Prepared by the American Sheep Industry Association for the American Lamb Board November 2012 Executive Summary I. II. III. IV. V. VI. VII. VIII. IX. X. XI. Feeder and Slaughter Lamb Market Trends Feeder and Slaughter Lamb Price Projections Carcass and Boxed Lamb Market Trends Retail Feature Activity Price Spreads Pelts Replacement Sheep Domestic Production and Trade Total Lamb and Mutton Availability Price Comparison to Imported Product Exchange Rates Executive Summary 2012 has been a tumultuous year for the lamb industry with a dramatic loss in value for feeder and slaughter lambs, lower meat prices, high feed costs and backed up lambs in feedlots. Retail and wholesale lamb prices hit record highs last November, putting pressure on consumers. Consumers rebelled at the higher price point and retail and foodservice orders began to slow. Consequently, lambs on feed began to get backed up and got heavier. It wasn’t until early November 2012 that reportedly Old Crop lambs were “cleaned up.” Through 2012 consumer income growth and consumer expenditures grew slowly; insufficient advances to put the much-needed boost back into lamb demand. The recent U.S. Department of Agricultural lamb purchase program and good sales through the December holidays should get the feedlots back to current weights and move inventories product. 2013 will likely see tight slaughter lamb supplies, reduced slaughter weights and lower production. Even with higher feed costs, feeder lamb prices could rebound with accelerated consumer income growth. Feeder lamb prices took the brunt of the market downturn in the past year. Feeder lamb prices at auction hit $99 per cwt. in September—the lowest level in four years. It was a little over a year, May 2011, when we saw the record $228 per cwt. average at auction. In the third quarter, the 3-market feeder lamb auction price saw a 44-percent quarterly decline and a 53-percent year-on-year drop. Executive Summary, page 2 Feeder lamb prices in direct trade hit a three-year low in the third quarter. Feeder lambs averaged $105.87 per cwt., 27-percent lower quarterly and 53-percent lower year-on-year. Feeder offers were constrained by high feed costs, uncertain slaughter dates and great uncertainty in the slaughter lamb market. In 2012 the U.S. lamb industry had a lot more product to take to market then the market was accepting at those prices. Total lamb availability to consumers through August (in which last import data is available) was down 1% year-to-year to 184.34 million lbs. While domestic production was up 4% in this period, imported product shrank 6%. Lower lamb supplies suggest higher prices at foodservice and retail, not lower. Consumer lamb demand apparently faltered. Lamb prices in retail grocery features saw an estimated 5% drop in the past year. Slaughter lamb prices at auction saw a 15-month downward slide by September. Live, slaughter lamb prices at auction lost 30% to $98.20 per cwt. between quarters and lost 45% year-to-year. Slaughter lamb prices on a carcass-based formula averaged $251.11 per cwt. ($127.83 per cwt. live-converted) in the third quarter, down 17% quarterly, and down 33% year-on-year. A concern among many industry proponents is that the meat market doesn’t seem to have fared as bad as the feeder and slaughter lamb market in this current downturn. Carcass prices averaged $313.30 per cwt. in the third quarter, 14-percent lower quarterly and a down 19% from a year ago. The gross carcass value averaged $322.24 per cwt., down 10% quarterly and down 21% year-to-year. Executive Summary, page 3 All primals weakened through the year. The loins, leg and shoulder saw muted losses at wholesale compared to the losses experienced by the higher-valued rack. The rack averaged $593.20 per cwt., down 13% quarterly and down 34% year-onyear. Loins, trimmed 4x4, averaged $543.54 per cwt., up 4% quarterly and down 6% year-to-year. The leg averaged $358.37 per cwt. in the third quarter, down 14% quarterly and down 16% year-to-year. The shoulder averaged $231.38 per cwt. in the third quarter, down 8% quarterly and down 26% year-on-year. Relative to the primals, ground lamb held its value for much of 2012 before weakening in the summer. Ground lamb averaged $552.42 per cwt. in the third quarter, down 7% quarterly and down 6% year-on-year. • The 3-market feeder lamb auction price saw a 44-percent quarterly decline to $102.13/cwt., down 53% year-onyear. • Markets included San Angelo, Ft. Collins and Sioux Falls. • Prices not established in Ft. Collins in September. • Prices averaged $112.21/cwt. in July, $94.48/cwt. in Aug. and $99.69/cwt. in Sept. Feeders Hit a Three-Year Low Feeder Lambs in Direct Trade Averaged $105.87/cwt., 27% Lower Quarterly, 53% Lower Year-on-Year Feed Costs Still High • Corn averaged $6.36 per bu. in its 2011/12 marketing year through August, 15% higher year-to-year. • Corn averaged $6.37 per bu. in June, $7.14 per bu. in July and $7.63 per bu. in Aug. • Alfalfa averaged $202 per ton in Q3, 3% lower quarterly, 4% higher year-on-year. • Alfalfa averaged $198 per ton in July, $203 per ton in Aug. and $205 per ton in Sept. • Live, slaughter lamb prices at auction lost 30% to $98.20/cwt. between quarters and lost 45% year-toyear. • Prices averaged $108.93/cwt. in July, $98.15/cwt. in Aug. and $87.53/cwt. in Sept. • At 140,400 head, formula trades were up 3% quarterly and up 68% year-on-year. • Slaughter lamb prices on a carcass-based formula averaged $251.11/cwt. ($127.83/cwt. live-converted) in Q3, down 17% quarterly and down 33% year-on-year. • Weighted-average prices were $268.84/cwt. in July, $251.85/cwt. in Aug. and $232.65/cwt. in Sept. Heavier-Carcass Discount Widened Consumer Demand is Key to Stronger Feeder and Slaughter Lamb Prices… and Ultimately to Industry Growth • Lamb demand in the third quarter could get a boost from possible higher beef prices and possible continued, but slow, income growth. • The ALB is challenged to boost consumer preference for lamb through continued taste samplings and promotions. • From 2000 to 2010, population growth in the United States was driven almost exclusively by racial and ethnic minorities (Pew Research Center). • Middle Eastern and Eastern European prioritize lamb quality (Williams, Capps, 2011) and will react to lamb promotions which will help boost demand. • Hispanics were responsible for 56% of the nation's population growth over the past decade. • Hispanics will respond to lower-priced lamb (Williams, Capps, 2011). • Ethnic groups consume 58% of lamb (Williams, Capps, 2011). Higher Trending Beef Prices Support Lamb Demand • Inflation-adjusted per capita disposable income gained 0.7% and 0.6% in the first two quarters of 2012, after three quarters of contractions. • These volatile times means any price forecast should be used with caution. • In mid-October LMIC forecasted: Slaughter lambs on a carcass-based formula and feeder lamb prices could fall 25% to 46% year-to-year, respectively. • By Q1 slaughter lamb prices could range from $285-$295 per cwt., 12% lower year-to-year. • By Q1 60-90 lb. 3-market ave. (CO, SD, TX) feeders could range from $135-$145 per cwt., down 34% year-to-year. • In 2012 seasonality in price trends was trumped by a backlog of market-ready lambs and lower consumer demand. • The predictive power of seasonal analysis might thus be compromised. • 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. • The drought-inflicted 2012 corn crop is forecasted to be the lowest in six years. • USDA reported that September U.S. corn stocks were 988 million bushels, the lowest carryout since 1995/96. • The USDA Economic Research Service forecasted the 2012/13 corn average at $7.10-$8.50 per bu. • Higher corn forecasts were partly explained by lower-than-expected early season cash and futures prices. • • Carcass prices averaged $313.30/cwt. in Q3, 14-percent lower quarterly and down 19% from a year ago. • Carcass price was $333.46/cwt. in July, $313.21/cwt. in Aug. and $293.22/cwt. in Sept. • Yield Grade determination is positively correlated with heavier slaughter lambs and increased deposits of back fat. • Yield Grade 1 & 2 in lbs. was 27% of total slaughter in May –the lowest level since late 2005--but rose to 37% by August. • Larger carcass will have a larger loin eye/rib eye area, which can make them more valuable. • Plant throughput is inherently higher with larger carcasses. • However, the shoulder is one item that is difficult to remove fat from when the carcasses are Yield Grade 4 or 5. Trimming it can be labor intensive and will squeeze packer margins. • Legs and loins primarily carry fat on the outside of the cut. Yield Grades for Federally Inspected Lamb and Mutton Percentages, Fiscal Year Source: USDA, AMS, Livestock and Seed Division. YG1 YG2 YG3 YG4 YG5 2007 4% 32% 47% 12% 3% 2008 5% 31% 47% 14% 3% 2009 4% 34% 45% 14% 4% 2010 5% 38% 43% 13% 2% 2011 4% 27% 49% 17% 3% 1-8/2012 5% 28% 36% 19% 13% Q3 Gross Carcass Value (Wholesale Average) Weakened Quarterly and Year-to-Year • The gross carcass value averaged $322.24/cwt. in Q3, down 10% quarterly and down 21% year-to-year. • Gross carcass price was $332.95/cwt. in July, $320.18/cwt. in Aug. and $313.59/cwt. in Sept. Third-Quarter Gross Carcass Value was 7% Higher than its 5-Year Average • The rack averaged $593.20/cwt. in Q3, down 13% quarterly and down 34% year-on-year. • The rack was $625/cwt. in July, $592.83/cwt. in Aug. and $561.78/cwt. in Sept. • Loins, trimmed 4x4, averaged $543.54/cwt., up 4% quarterly and down 6% year-to-year. • Loins were $550.57/cwt. in July, $544.56/cwt. in Aug. and $535.50/cwt. in Sept. • The leg averaged $358.37/cwt. in Q3, down 14% quarterly and down 16% year-to-year. • The leg was $376.49/cwt. in July, $357.52/cwt. in Aug. and $341.12/cwt. in Sept. • The shoulder averaged $231.38/cwt. in Q3, down 8% quarterly and down 26% year-on-year. • The shoulder was $230.34/cwt. in July, $224.58/cwt. in Aug. and $239.21/cwt. in Sept. • Ground lamb averaged $552.42/cwt. in Q3, down 7% quarterly and down 6% year-on-year. • When wholesale prices drop, retailers are reluctant to drop prices, but will increase featuring. • Feature activity was up 19% from September 2011 to mid-October 2012. • Prices listed in lamb features were down 5% over this same period to mid-October. • Product and quality wasn’t necessarily constant over this period. Mix of products at retail could have changed over time. • The rack-loin price spread fell 69% in Q3 to $0.60 per lb., down 84% year-on-year. • Industry still killing Old Crop (OC) lambs in October when OC lambs typically finished slaughtering by mid-summer. • Producers losing an estimated $65 per cwt. or $264 per head. • September estimated break-even was $163 to $176 per cwt. compared to a price range of $88 to $119 per cwt. (auction & liveconverted formula slaughter lamb price). Item Cost 1. Total cost of feeder (92.5-lb. feeder @ $197 per cwt. in Nov./Dec. 2011) $182/head 2. Average Freight from CA, TX, ID $6.00/head 3. Cost of Gain in Colorado feedlot (162.5 lbs. gained @ $1.40/lb. to 255 lbs.) $228/head 4. Break-even price of slaughter lamb @ 255 lbs. $416/head Break-Even $163/cwt. Item Cost 1. Total cost of feeder (92.5-lb. feeder @ $197 per cwt. in Nov./Dec. 2011) $182/head 2. Average Freight from CA, TX, ID $6.00/head 3. Cost of Gain in Colorado feedlot (162.5 lbs. gained @ $1.60/lb. to 255 lbs.) $260/head 4. Break-even price of slaughter lamb @ 255 lbs. $448/head Break-Even $176/cwt. • Margins do not include packer costs: Lamb sale value minus its purchase value. • Positive margins partly because the value of live slaughter lambs fell more sharply than carcass & cutout values. The live to carcass price spread averaged $99 per head, up 16% quarterly and up 128% year-to-year. • The mid-year carcass value exceeded the cutout. • In Q3, the cutout halted its downward fall and held steady--even increased in some weeks--while the carcass continued its weakening trend. Carcass to cutout spread was $6/head in Q3, up from -$7/head and down 56% yearon-year. • The Agricultural Marketing Service reported that the October pelt trade was light to moderate with some interest in top quality large square footage pelts (USDA/AMS, 10/2012). • Fall Clips were $12.90 per piece in Q3, down 15% quarterly and down 30% year-to-year. • No. 1 pelts were $10.48 per piece in Q3, down 24% quarterly and down 32% year-to-year. • Recall pelt prices are prices received by packers for slaughter lambs processed. • Q3 ewe prices not well tested: Not reported in either July or August. • In September, ewes averaged $138.32 per head, down 36% year-on-year. The high was $216 per head for 12-14 month yearling ewes and the low was $68 per head for aged ewes. • In Q3, rams were about 34% lower than a year ago. Black-faced rams averaged $694 per head and whitefaced rams brought $930 per head. • At 1.43 million head, commercial slaughter was down 1% through August year-to-year. • Live slaughter weights were up 3% through August to 146 lbs. • Heavier weights boosted production. • Production was 101.2 million lbs., up 6% through August yearto-year. • Australian lamb imports through Aug. were 60.9 Mill. Lbs., Down 1% Year-to-Year • Through Aug., NZ’s lamb imports were 25.8 Mill. Lbs., Down 16% Year-to-Year Mutton Imports Sharply Lower Year-to-Year • At 14.2 million lbs., mutton imports were 50% lower though August compared to the same period a year ago. • Mutton imports from Australia were 9.6 million lbs., down 27% in this period. • New Zealand mutton imports were down 69% to 4.6 million lbs. • At 198,000 lbs., lamb exports were down 68% through August year-to-year. • Mutton exports totaled 6.6 million lbs. through August, down 46% year-on-year. 617 198 -68% 12,173 6,553 -46% 12,790 6,751 -47% • U.S. live sheep exports to Mexico were zero through August. Last live exports to Mexico were in early November 2011. • Live exports to Canada were down 15% through August to 28,913 head. Total Lamb Availability Contracted Through August Compared to a Year Ago • Through August, total lamb availability (imports plus domestic production, subtracting exported lamb) was 184.34 million lbs., down 1% year-on-year. • Through August, U.S. domestic lamb supplies were up 4% year-to-year and lamb imports were down 6%. Total Lamb Availability Contracted an Annual Average of 3% from 2007 to 2011 • In the eight months through Aug., domestic lamb market share was 53%, up 4% year-to-year. • Through Aug., domestic lamb & mutton market share was 51%, up 11% year-to-year. • Through Aug, domestic mutton market share was 33%, up 25% year-on-year. • 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. Note: 1.) Imported product is lighter weight. 2.) Prices reported in Commerce data could be established in forward pricing. Insufficient Partial Boneless Prices for Comparison • A weakened dollar means U.S. importers must now pay more for a unit of foreign currency, which increases prices to U.S. consumers. • Sustained--albeit weak--U.S. economic growth and signs of housing sector recovery could add strength to U.S. dollar. • In Q3 the U.S./Australian dollar was $1.04, up 3% quarterly and down 1% year-to-year. • In Q3 the U.S./New Zealand dollar hit $0.809, up 2% quarterly and down 3% year-to-year.