JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting
As of Jan. 1, the American sheep industry contracted by 1.1 percent to 3 million breeding ewes. Apart from inventory gains in 2005, 2006 and more recently, in 2015, ewe numbers have continued to contract – down 4 percent in five years and down 10 percent in 10 years.
Total sheep and lambs was 5.23 million head as of Jan. 1 versus 2018 – down 0.7 percent annually, down 1 percent in five years and down 7 percent through 10 years.
Among the top five states by breeding ewes, Texas was down 2 percent to 455,000 head and California was down 4 percent to 250,000 head; but Wyoming and Utah gained. Wyoming jumped 2 percent to 215,000 head and Utah gained 5 percent to 210,000 head. No. 5 South Dakota fell 2 percent to 157,000 ewes.
The states that gained and lost inventory are variable, with no clear trend. Some of the largest sheep states in the West saw inventory gains, while their neighbors lost ewes. Colorado and the Desert States saw a 1 percent inventory gain, propelled by 5 percent gains in Utah and New Mexico. The greatest inventory gain in 2018 occurred in the Mid-Atlantic Region at 8 percent and the Great Lakes Region at 2 percent. The Midwest, Texas and Eastern States totaled 91 percent of Western States’ breeding ewes. That is, sheep production is still concentrated in a handful of Western States.
It is possible that sheep inventory steadies in coming years due to strong demand, but we might see production shifts, particularly closer to Colorado – the state with the largest concentration of feeding and packing plant capacity. We might see a continued shift in production away from Texas and California. Sheep production in Texas competes with other enterprises, such as hunting, while California faces higher production costs.
The overall inventory contraction counters the theory that high prices can elicit a supply response. Only 10 years ago, feeder lambs were receiving $1 per lb., but now the average is $1.66 per lb. Wool prices are also high – at least at a four-year high. What is not revealed in these averages is the year-to-year volatility that many face during marketing, as well as increased production costs. The sheep industry also faces an aging population of operators, as does United States agriculture, in general. Additional concerns for many producers include the ongoing predator problem, increased regulatory pressures and reduced market access.
One positive that points to an expanded lamb market is that a new processing plant is under construction in eastern Colorado. One owner explained that lamb market growth is fully expected as the Japanese export market is now open, younger generations have expressed a new interest in lamb, and there are plans – in this new facility – to smooth out production by integrating a feedlot.
“To stay in this thing you have to have the ability to get lambs harvested when they need to be harvested, and we haven’t had that for the past several years,” said co-owner Spence Rule (The Fence Post, 10/12/18).
What national data doesn’t reveal is the significant non-traditional lamb market. For every head counted in federal slaughter data, an estimated 0.4 lamb is channeled through the non-traditional market. If the non-traditional market is counted in inventory numbers, then total domestic inventory held steady between 2017 and 2018, and sheep and lambs didn’t decline.
Slaughter lamb prices on formula averaged $263.68 per cwt. on a carcass basis in February, up 1 percent monthly and up 2 percent year-on-year. The live-equivalent average was $132.01 per cwt. January and February prices were higher year-on-year, but noticeably lower than the first couple months of 2014, 2015 and 2016 (2017 prices were not reported).
Live, negotiated slaughter lambs averaged $132.52 per cwt., steady monthly and down 2 percent from a year ago.
Lambs at the Sioux Falls, S.D., auction weighing 110 to 130 lbs. averaged $146.38 per cwt. in February, up 9 percent monthly and down 6 percent year-on-year. Heavier lambs, 130 to 160 lbs., brought $138.32 per cwt., up 4 percent monthly and down 7 percent year-on-year.
In the largest non-traditional auction, New Holland, Penn., 110 to 130 lb. lambs averaged $164.64 per cwt. in February, up 12 percent monthly and up 3 percent year-on-year. Lambs weighing 130 to 160 lbs. brought $154.25 per cwt., up 5 percent monthly and down 4 percent year-on-year. In the first week of March, more than 2,500 sheep and lambs traded in New Holland, and that number will likely top 3,000 head as Easter nears.
There were no reported trades in the direct feeder lamb market, and limited auction trades of commercial feeders. Lamb feeders from California and Texas were likely shipped into Colorado feedlots in February and March in an effort to increase Easter supplies.
The wholesale composite averaged $378.29 per cwt., down 1 percent monthly and up 2 percent year-on-year. A softening in the wholesale composite in January and February is not uncommon before gaining in late spring. Among the primals, the shoulder, loin and leg were down monthly, yet the rack gained 1 percent monthly.
The rack continued its hot streak. In August 2017, the rack, 8-rib, medium, hit a record high, surpassing $9 per lb., and is again charging upward after an 18-month softening, hitting $899.67 per cwt. in February, 8 percent higher year-on-year.
In February, the leg, trotter-off, averaged $360.48 per cwt; the loin, trimmed 4×4, averaged $516.64 per cwt.; and the shoulder, square-cut, averaged $275.88 per cwt.
U.S. pelts remained unchanged for about three months. In January and February, the volume of shorn pelts grew sharply compared to the availability of unshorn pelts as feedlot supplies swelled before Easter. Shorn, supreme pelts ranged from -$1.50 to $2.25 per piece. If an unshorn pelt is available, it brought up to $4.00 per pelt in February.
Wool value totaled $42.77 million in 2018, the highest level since 2011 when value topped $48 million and international wool prices were at record highs. Between 2011 and 2018, American wool prices dropped 5 percent to $1.75 per lb. greasy, on average, but production dropped 17 percent. Overall, high wool prices – especially for fine wool – have propelled the value of the American wool clip to historic highs in spite of the wool clip contracting. Prices of medium-fine and coarser wools haven’t fared as well, but are making a comeback. About 70 percent of the American wool clip is less than 24.5 micron.
Wool production expanded in 2015 to 27.0 million lbs. However, in 2016 wool production contracted 4 percent and another 5 percent in 2017. In 2018, wool production totaled 24.4 million lbs., down 2 percent annually.
In 2018, eight states produced 65 percent of the American wool clip. These states also each produced more than a million lbs. of greasy wool in 2018: California, Wyoming, Utah, Colorado, Texas, South Dakota, Montana and Idaho. California produced 2.4 million lbs. and Idaho totaled 1.5 million lbs. greasy. For many years, Texas ranked No. 1 in wool production. Ten years ago, Texas produced 3.5 million lbs. Years of drought, general inventory contraction and a switch for many into hair sheep accelerated the transition. Two states – Oregon and Iowa – used to produce more than a million lbs. a decade ago, but now total 700,000 to 800,000 lbs. each.
Tight international supplies of wool will likely support wool prices this year and hopefully support wool grower returns. By March 7, the Australian Eastern Market Indicator averaged 2,008 Australian cents per kg clean, down for the second consecutive week, but up 2 percent from February and up 13 percent year-on-year. In U.S. dollars, the EMI was $6.52 per lb. clean. The Australian market saw some softening because the “good style wools with favorable additional measurement results and low vegetable matter” were in short supply (AWEX, Weekly Wool Market Report, 3/7/19). The bulk of the wool offering was “lesser styled wools.”
Finer wool continued to receive premiums in Australia and the Australian futures market suggested premiums could rise in the near future. Australian future trades settled at 2,280 Australian cents per kg for April and May, and 2,250 Australian cents per kg for June (AWI, The Woolmark Company, Wool Market Weekly Report, 3/1/19).
There is some concern that high wool prices levels are not sustainable. “Processors are left having to buy hand to mouth to run machinery while not being able to pass the cost of production down the pipeline,” reported the Wool Market Weekly Report (3/1/19).
There is also caution in the market as the U.S.-China trade war continues as of this writing. In 2018, American wool exports amounted to 84 percent of the wool clip. If there is no deal to stop the Chinese export wool tariff rise from the current 10 percent to 25 percent, the penalty tariff will virtually stop exports to China. In 2018, China took 59 percent of all American wool exports and 49 percent of the 2018 total American wool clip.
If the current penalty duty of 10 percent remains or an agreement is made to eliminate the penalty tariffs on wool, then it is most likely that wool business with China will continue strongly, but a 25 percent tariff will “kill” that market. The American wool industry is working on diversifying its export markets.
Overall, American quality has improved for growers raising wool sheep. Recent and sustained high prices for medium-fine wool will continue to be an impetus for a high-quality American wool clip this spring.