Third-Quarter 2013 Sheep Industry Review Prepared by American Sheep Industry Association for the American Lamb Board October 2013 Executive Summary I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. Feeder and Slaughter Lamb Market Trends Feeder and Slaughter Lamb Price Projections Carcass and Boxed Lamb Market Trends At Foodservice and Retail Price Spreads Pelts Replacement Sheep Domestic Production and Trade Nontraditional Market Total Lamb and Mutton Availability Price Comparison to Imported Product Exchange Rates Executive Summary By late in the third quarter there was rising optimism on the part of producers and feeders with strengthening feeder and slaughter lamb prices. Feeder and slaughter lamb offers were likely higher due to lower feed costs and concerns over tightening supplies. Feed costs for both corn and hay were lower than a year ago and good moisture through the summer in many sheep regions lends itself to promising winter grazing. Overall, improved feed conditions and higher feeder lamb prices was the necessary impetus for some reported flock rebuilding – retaining ewe lambs and higher replacement stock prices. A major winter storm in South Dakota and neighboring states in early October resulted in the loss of hundreds of sheep and lambs, a significant set-back for some highly populated sheep sates. The loss of lambs might mean further price increases if concerns heighten about the availability of supply. On a more cautionary note, while feeder and slaughter lamb prices saw significant gains in the third quarter, the carcass and wholesale market saw little movement. Executive Summary, page 2 In early October, the government shutdown meant the suspension of U.S. Department of Agriculture (USDA) sheep and lamb price and production data. Fortunately for the sheep industry, the market was in an upswing at the time of the shutdown and continued to gain through the reporting cessation. In the Markets The 3-market feeder lamb auction price saw a 1-percent quarterly drop to $113.02/cwt., up 12% year-on-year. Feeder lambs in direct trade averaged $109.85/cwt. in the third quarter, up 11% quarterly, and up 4% year-to-year. Live, slaughter lamb prices at auction gained 9% quarterly to $111.47/cwt. , 14-percent higher year-on-year. Slaughter lamb prices on a carcass-based formula averaged $231.46/cwt. ($116/cwt. live-converted), up 3% quarterly and down 8% year-on-year. The gross carcass value averaged $279.28/cwt. in third quarter, down 2% quarterly and down 13% year-to-year. The weighted average carcass price averaged $258.54/cwt. in the third quarter, 4-percent higher quarterly and down 11% from a year ago. Executive Summary, page 3 Domestic lamb market share was 49%, down from 53% year-on-year. Contracting market share challenges reinvestment and innovation in the industry. An increased number of slaughter lambs has more than compensated for lower slaughter weights in maintaining (even increasing) production. In the first-nine months of the year, estimated lamb slaughter was 1.48 mill. head, up 8% year-on-year. Lamb production was 1.04 mill. lbs., up 0.8% year-on-year. In the third quarter, cold storage averaged 21.5 mill. lbs., up 10% quarterly and down 9% year-on-year. Forecasts Lamb retail prices should increase toward the December holidays, bolstered by improved incomes and higher beef prices. Quality consistency and tight supplies will help support prices. The Livestock Marketing Information Center (LMIC) forecasted both slaughter and feeder lamb prices to increase quarterly, up to 11 and 32 percent higher than a year ago, respectively. LMIC forecasted in late September that commercial production could be 5-percent lower in the fourth quarter year-on-year. Imports could fall 2 percent year-to-year and total supply could be down 7 percent year-to-year. I. FEEDER AND SLAUGHTER LAMB MARKET TRENDS Auction Feeder Lamb (60- to 90-lb.) Prices Up 12% in a Year • The 3-market feeder lamb auction price saw a 1-percent quarterly drop to $113.02/cwt., up 12% year-on-year. • Markets included San Angelo, Ft. Collins and Sioux Falls. • Prices averaged $108/cwt. in July, $110/cwt. in Aug. and $121/cwt. in Sept. Three Markets Gained Thru 2013 Feeder Lambs in Direct Trade Gained Quarterly o Feeder lambs averaged $109.85 per cwt. in Q3, up 11% quarterly, and up 4% year-to-year. o Feeders averaged $102/cwt. in July, $107/cwt. in August and $120/cwt. in September. Sept. Feeders in Direct Trade Down 17% from Sept. 5-Year Ave. 105.87 97.99 -0.07 September Direct Feeder Trade 40% Higher Year-on-Year; 92% Higher than its 5-Year High Feed Costs Coming Down Corn averaged $6.88 per bu. in its 2012/13 marketing year, 8-percent higher year-on-year. Corn averaged $6.97 per bu. in June, $6.79 per bu. in July and $6.21per bu. in August. The early-October Omaha corn prices moved into the $4.00 per bu. range, the lowest for any week since early October 2010. Corn Began to Fall in June Alfalfa averaged $201 per ton in Q3, down 0.5% year-on-year, and fell from $209 to $194 per ton within the quarter. Q3 Auction Slaughter Lamb Prices 14-Percent Higher Year-on-Year • Live, slaughter lamb prices at auction gained 9% quarterly to $111.47/cwt., 14-percent higher year-on-year. • Prices averaged $109/cwt. in July, $108/cwt. in August and $117/cwt. in September. Auction Slaughter Lamb Price Rebounded 37% Since its 7-Year Low in Aug. 2012 Q3 Auction Slaughter Lamb Prices Higher than Q1 Prices Carcass-Based Formula Slaughter Lamb Prices Gained Steadily through 2013 • At 155,100 head, formula trades were down 3% quarterly and up 14% year-on-year. • Slaughter lamb prices on a carcass-based formula averaged $231.46/cwt. ($116/cwt. live-converted), up 3% quarterly and down 8% year-on-year. • Weighted-average prices were $227/cwt. in July, $229/cwt. in Aug. and $238/cwt. in Sept. • In Q3, average weight was 78.6 lbs., down 6% quarterly and down 12% year-on-year. In Rebound Period Since last October, Slaughter Lamb Prices up 7% Heaviest Carcasses Received Discount Live, Negotiated Slaughter Lamb Sales up Quarterly • Slaughter lambs in live, negotiated sales averaged $118.34/cwt. in Q3, up 0.4% quarterly and up 3% year-on-year. • Lambs averaged $119/cwt. in July, $117/cwt. in Aug. and $120/cwt. in Sept. • Q3 weights were 134 lbs., down 6% quarterly and down 5% year-on-year. II. FEEDER AND SLAUGHTER LAMB PRICE PROJECTIONS LMIC Forecasted that Tight Supplies will Likely Support Prices • LMIC’s late September forecasts: • Q4 national slaughter lambs by carcass weight in direct trade could range from $245 to $250 per cwt. – 11 percent higher year-on-year. • Sixty- to 90-lb. 3-market feeder lambs could range from $130 to $140 per cwt. – 32 percent higher. • These volatile times means any price forecast should be used with caution. Seasonal Index Lends Predictive Insight • Price trends--up or down--depend on which factor dominates, supply or demand. • When feeders come to market in the fall and slaughter lamb supplies increase, prices tend to weaken, but pulled up by holiday demand needs. • The index shows the average relationship of prices in each month to the average for the year. An index of 105 means prices are 5% above the annual price average. Feeder Lamb Prices Expected to Climb Through the Year’s End Slaughter Lamb Prices at Auction Predicted to Gain through Q4 LMIC Forecasted Sharp Q4 Production Contraction • LMIC forecasted in late September that commercial production could be 5-percent lower in the fourth quarter year-on-year. • Imports could fall 2 percent year-to-year. • Total supply could be down 7 percent year-to-year. • Bottom line: Industry supplies expand and contract which helps fuel price volatility. Extreme Price Volatility is a Cost to the Industry -- in Lower R&D, Loss of Infrastructure, and Most Important, Loss of Producers & Sheep Lamb Demand Forecast? Tighter Q4 Supplies, Strong Beef Prices, Stronger Income Growth, and Quality Consistency (More YG 2s and 3s) ….Could Support Lamb Demand Inflation-Adjusted Income Making Slow Rebound Retail Beef Charges Up 11% in 2 Years 487.97 -0.68% 466.91 4.51% Why is Retail Beef Higher? • Beef supplies down. (Contrary to increased domestic and imported lamb at retail.) • Incomes up. • “Last year’s record-high production costs and droughtreduced supplies continue to force retail meat prices higher with beef, pork and chicken prices setting new records again in August,” said Len Steiner and Steve Meyer (Daily Livestock Report, 9/18/13). • By the same reasoning, why haven’t these factors forced retail lamb higher (or have they?)? Good News for the Lamb Industry • A recent Food Demand Survey (FooDS) conducted at Oklahoma State University found consumers’ willingness-to-pay for steak and hamburger increased by 8.30% and 4.21%, respectively, from August to September. • Willingness to pay is another way to think of lamb demand. Lower Lamb Feed Costs • LMIC forecasted that the 2013/14 marketing year average corn price received by producers could average $4.50 per bushel (10/3/13), down from $6.88 per bu. in its 2012/13 year. • In mid-September, USDA reported that the corn basis is beginning to correct, slowly making corn delivered to the feedlot in the low to mid $6 range (USDA/AMS, 9/13/13). • The December corn future settled at $4.42 per bu. on October 15. • Corn supplies up: Corn stocks at the end of the marketing year in August were more abundant than analysts expected and a record crop is possible. • Improved pasture & range conditions mean softer hay prices this year (LMIC, 6/2013). Feeders See Some Positive Profits • Recall the breakeven analysis is only one snapshot of feedlot marketing. • Many feeders have been in the red for the past three years; some just now making money. • Cost of gain fell from about $1.30 per lb. to $1.10 to $1.20 per lb. late in the third quarter. • Early October estimated break-even was $118 to $121 per cwt. compared to $119 per cwt., the liveconverted formula carcass-based price. Cost of Gain Falls into Q3 Sensitivity Break-Even Analysis A: October kill of late August California lambs with a $1.10 per lb. cost of gain. Item 1. Total cost of feeder (100-lb. feeder @ $112.50 per cwt. in late August 2013) 2. Average Freight from California 3. Cost of Gain in Colorado feedlot (45 lbs. gained @ $1.10/lb. to 145 lbs.) 4. Break-even price of slaughter lamb @ 145 lbs. Break-Even Cost $112.50/head $9.00/head $49.50/head $171/head $118/cwt. Sensitivity Break-Even Analysis B: October kill of late August California lambs with a $1.20 per lb. cost of gain. Item Cost 1. Total cost of feeder (100-lb. feeder @ $112.50 per $112.50/head cwt. in late August 2013) 2. Average Freight from California 3. Cost of Gain in Colorado feedlot (45 lbs. gained @ $1.20/lb. to 145 lbs.) 4. Break-even price of slaughter lamb @ 145 lbs. Break-Even $9.00/head $54/head $175.50/head $121/cwt. III. CARCASS AND BOXED LAMB MARKET TRENDS Carcass Gained Quarterly, Yet Down Year-on-Year • Weighted average carcass price averaged $258.54/cwt. in Q3, 4-percent higher quarterly and down 11% from a year ago. • Carcass price was $256/cwt. in July, $259/cwt. in Aug. and $262/cwt. in Sept. • Lightweight carcasses received premium at $323 to $352 per cwt. in Q3. Carcass Prices Down 32% from Record High Carcass Made Slow, but Steady Gains in 2013 Carcasses Trimmer: YG 4s and 5s Coming Down • Yield Grade determination is positively correlated with heavier slaughter lambs. • Yield Grade 4 & 5 in lbs. was 23% of total slaughter in the first eight months of 2013 compared to 30% in 2012. YG 1s (Minimal Back Fat) Up with Very Current Market Yield Grades for Federally Inspected Lamb and Mutton Percentages, Fiscal Year Source: USDA, AMS, Livestock and Seed Division. YG1 YG2 YG3 YG4 YG5 2008 5% 31% 47% 14% 3% 2009 4% 34% 45% 14% 4% 2010 5% 38% 43% 13% 2% 2011 4% 27% 49% 17% 3% 2012 5% 28% 37% 18% 12% 1-8/2013 8% 37% 32% 14% 9% Why Have Yield Grade 5s Been Increasing in 2013? Formula Purchases Up in 2013 --Do purchases on a grid mean improved quality consistency? Q1 Gross Carcass Value (Wholesale Average) Weakened Quarterly and Down Year-to-Year • The gross carcass value averaged $279.28/cwt. in Q3, down 2% quarterly and down 13% year-to-year. • Gross carcass value was $280/cwt. in July, $278/cwt. in Aug. and $280/cwt. in Sept. Sept. Wholesale Market Higher than 2008 & 2009 but 43% Lower than 2010-2012’s September Gross Carcass Value 32-Percent Lower than Nov. 2011 High Lamb Primals Relatively Steady Over Past Year The Rack Fell the Sharpest Since its Record-High in June 2011, 43% • The rack averaged $507.19/cwt. in Q3, down 0.4% quarterly and down 15% year-onyear. • The rack was $509/cwt. in July, $496/cwt. in Aug. and $517/cwt. in Sept. Q3 Loins Steady Most of 2013, but Fell in September • Loins, trimmed 4x4, averaged $452.32/cwt., up 0.05% quarterly and down 17% year-toyear. • Loins were $455/cwt. in July, $458/cwt. in Aug. and $444/cwt. in Sept. Leg, Trotter-Off, Lost Greatest % Among Primals in Q3 • The leg averaged $299.49/cwt. in Q3, down 5% quarterly and down 16% yearto-year. • The leg was $300/cwt. in July, $297/cwt. in Aug. and $301/cwt. in Sept. Shoulder Down Quarterly and Year-on-Year • The shoulder averaged $2226.50/cwt. in Q3, down 2% quarterly and down 2% year-on-year. • The shoulder was $225/cwt. in July, $227/cwt. in Aug. and $227/cwt. in Sept. Ground Lamb Down Quarterly and Year-on-Year • Ground lamb averaged $520.27/cwt. in Q3, down 2% quarterly and down 6% year-onyear. • Ground lamb was $523/cwt. in July, $515/cwt. in Aug. and $523/cwt. in Sept. IV. AT RETAIL & FOOD SERVICE Food Service Sector Growth • The National Restaurant Association’s Restaurant Performance Index (RPI) declined for the third straight month in August, although still above the level indicating expansion of the sector (9/2013). • The Current Situation Index rose between July and August, but the Expectation Index (measuring the outlook for the next 6 months) was down. • Lamb carcass trade 17% of FI slaughter in Q3, up from 14%. Food Inflation Mixed for Retail Proteins • The price of food at home gained 1% between Q2 2012 and Q2 2013. • Beef and veal gained 2% in this period, • Pork dropped 0.5% and • Poultry jumped 5% (USDA/ERS, 10/2013). • The featured retail lamb price fell 6% between the second quarters of 2012 and 2013; however, the product mix wasn’t identical across quarters. Retail Feature Activity Down Quarterly • Feature activity in Q3 was down 16% quarterly and up 4% from a year ago. • Feature price of all lamb items was $6.43 per lb., down 1% quarterly and down 7% year-on-year. • Note: This is not an apples-to-apples comparison for featured products will differ between periods. Popular Feature Items Weakened Quarterly • The shoulder blade chop averaged $4.74 per lb. in Q3, down 6% quarterly and down 1% year-on-year. • The number of shoulder blade chop features fell 26% quarterly and was down 27% year-on-year. • Loins chops averaged $8.68 per lb. in Q3, down 4% quarterly and down 6% from a year ago. • The number of loins chop features were down 4% quarterly and up 77% from a year ago. V. PRICE SPREADS The Rack-Loin Price Spread Typically Gains Toward the December Holidays • The rack-loin price spread averaged $0.55 per cwt. in Q3, down 4% quarterly and down 66% yearto-year. • In the last year, the loins fell sharper than the rack, widening the spread. Understanding Packer Spreads • Packer price spreads do not include any costs of processing. • Packers sell wholesale primals (cuts) which are combined together and called the cutout. • Packers also sell carcasses, to the processing industry and to one another. • The price spreads assume that all that is processed sells and no allowance is made for cold storage tonnage. Packer Spreads Down in the Last Year The live to carcass price spread averaged $40.14 per head in Q3, down 13% quarterly and down 45% year-to-year. -- In last year, the carcass dropped 12% and slaughter lambs gained 4%. Live to cutout spread was $54.45 per head, down 24% quarterly and down 49% year-to-year. -- In the past year, the cutout was down 18% and slaughter lambs were up 4%. Carcass to cutout spread was $14.09 per head in Q3, down 43% quarterly and down 56% year-on-year. -- In the past year, the cutout fell 19% while the carcass lost under 13%. VI. PELTS Pelts Down Quarterly and Year-to-Year Due to Lower Demand • The stronger US$ contributed to the lower undertone in September, reducing the competitiveness of U.S. pelts on export markets (USDA/AMS, 9/13/13). • Comparatively smaller lambs in the product mix resulted in reduced credits (USDA/AMS, 9/27/13). • Fall Clips were $12.14 per piece in Q3, down 13% quarterly and down 6% year-to-year. • No. 1 pelts were $9.25 per piece in Q3, down 15% quarterly and down 12% year-to-year. Recall pelt prices are prices received by packers for pelts from slaughter lambs processed. --Many producers do receive pelt credits. VII. REPLACEMENT SHEEP July Replacement Ewes Up 2% Year-to-Year • August and September prices not established. July Ewes (per head): • 12-24 mo: $155 • 2-4 years: $116.25 • 5-6 years: $88.13 • Over 6 years: $63.16 VIII. DOMESTIC PRODUCTION AND TRADE Increased slaughter numbers and lower weights mean production falls only marginally. • In the first-nine months of the year, estimated lamb slaughter was 1.48 mill. head, up 8% year-on-year. • Lamb production was 1.04 mill. lbs., up 0.8% year-onyear. Lamb Production Trended Downward in 2009-2011, but Up in Last Two Years Slaughter Weights in 2013 thru Sept. were 140 lbs., Down 6% Year-on-Year -- At 136 lbs., Q3 live weights were 4-percent lower quarterly. --Slaughter weights were 141 lbs. in July, 136 lbs. in Aug. and 133 lbs. in Sept. In Q3, cold storage averaged 21.5 mill. lbs., up 10% quarterly and down 9% year-on-year. -- Recall that some portion of cold storage is imported product. Cold storage was 19.3 mill. lbs. in July, 23.3 mill. lbs. in Aug. and 21.9 mill. lbs. in Sept. Lamb and Mutton Imports Higher At 106.8 million lbs., lamb and mutton imports in Jan.July were 21% higher year-on-year. Lamb Imports Totaled 88.7 Mill. Lbs. in Jan. to July – Up 16% Year-to-Year Lamb Imports Higher Each Month in 2013 Except May Aust. and NZ Lamb Up Year-to-Year • Australian lamb imports in Jan.-July were 59.3 mill. lbs., up 13% year-to-year. • NZ’s lamb imports were 29.3 mill. lbs., up 23% yearto-year. Mutton Imports Sharply Higher Year-on-Year • At 18 million lbs., mutton imports were 56% higher in Jan.-July compared to a year earlier. • Mutton imports from Australia were 12.8 million lbs. in Jan.-May, up 66% year-to-year. • New Zealand mutton imports were up 26% to 5 million lbs. in this period. Mutton Imports on Upward Trend Since mid-2011 Lamb & Mutton Exports Down 17% January to July Year-to-Year Lamb exports up 110% through July to 350,000 lbs. Mutton imports down 20% through July to 4.4 mill. lbs. May Lamb Exports Hit a 4-Year High Total Live Sheep Exports Down 16% Year-to-Year through July to 22,522 Head • U.S. live sheep exports to Mexico were 16,090 head in Jan.-July compared to 0 head during the same period in 2012. • At 6,348 head, live exports to Canada were down 76% year-to-year. Q3 Cull Ewe Prices Lowest on Record --San Angelo ewe prices averaged $33.39 per cwt. in Q3, up 1% quarterly and down 25% year-on-year. --Culls averaged $33/cwt. in July, $35/cwt. in Aug. and $33/cwt. in Sept. IX. NONTRADITIONAL MARKET Nontraditional Market Got Late-September Boost • The nontraditional market is often characterized by a lighter-weight lamb, around 100 lbs., but very variable depending upon customer. • The nontraditional market is mainly comprised of lambs sold direct to consumers. • Some nontraditional lambs are processed by state inspected plants and even some FI plants. • The largest nontraditional markets are the livestock auctions at New Holland, PA and San Angelo, TX, but nontraditional markets exists across most auctions. Eid ul-Adha Supported September Nontraditional Markets • Eid ul-Adha, the Muslim Festival of Sacrifice, is probably the most important Muslim holiday for the sheep and lamb industry. • Sheep auctions see an increased number of buyers in the few weeks before the holiday which reportedly helps boost prices. • This year, the holiday was October 15, but the date falls about 12 days earlier each year according to the Muslim lunar calendar. New Holland Lambs Lower • Prices averaged $122.05 per cwt. in Q3, 6-percent lower quarterly and down 36% from a year ago for 90- to 110-lb. slaughter lambs. • Prices gained from $120 per cwt. in August, to $133 per cwt. in September to $141 per cwt. in the first two weeks of October for 90- to 110-lb. lambs. X. TOTAL LAMB AND MUTTON AVAILABILITY Total Lamb Availability Up Through July Year-on-Year • In Jan.-July total lamb availability (imports plus domestic production, subtracting exported lamb) was 175 million lbs., up 9% year-on-year. • In this time, U.S. domestic lamb supplies were up 2% to 86.3 million lbs. compared to a year ago. • Imports were up 16% year-to-year to 88.7 million lbs. • Note: These figures do not include the nontraditional market estimated volume. Total Lamb Availability Trending Up U.S. Lamb Market Share Below 50% • In January to July: Domestic lamb market share was 49%, down from 53% year-on-year. Domestic lamb & mutton market share was 45%, down from 51% year-to-year. Domestic mutton market share was 22%, down from 33% a year ago. Domestic Share of Lamb Market Contracting, Challenging Growth XI. IMPORTED PRODUCT PRICE COMPARISONS Domestic & Imported Cuts not Identically Specified: Challenges an “Apples to Apples” Comparison • U.S. Commerce data only offers broad cut categories. • There are limitations to USDA/AMS/MRP import data: • Confidentiality measures can sometimes prohibit price reporting. • The volume threshold might not be met if smaller importers/reduced volumes are imported. Price Comparison with Imports is Tricky Caveats: 1. Imported product might be sitting in cold storage and not competing directly with domestic product at a specific time period. 2. Imported product is lighter weight. 3. Prices reported in Commerce data could have been established in forward pricing. U.S. Rack Still Higher-Priced *Note weight differences: U.S. rack 1.5-3.0 lbs. and imported rack 28 oz. +, not a perfect comparison but useful as a snapshot. But U.S. Rack Gained Competitiveness in 2013 Imported Shortloins Comparison with U.S. Loins under MPR U.S. Loins Gained In Competitiveness U.S. Shoulder Competitiveness Improved: Imported Shoulder Gained & Domestic Shoulder Weakened in Q3 Shoulder Premium Down in 2013 XII. EXCHANGE RATES In 2013 the U.S. Dollar Gained 12% Against the A$; Imports More Competitive In Q3 the U.S./Australian dollar fell 7% quarterly to $0.92, down 12% yearon-year. In Q3 the U.S./New Zealand dollar hit $0.80, down 3% quarterly and down 1% year-to-year.