Nine Percent Drop Forecasted in 2019 Lamb Imports

JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

In early January, the Livestock Marketing Information Center forecasted that 2019 lamb and mutton imports could drop 9 percent annually. If this occurs, it will be the largest year-to-year contraction in imports in more than 10 years. In the past five years, lamb imports gained 10 percent on average annually, and mutton imports gained 16 percent.

According to Meat & Livestock Australia, Australian sheep inventory was down 4 million head – or 6 percent – in mid-2018, and is expected to contract by another 4 percent by mid-2019. Prolonged dry conditions led to an uptick in marketings in recent years, but this trend has now been exhausted due to sharply culled ewes and ewe lambs. Australian lamb slaughter is expected to fall 7 percent annually in 2019 to 21.2 million head. With reduced lamb production in Australia and New Zealand – and likely the United States – global competition for lamb will likely increase, supporting prices.

In 2018, Australian lamb exports increased 7 percent year-on-year to a record 267,000 tons, while mutton shipments jumped 23 percent. Lower flock numbers and supply will likely lead to an 8 percent contraction in lamb exports in 2019, according to Meat & Livestock Australia (2/2019). “Robust international demand and a low Australian dollar will continue to support Australian exports and, in turn, domestic saleyard prices,” explained Scott Tolmie, MLA’s market intelligence manager.

The relatively strong U.S. dollar compared to the Australian dollar could help keep imported lamb competitive in American markets as global prices remain strong or strengthen.

“Forecasts for the Australian dollar indicate further support for exports, as was the case throughout the second half of 2018, with the major Australian banks predicting the Australian dollar to remain below 75 U.S. cents during 2019,” according to Meat & Livestock Australia (1/2019).

With a strong United States economy, the Federal Reserve is poised to raise interest rates – which is good for investors – and could further strength the U.S. dollar. This could also hurt exporters, particularly lamb and wool exporters.

Slaughter Lambs Remained Sluggish

Slaughter lambs on a grid averaged $261.53 per cwt. on a carcass basis, down 2 percent monthly in January and held steady year-on-year. Live, negotiated slaughter lambs remained steady at $132.40 per cwt. in January and also steadied year-on-year. Slaughter lambs at auction averaged $137.94 per cwt., 5 percent higher monthly and 2 percent stronger year-on-year.

Commercial feeder lambs at auction were not well tested in January. No trades were reported in January for direct traded feeders.

Production Up, Trade Down

Estimated American lamb harvest was 1.89 million head in 2018, up 3 percent year-on-year. Estimated lamb production was 5 percent higher annually at 132.03 million lbs. Dressed weights for lambs and yearlings was 70.4 lbs. through November, 3 percent higher annually.

However, there were signs of supply tightening by early 2019. Lambs on feed in Colorado – the largest feeding state – were down in January and February compared to a year ago. Relatively tight domestic supplies and forecasted lower imports could support domestic prices through the spring.

After a 4-percent annual drop in slaughter in the first quarter, LMIC forecasted that commercial harvest could rise 2 percent higher year-on-year in the second quarter. In the second quarter, LMIC forecasted that national slaughter lambs on a carcass basis could be $266 to $271 per cwt., higher quarterly, but down 3 percent year-on-year. Sixty- to 90-lb. feeders could be $186 to $194 per cwt., down quarterly and down 2 percent year-on-year.

As we progress into 2019, we can’t help but reflect on whether the domestic industry will be able to keep lambs current this year, and avoid backed-up and overweight lambs in feedlots as we often see into the summer. In general, the percent of backfat, as seen in higher percentages of yield grade 4s and 5s in harvest, peaks during the summer then drops as harvest becomes more current later in the year. 

This now common trend begs the questions: Is this cyclical phenomenon a victim of strong and unpredictable imports? Are year-to-year wide fluctuations in live lamb markets the new norm? The answer is complicated. In some quarters it appears that domestic live lamb prices are closely tied to imports. In other periods, imported lamb and domestic lamb appear to move in separate markets. Supply fluctuations – but also shifts in consumer demand – might be a factor.

Last year through November, lamb imports were down 0.5 percent to 186.9 million lbs. Imports from Australia were up marginally year-on-year to 136.4 million and New Zealand imports were off by 2 percent to 48.3 million lbs.

Imports held relatively steady year-to-year in 2018, so why did we see sharp fluctuations in live prices? The meat market was down 2 percent in 2018, but the live, slaughter lamb market was down 12 percent. Part of the explanation is that 2018 prices were coming off a very strong year. While imports were strong, domestic supplies were relatively tight in 2017, which put pressure on prices.

Another part of the story might be that while imports in 2018 were relatively steady, the distribution of these shipments through the year was seemingly unpredictable. In the first quarter, imports were down 11 percent compared to the previous year, up 28 percent in the second and third quarters, and then down 20 percent in October and November. Historically, slaughter lamb price strengthened through the fall, but instead, weakened last year due to heavier-than-expected imports in the third quarter. It is possible, however, that shifts in demand and freezer inventories also played a role.

Lamb and mutton exports were up 2 percent year-on-year in 2018 ending November. Lamb exports in this period were down 6 percent to 744,000 lbs. and mutton exports were up 3 percent to 4.7 million lbs. Mexico is the largest destination for American lamb by a wide margin. Last year through November, Mexico was also the largest destination for American mutton followed by the United Arab Emirates.

Meat Market Steady

The wholesale composite remained mostly unchanged in January at $383.43 per cwt., and up 4 percent year-on-year.

The 8-rib rack, medium, averaged $889.54 per cwt., up 1 percent monthly, while the shoulder, square-cut, fell 2 percent to $280.33 per cwt. The loin, trimmed 4×4, averaged $533.45 per cwt., down 2 percent, and the leg, trotter off, held steady at $368.48 per cwt.

The rack was up 6 percent annually, the shoulder up 1 percent, the loin down 5 percent, and the leg up 7 percent.

The wholesale leg, trotter-off, started the year off with a bang, posting a five-year high in January at $368.48 per cwt. It is anticipated that perhaps there is a tight supply of legs heading into Easter, given a 4-percent swell in lamb harvest last December year-on-year. Freezer inventories have yet to be updated due to the government shutdown in January.

Easter is the highest demand period for legs during the year, as many religions celebrate Easter with a leg of lamb. In fact, retail lamb sales at Easter overshadow sales for the remaining year. The Western Easter falls on April 21 this year, preceding the Eastern Orthodox (Greek) Easter on April 28. Passover falls on April 20-27. Grocery stores heavily feature lamb during this holiday, and many auctions will see an uptick in lamb sales, with heightened interest in 30 to 55 lb. milk-fed and fat lambs.

International Wool Market Strengthened

On Feb. 7, the Australian Eastern Market Indicator averaged 1,944 Australian cents per kg clean, up 7 percent year-on-year. In U.S. dollars, the EMI was $6.26 per lb. clean, down 3 percent year-on-year. The exchange rate was $1 AUD to 71 U.S. cents, down from 78 cents, or 9 percent, a year ago. 

Perhaps most pressing for the international wool market in February was forecasts for tighter Australian wool supplies. In its marketing year to date, Australian wool offerings were down 15 percent year-on-year in 2018-19 compared to 2017-18. “This forecast has led many exporters to attempt to secure meaningful quantity, while it is still available,” (AWEX, 2/7/19).

As international wool prices begin to climb again, many first-stage processors were looking at blended products to offset costs, particularly synthetic blends, which increase demand for mid-micron and coarser wools. “The crossbred wools have seemingly become first choice for cheaper blend components and have been heavily targeted to keep mills churning out garments,” (Fiber2Fashion, 2/1/19).

By mid-February, the Australian market had grown seven consecutive weeks after a late-year tumble. Strong Australian wool prices will likely hold until American shearing commences in late spring. This bodes well for the upcoming domestic wool season because American wool prices are directly tied to Australian prices.

The resulting tariff on wool by China this spring will be critical for the success of American wool sales. As of this report writing, United States-China trade talks were underway, but the threat of a 25 percent tariff on American wool exports to China still loomed large. However, “meaningful statements of intent in the near term will help to settle many nerves and markets,” (Elders, Queensland Country Life, 2/4/19).

Tariffs on agricultural exports to China are forecasted to make a profound impact in 2019. According to the USDA Economic Research Service, there will be a “significant decline” in agricultural exports to China in fiscal year 2019 (USDA/ERS, 12/3/19). This fiscal year, agricultural exports to China are expected to be down $7.3 billion from the 2018 total of $16.3 billion – down 55 percent.

Regardless of fiscal and macroeconomic factors, American wools that receive premiums this spring will be those wools that are better prepared. This means cleaner wools, wools with low vegetable matter, and strong and long wools. Wools with mid-breaks can and will be discounted.