Market Report

Lamb Production Expands in 2018

JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

In the first seven months of the year, lamb harvest totaled 1.07 million head, up 3 percent year-on-year. Mutton harvest was 59,839 head, up 4 percent year-on-year.

Lamb imports slowed in the first five months of 2018 and consequently, the lamb import share contracted. In January through May, lamb imports were down 1.4 percent year-on-year to 89 million lbs. Australian lamb imports were down 1 percent year-on-year to 65.7 million lbs. and New Zealand lamb imports were down 3 percent to 22.8 million lbs.

Estimated total lamb availability – domestic and imported lamb – through May was 151.9 million lbs., up 2 percent year-on-year. While total lamb supplies expanded, the estimated imported share slipped from 60 percent in January to May 2017 to 58 percent this year.

As the summer progressed, feedlot supplies remained relatively high. Higher feedlot supplies – and heavier weights – likely led to lower slaughter lamb prices this summer. On Aug. 1, 92,569 head were reported in Colorado feedlots, up 14 percent year-on-year and 40 percent higher than August’s five-year average. Many lambs are finished in Colorado feedlots, but feedlots exist across the United States.
 

Lamb Seasonal Volatility

In the summer, inventory of lambs typically exceeds lamb harvest. Thus, lambs on feed get heavier, often “challenging a supply of fresh, consistent product,” according to a recent American Lamb Board study (7/2018). The ALB white paper entitled Seasonality of the U.S. Lamb Industry highlights the strong seasonality of American lamb as promoting “inefficiencies and market volatility” in the United States lamb industry. The paper maintains that “each sector of the industry should consider management alternatives to better supply a more consistently available product.” ALB promotes out-of-season breeding with the caveat that the adoption of alternative breeding systems only makes sense if the benefits outweigh the costs.

During the summer, as weekly harvest slows and lambs get heavier, slaughter lamb prices drop. A seasonal index calculated since 2000 reveals that in the second quarter, lamb prices are 4 percent higher than the annual average, but then fall 1 percent below the annual average in the third quarter. This seasonality can be more pronounced in some years, less so in others. 

Feeders Lower

Feeder lambs in direct trade averaged $145 per cwt. in July, down 14 percent year-on-year and down 8 percent from July’s five-year average. Prices were perhaps lower due to uncertainty regarding movement in slaughter lamb prices and whether imports will pick up. Slaughter lamb prices were lower in July, and feedlots were likely waiting to see how low slaughter lamb prices would fall before committing to fall’s feeders.

The prospects for fall and winter feeding in the western United States might be diminished this year due to the drought. This constraint could add to the already ample supply of feeders for sale in the next couple of months, putting downward pressure on feeder lamb prices.

More than 4,000 feeders traded out of Texas in July with weights ranging from 68 to 103 lbs. for $125 to $152 per cwt. Six hundred feeders traded out of Oregon in a feeder lamb pool: 103 lbs. for $140 per cwt.

Feeder lambs at auction in Texas averaged $148.88 per cwt. in July, down 12 percent monthly and down 16 percent year-on-year.

Slaughter Lambs Lower

Privately traded lambs on a formula – or grid – dropped a marginal quarter of a percent in July and were down 17 percent from a year ago. The formula average was $282.48 per cwt. for an 87.6 lb. carcass and $142.71 per cwt. on a live-basis.

In the live, negotiated trade, prices averaged $157.29 per cwt., down 2 percent monthly and down 13 percent year-on-year. Live weights averaged 149 lbs.
Price premiums are common in the hog and cattle industries. In the hog industry, hogs free of beta agonists can receive price premiums. Similarly, cattle raised without antibiotics or hormone-free cattle can receive premiums. Lamb packers can add premiums for consumer-desired lamb traits to help provide incentives to producers. Out-of-season lamb is just one example. 

Pelts Down

Lower pelt prices this summer could explain lower slaughter lamb price offers.

In July, supreme unshorn pelts averaged $2.00 per piece at the low end and $7.00 per pelt at the high end. Prices at the low end were 69 percent lower than a year ago and, at the high end, down 26 percent year-on-year. Pelts that receive the low-end price of the supreme category might have visible discolored fiber or manure and seeds present.

Although the United States and global economy has been growing in recent years and wool prices are at record highs, the sheepskin market has not shared this success. Prices were relatively low in 2016, made considerable gains in 2017 and early 2018 before falling lower than 2016’s highs during this summer.
By comparison, Australian skins saw some price support in July, and were comparable to American pelt prices at the high end. At the low end, Australian sheepskins 24.1 kgs and heavier, free of vegetable matter, received Australian 900 cents per skin (U.S.$ 6.67) and 1,000 cents per skin (U.S.$ 7.41) at the high end in July. Australian pelt prices were up 20 percent in July year-on-year.

One possible reason United States pelts fell in value while Australian pelts gained is that in July, the U.S. dollar grew 1 percent against the Australian dollar. This meant that each U.S. dollar bought more Australian dollars than a month earlier, perhaps diverting prospective United States buyers to the Australian market.

Forecasts

The Livestock Market Information Center forecasted that national, direct slaughter lamb prices could be $308 to $312 per cwt. in the third quarter, down 5 percent from a year ago. Feeder lambs could be $183 to $190 per cwt. in the third quarter, up 9 percent.

Next year, LMIC’s forecast for tight supplies will likely help support producer prices. For 2019, LMIC forecasts American lamb production could expand marginally while imports fall 1 percent. Larger than expected beginning stocks can help support 2019 supplies, which are forecasted to be down 6 percent year-on-year.

Wholesale Lamb Steady

The wholesale composite averaged $381.66 per cwt. in July, up 1 percent monthly and down 11 percent year-on-year.

The 8-rib rack, medium, saw $876.56 per cwt. in July, up 2 percent monthly. The loin, trimmed 4×4, averaged $550.51 per cwt., up 3 percent in July. The leg trotter-off averaged $367.93 per cwt., about steady with June. The shoulder, square-cut, averaged $283.76 per cwt., up 2 percent monthly.

The shoulder took the biggest hit this summer, falling 20 percent from last summer’s high. The rack, 8-rib medium, was down 5 percent year-on-year. The leg, trotter-off, was down 12 percent from a year ago. The loin, trimmed 4×4, fell 11 percent from a year ago.

Ground lamb averaged $565.66 per cwt. in July, steady with June and down 3 percent year-on-year.

A perception prevails that imports compete against American product. Recall, however, that American lamb commands a price premium in the market. The American Lamb Board is charged with building domestic lamb demand, separate from demand for imported product. Maintaining a consistent quality is crucial for the United States to hold onto its market niches.

According to a 2017 ALB study, a 24 percent and 25 percent price premium was found for the American leg category over Australian and New Zealand legs at retail; a 37 percent and 58 percent premium for American loins over Australian and New Zealand loins; a 19 percent and 56 percent premium for American ribs/racks over Australian and New Zealand ribs; and a 14 percent and 2 percent premium for American shoulders over Australian and New Zealand shoulders.

Australian Wool Market Pushed Higher

The Australian Eastern Market Indicator averaged 1,990 Australian cents per kg clean (1,481 U.S. cents per kg) during the week of Aug. 10, marginally higher than its pre-recess break and 28 percent higher year-on-year. When expressed per lb., the EMI averaged Australian $9.05 per lb. and U.S.$ 6.71 per lb.

High Australian wool (and lamb) prices are primarily due to a drought-induced tight supply and strong demand. Looking forward, high wool and lamb prices will induce growers to hold onto stock, rather than liquidate as under typical drought seasons.

“There will be demand destruction at current price levels, but supply concerns mask any impact to date. We expect this situation to play out in the short term, but the risk of the market fatiguing increases as we move forward into the new season,” (Weekly Market Report, 8/10/2018). In the latter half of 2018 and into 2019, the Australian wool supply will likely see some contraction, which could be good timing, if demand is backing away from the current high prices.

Australian Wool Innovation Ltd. forecasted in April that its wool clip could contract by 2 percent in its 2018-19 season, assuming normal growing conditions. What defines a “normal” growing year is unknown.

This year, the American wool clip was long and clean, but yields were slightly lower than the 2016-17 season because the winter was drier. If western sheep country receives a good snow cover, wool can stay clean.

If the Australian drought persists, its wool will likely get finer (as occurs when sheep are nutritionally challenged) and shorter (as producers shear, struggling to pay bills).