estimated lamb production rose 7 percent year-on-year to 67.8 million lbs. One factor to increased production is heavier harvest weights. Weights in federally-inspected harvest averaged 142 lbs. in the first half of the year, up 2.4 percent year-on-year.

In the first half of 2018, lamb imports from Australia increased 60 percent year-on-year. Meat & Livestock Australia reported that increased exports are in part due to a drought-induced increase in Australian harvest, but also “reflect robust global demand for sheepmeat,” (6/6/2018). Increased exports has been driven by growth in all key export destinations: the Middle East, China and the United States.

In addition, a weaker Australian dollar (relatively stronger U.S. dollar) helped boost Australia’s export competitiveness. The flip side is that imported lamb from Australia is more expensive, increasing imported lamb prices this summer. The Australian dollar lost 4 percent from January to June, landing at an average of 76 cents per U.S. dollar.

It is possible that a significant portion of the surge in imported lamb volume is going straight into U.S. freezers and not to consumers. USDA maintains cold storage figures, but doesn’t indicate whether the stocks are domestic or imported product, or both. In early June, lamb and mutton in cold storage totaled 35.6 million lbs., up 5 percent monthly and up 20 percent year-on-year. Freezer inventory has trended upward in the past 18 months.

Lamb Exports Higher

Lamb exports from January to April 2018 totaled $7.3 million – 16 percent higher year-on-year (U.S. Meat Export Federation, 6/2018). Exports totaled 3,457 metric tons (7.6 million lbs.) during this period – 39 percent higher. 

Eight-five percent of lamb exports in the first trimester were sent to Mexico for a total of 2,932 metric ton (mt), 48 percent higher year-on-year. The U.S. dollar has strengthened since January, but to date there is no obvious negative effect on lamb exports, reflecting strong demand.

There was also strong variety meat demand from Mexico: 2,663 mt for $2.5 million from January to April. Volume was up 644 percent year-on-year and value was up 73 percent.

Other top lamb export destinations included the Caribbean, Africa, Canada and Philippines. Muscle cut exports were up sharply to the Bahamas and Turks and Caicos Islands. Gabon and Angola show promise for demand for American lamb variety meat.

Trade War Concerns

There is a long-standing joke that if you ask an economist a question, you’ll get five different answers. Trade is one issue; however, that economists generally agree upon. Free trade is good, not-so-free trade is not-so good. Reduced trade barriers are thought to raise incomes and well-being of people in participating countries. If trade barriers rise, a few might benefit at the expense of the many.

Trade is critical to the growth of the American lamb and wool industries. Lamb exports expanded this year, and more than half of the American wool clip is exported. Lamb imports are significant, perhaps helping to expand lamb demand for both American and imported product. 

As of this writing, there was great uncertainty regarding potential trade wars. Regardless of the outcome, any policies that weaken international growth can potentially cause the U.S. dollar to strengthen further. The effect, therefore, is that imports will become more expensive to United States consumers and exports less competitive internationally.

Feeder Lambs

In June, feeder lamb prices weakened seasonally. Many lambs are born in the spring, thus the number of feeders coming to market swells in late summer, historically causing a 6-percent price weakening from the annual average. Nearly 2,000 head of feeder lambs traded direct out of Texas, bypassing auctions. Weights averaged 60 to 80 lbs. and prices averaged $168.50 to $178 per cwt.

A three-market auction price for 90 to 110 lb. feeders in Colorado, South Dakota and Texas averaged $172.98 per cwt. in June, down 16 percent monthly and down 13 percent year-on-year (Livestock Market Information Center).

Slaughter Lamb Prices Lower in June

While slaughter lambs are typically seasonally higher in June, prices were mixed this year. A tighter supply of domestic market-ready lambs supports prices, but ample harvest combined with heavier lamb weights thus far this year and higher imports likely had a price-depressing effect.

Slaughter lamb prices at auction averaged $152.52 per cwt., down 5 percent monthly and down 18 percent year-on-year. Slaughter lambs at auction in Sioux Falls, S.D., averaged $166.71 per cwt. in June, up 28 percent monthly and down 17 percent year-on-year. Prices were lower in San Angelo, Texas, with slaughter lambs averaging 125 per cwt., down 7 percent year-on-year and down 26 percent year-on-year. Prices differ from auction to auction based upon relative volumes and non-traditional lamb market presence.

Slaughter lambs on formula averaged $283.18 per cwt. for an 86.88 lb. carcass. Prices were up 3 percent monthly and down 17 percent year-on-year. Average weights for formula lambs in June were 120 percent of average federally-inspected weights.

Live, negotiated slaughter lamb prices averaged $160.50 per cwt., up 5 percent in June and down 13 percent year-on-year. Weights were down 5 percent for the month at 154.90 lbs.

Pelt prices, on a monthly basis, dropped nearly 28 percent in June, and will likely affect slaughter lamb offers (feeders’ bottom line) moving forward. Unshorn supreme pelt prices averaged $2.50 to $8.60 per piece in June while premium pelts brought -$2.50 to $6.60 per pelt.

Meat Market Steady although Supplies Up

The wholesale carcass composite cutout averaged $376.80 per cwt., virtually unchanged from May and down 19 percent year-on-year. With the exception of the rack, all primals were lower monthly.

All primals were lower from a year ago. The rack dropped only 2 percent year-on-year, but other primals saw prices 17 to 57 percent lower from a year ago. Increased availability of lamb this year is having a price-depressing effect.

The rack, 8-rib, medium averaged $862.60 per cwt., up 2 percent monthly. The shoulder, square-cut, saw its value drop 1 percent monthly to $278.81 per cwt. The loin, trimmed 4×4, averaged $536.17 per cwt., down 3 percent from May. The leg, trotter-off, saw a 1-percent drop in June to $366.93 per cwt. Ground lamb was steady between May and June at $564.32 per cwt., up 5 percent year-on-year.

The downturn in the loin was unusual as it typically sees a demand spike during summer grilling, but could be due to a rise in popularity in the more affordable shoulder blade chops. The sharp drop in the American shoulder was also unusual, but might be a return to normal this year after an unusually sharp appreciation last summer.

Although American lamb prices have softened somewhat this summer, the spread between imported lamb and domestic prices at wholesale has narrowed or even flip-flopped. Imported lamb prices are high, even higher than domestic prices for some primals. Exchange rates might explain this. Since January, it has taken more U.S. dollars to buy one Australian dollar, thus making imports more expensive. This hasn’t deterred volume, but imported prices have risen.

Wool Market Still Strong, but Confidence Rattled

By mid-July the Australian wool market saw two weeks of back-to-back weaker prices, down from its record high. By July 13, the Australian Eastern Market Indicator was Australian $8.99 per lb. clean, and U.S. $6.63 per lb. clean. The EMI lost 75 Australian cents during the previous two weeks. However, prices were still 20 to 30 percent higher year-to-year due to strong demand.

Although there is wide-spread optimism about the growth of wool demand by Chinese and international buyers, exchange rate uncertainty – likely tied to U.S.-China trade war uncertainty – might put pressure on Chinese buyers. Media reports abound that China has historically set its currency at an artificially undervalued level against the U.S. dollar to give its exports an unfair price advantage. It is possible that in early summer China was moving to further devalue its currency in advance of potential United States tariffs. A 6 percent devaluation in May and June is a significant exchange rate move, (ETF Daily News, 7/5/2018). If so, this could hinder American wool sales, making American wool less attractive (more expensive) to Chinese buyers. It also means Chinese mills will have to pay more in local currency to buy Australian wool. In this interconnected world in which we live, this could depress Australian wool prices, which will in turn, depress American wool prices. Already, there is a concern that exchange rate and trade uncertainty could disrupt Chinese commitments to buy American wool this June that have yet to be delivered.

Strong international demand for wool helped push American wool prices higher this summer, due to the connectedness of the two markets. In the United States, Fleece States (WA, OR and CA) wool was 5 percent higher in June compared to early spring and 49 percent higher than a year ago. Twenty-two micron averaged $5.80 per lb. clean and 25 micron averaged $4.58 per lb.

Wool in the Territory States (western wools) averaged about 8 percent higher monthly in June and 41 percent higher than last spring. Eighteen micron averaged $7.00 per lb. clean, 20 micron averaged $6.51 per lb., 22 micron averaged $6.15 per lb., 24 micron saw $5.41 per lb., and 26 micron averaged $4.18 per lb.
No clean wool prices were reported in Texas and New Mexico in June for trade often occurs earlier in the year.