Second-Quarter 2016 Sheep Industry Review Prepared by the American Sheep Industry Association for the American Lamb Board July 2016
Executive Summary I. Feeder and Slaughter Lamb Market Trends II. Carcass and Boxed Lamb Market Trends III. At Foodservice and Retail IV. Price Spreads V. Pelts VI. Replacement Sheep VII. Domestic Production and Trade VIII. Nontraditional Market IX. Total Lamb and Mutton Availability X. Price Comparison to Imported Product XI. Exchange Rates XII. Price Projections and Outlook
Executive Summary The second-quarter 2016 saw a stronger live lamb market, but the strength was likely prompted by tighter live lamb supplies and ethnic market demand and not necessarily due to movement in the meat market. The wholesale lamb market has remained mostly stagnant to weaker through the year. As supply and demand wrestle to establish prices, it appears supply will trump in the short term until sufficient fresh product is available to test demand. Perhaps not until this fall, and the holiday season, will we see how well demand holds. Improved western pasture conditions coupled with tight supplies of new crop lambs delayed feeder shipments this spring to commercial feedlots and at heavier weights. This was perhaps to the industry's benefit for feedlots were still clearing out old crop lambs lambs born in early 2015--in July. As old crop lambs were processed, harvest weights rose, as seen in a larger portion of yield grades 4s and 5s with increased back fat. Significant cold storage stocks remain a concern in forecasting price trends. In the Markets The 3-market feeder lamb auction price saw a 4% drop quarterly to $192.95/cwt. and was 1% lower year-on-year. In the second quarter, feeders in direct trade averaged $162.29/cwt., up 17% quarterly and up 8% year-on-year. Live, slaughter lamb prices at auction averaged $146.92/cwt. in the second quarter, 8% higher quarterly and 2% lower year-on-year.
Executive Summary, page 2 National, formula/grid slaughter lamb prices on a carcass basis have not been reported since late January 2016. Lack of price reporting disables LRP-Lamb, the only risk management tool available to the lamb industry. Lack of price information also adds considerable risk, and costs, to the entire industry. Prices guide efficient resource allocation decisions of when to sell, for example. Slaughter lambs in live, negotiated sales averaged $139.07/cwt., up 2% quarterly and up 1% year-onyear. The meat market remained stagnant to weaker in the second quarter. The net carcass value (wholesale composite less processing and packaging) averaged $308.50/cwt., down 3% quarterly and 5% lower year-on-year. The rack, 8-rib medium, dipped below $7 per lb. for the first time since 2013. Carcass reporting was limited in the second quarter. Mostly heavier carcasses were reported which distorts the market because heavier carcasses bring less per pound. Sixty- to 75-lb. carcasses averaged $290.63 per cwt., 4% lower quarterly and 10% lower year-on-year. Retail lamb in the first quarter was mostly lower quarterly and steady to lower year-on-year. Most primals have remained flat with some gains; however, the rib has seen some more pronounced weakening. Production & Trade Lamb harvest through June was an estimated 949,922 head, up 0.3% year-on-year. Lamb production was an estimated 67.2 million lbs., down 0.5% year-on-year. Lamb imports were up 23% year-on-year to 71.2 million lbs. in the first trimester, but likely to slow. Total estimated lamb supplies in January to April was 119.15 mill. lbs., up 12% year-on-year. However, due to a sizeable freezer inventory we don t know what actual sales are. Cold storage averaged 42.3 million lbs. per month in 2016, the highest annual monthly average on record. Reportedly, a significant portion of cold storage is imported.
Executive Summary, page 3 Forecasts The Livestock Market Information Center (LMIC) forecasted that slaughter lamb prices could move higher into the third quarter. Lower forecasted imports and tight domestic supplies will likely help support prices. LMIC expects the third-quarter lamb supply to be the tightest in three years with lower production and lower imports. New crop lambs out of California and Idaho were in reduced supply and there was concern that the summer lamb supply could become increasingly tight once the old crop lambs go to market. LMIC forecasted that in the third quarter, slaughter lamb prices could strengthen by 6% quarterly, but come in lower than a year ago. The national, direct slaughter lamb price is forecasted at $262 to $267 per cwt. on a carcass basis, 11% lower year-on-year (LMIC, 6/17/16). Slaughter lamb prices at auction historically weaken into the third quarter, but for the past couple years we ve seen prices move higher. LMIC forecasted that feeders could weaken by 12% in the third quarter and average lower year-on-year (6/17/16). LMIC forecasted that 60- to 90-lb. feeders are forecasted to range from $169 to $174 per cwt., 8% lower year-on-year. LMIC s feeder forecast is in keeping with historical trends: Feeder lambs typically hit their annual low in the third quarter before rising sharply through the fall. The lack of strength in the meat market is a concern given recent gains in the live lamb market. Meat market weakening could be a symptom of higher imports to date, the slow release of freezer stock, lower beef prices and cautious consumer spending.
I. Feeder and Slaughter Lamb Market Trends
Auction Feeder Lamb Prices (60- to 90-lb.) Lower in Q2 The 3-market feeder lamb auction price saw an 4% drop quarterly to $192.95/cwt. and 1% lower year-on-year. Prices were $195.74/cwt. in April, $192.43/cwt. in May and $190.67/cwt. in June. Markets included San Angelo, Ft. Collins and Sioux Falls.
Feeder Lamb Prices Rebounded in Late 2015 before Weakening Again into 2016
Feeder Lamb Prices Stronger in Direct Trade as Feeders Scramble to Secure Limited Supplies oin Q2, feeders averaged $162.29/cwt., up 17% quarterly and up 8% year-onyear. oprices averaged $156.50/cwt. in April, $157.83/cwt in May and $172.53/cwt. in June.
Feeders in Direct Trade Trended Up in 2016
Improved pastures meant delayed shipments of new crop lambs in 2016.
Corn Steady In May (last data) corn averaged $3.68 per bu., up 3% monthly and 1-percent higher year-on-year.
Alfalfa Lower By May (latest data) alfalfa averaged $147 per ton, down 4% monthly and down 23% year-on-year.
Western Pasture Conditions Still Dry, but Improving Source: LMIC
Auction Slaughter Lamb Prices Higher Quarterly; Lower Year-to-Year Live, slaughter lamb prices at auction averaged $146.92/cwt. in Q2, 8% higher quarterly and 2% lower year-on-year. Prices averaged $130/cwt. in April, $147.94/cwt. in May and $154.83/cwt. in June.
Slaughter Lamb Prices Followed 2015 Trend, Thus Far
Slaughter Lamb Prices Seasonal, but Revealing Downward Trend since 2014
Carcass-Based Formula Slaughter Lamb Prices Not Reported National, formula/grid slaughter lamb prices on a carcass basis have not been reported since late January 2016. Lack of price reporting disables LRP-Lamb. Leaves a knowledge gap in the marketplace.
Only heavier formula trades reported: Not representative of the market.
Live, Negotiated Prices Higher Quarterly Slaughter lambs in live, negotiated sales averaged $139.07/cwt., up 2% quarterly and up 1% year-on-year. Prices averaged $131.16/cwt. in April, $137.14/cwt. in May and $148.92/cwt. in June.
Live, Negotiated Price Generally Tracks Formula Price
Portion of Formula Trades in 2016 Harvest Higher yet Very Limited Price Information Available
Portion of Packer-Owned and Formula Trades Volatile, but Increasing
II. Carcass and Boxed Lamb Market Trends
Carcass Reporting Limited, Spotty Mostly heavier carcasses reported which distorts the market: Heavier carcasses bring less per lb. 65-75 lb. carcasses averaged $290.63 per cwt., 4% lower quarterly and 10% lower year-on-year.
Heavier Carcasses Slumped in Q1; Rebounded by June 2016
YG 4s and 5s Increased in 2016
Federally Inspected Lamb and Mutton Yield Grades Percentages derived from yield grade by lbs. Source: USDA, AMS, Livestock and Seed Division YG1 YG2 YG3 YG4 YG5 2014 6% 33% 41% 14% 6% 2015 5% 29% 41% 16% 8% Jan-May 2016 5% 27% 38% 20% 9%
Lambs graded averaged 60% in Q2, up from 55% in Q1 and down from 62% a year ago.
Second-Quarter Net Carcass Value (Composite of wholesale cuts) Lower The net carcass value (wholesale composite less processing and packaging) averaged $308.50/cwt. in Q2, down 3% quarterly and 5% lower year-on-year. The net carcass value averaged $309.30/cwt. in Apr., $308.89/cwt. in May and $307.31/cwt. in June.
Q2 Continued 2015 Downward Trend in Net Carcass Value
Rack, 8-Rib Medium, Dipped below $7/lb. The rack averaged $674.97/cwt. in Q2, down 4% quarterly and down 10% yearon-year. The rack averaged $676.48/cwt. in Apr., $681.46/cwt. in May and $666.99/cwt. in June.
Loins Steady Year-on-Year Loins, trimmed 4x4, averaged $520.78/cwt., down 0.4% quarterly and 0.5% higher from a year ago. Loins were $518.80/cwt. in April, $519.50/cwt. in May and $524.05/cwt. in June.
Leg, Trotter-Off, Higher Year-on-Year The leg averaged $343.94/cwt. in Q2, down 2% quarterly and up 2% year-onyear. The leg averaged $347.54/cwt. in April, $343.70/cwt. in May and $340.57/cwt. in June.
Shoulder Weaker Year-on-Year The shoulder averaged $273.86/cwt. in Q2, down 5% quarterly and down 6% year-onyear. The shoulder was $271.17/cwt. in April, $275.13/cwt. in May and $275.27/cwt. in June.
Ground lamb averaged $526.82/cwt., down 5% quarterly and down 7% year-onyear. Ground lamb was $542.54/cwt. in April, $512.52/cwt. in May and $525.40/cwt. in June. Ground Lamb Weaker
III. At Retail & Food Service
Retail Lamb in Q1 Mostly Lower Quarterly and Steady to Lower Year-on-Year Price per lb. % change quarterly % change year-to-year Rib $17.10-2.0% -2.0% Leg $7.03-1.0% 0.2% Loin $12.60-6.0-0.4% Shoulder $6.71-1% -1% Ground 5.79$ 2% 7%
Retail Mostly Flat Except Rib
Foodservice Sales Good, but not Great Food sector retail sales growth in May was at the slowest year over-year pace since March 2014, according to data released by the U.S. Census Bureau (Daily Livestock Report, 7/5/16). Food service and drinking place sales were up 4% from a year earlier, compared to a 9% gain in April. By comparison, grocery store sales increased 0.7% from a year ago. In April, grocery store sales were up 2% from twelve months earlier.
IV. Price Spreads
At $1.54 per lb., the rack-loin spread was down 15% quarterly, and down 34% year-on-year. --The loin maintained in 2016 while the rack weakened. Comparing wholesale cuts: rack, medium, 8-rib and 4x4 trimmed loins.
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.
Only the live to cutout spread is reported due to lack of price reporting for the carcass.
Break-Even Analysis Breakeven analysis is only one snapshot of feedlot marketing. -- Depends upon time and weight coming into the feedlot, length of time on feed and rate of gain in the feedlot. -- Includes feed costs, death loss and other costs (premium to compensate for last year s losses).
Cost of Gain in Colorado Feedlots Lower Through Q2
Positive margins estimated for Colorado feeders in June Cost of gain lowered by about 5 cents in Q2 to 78 cents per lbs., down about 10 cents yearon-year. The June estimated break-even was $124 to $126 per cwt. compared to $149 per cwt.,-- average live, negotiated slaughter lamb price.
Sensitivity Break-Even Analysis A: 75-cents per lb. cost of gain Item 1. Total cost of feeder (4,300 head traded from CA in April at 120 lbs. and $136/cwt.) Cost $163.20 per head 2. Average freight $8.00 per head 3. Cost of gain in Colorado feedlot 45 lbs. gained @ $0.75/lb. to 165 lbs.) $33.75 per head 4. Break-even price of slaughter lamb @ 165 lbs. $204.95 per head Break-Even $124.21 per cwt.
Sensitivity Break-Even Analysis B: 80-cent per lb. cost of gain Item 1. Total cost of feeder (4,300 head traded from CA in April at 120 lbs. and $136/cwt.) Cost $163.20 per head 2. Average freight $8.00 per head 3. Cost of gain in Colorado feedlot 45 lbs. gained @ $0.80/lb. to 165 lbs.) $36.00 per head 4. Break-even price of slaughter lamb @ 165 lbs. $207.20 per head Break-Even $125.58 per cwt.
V. Pelts
U.S. Pelts Mixed Quarterly In late January, USDA/AMS adopted new classes for pelt reporting, to better identify prices for like quality pieces. Descriptors for Pelt Classes include square footage, discolored fiber, manure/seed free, staple length, micron, and processing defects. Supreme highest quality unshorn pelts brought $8.88 per piece in June, up 0.4% monthly. Damaged/puller pelts the lowest quality--was steady at -$1.75 per piece. Packers asked for a disposal fee.
Strong USD & Weak International Pelt Demand Depressed US Market
VI. Replacement Sheep
Ewe Prices Mostly Steady for Younger Ewes, Lower for Older -- Running Age Ewes, 2-4 years, averaged $206.64 per head in the first-half of 2016, 0.03% lower year-onyear. -- Middle Age Ewes, 5-6 years, averaged $164.77 per head, down 0.04% year-on-year. -- Aged Ewes, over 6 years, averaged $97.32 per head, down 20% year-on-year.
Ewe Prices Variable, Dependent Upon Age Ram prices not well tested for quarterly comparison.
VII. Domestic Production and Trade
Lamb Production Down Lamb harvest estimated at 949,922 head through June, up 0.3% year-on-year. Lamb production estimated at 67.2 million lbs., down 0.5% year-on-year.
Federally-inspected sheep and lamb harvest weights averaged 141 lbs. in Q1 and Q2, down from 143 lbs. in Q2 2015.
Colorado Lambs on Feed Steady Year-on-year; Lower from 5-year Average Source: LMIC
Cold Storage Record-High
Cold storage averaged 42.3 million lbs. per month in 2016, highest annual monthly average on record.
Lamb & Mutton Imports were Up 22% Year-on-Year to 87.5 Million Lbs. in the First Trimester
Lamb Imports were Up 23% Year-on-Year to 71.2 Million Lbs. in the First Trimester
Australian Lamb Imports Up 33% in First Trimester Australian lamb imports in Jan.-April were 53.8 mill. lbs., up 33% year-on-year. NZ s lamb imports were 17.0 mill. lbs., up 3% in the year-toyear.
In Jan-Apr, lamb imports were $223.2 million, up 9% year-on-year.
At 16.4 million lbs. in Jan-Apr, mutton imports were up 18% year-on-year. -- Australia up 16% to 13 mill. lbs.; -- NZ up 30% to 3.3 mill. lbs.
Lamb & mutton exports were 1.5 mill. lbs. in Jan-Apr, up 10% year-on-year. --Lamb exports were 329,100 lbs., up 235%.
Total Live Sheep Exports Down Sharply in first Trimester Total live sheep exports to Mexico in Jan-Apr was 7,473 head, down 14% year-on-year. Live exports to Canada down 99% year-on-year in Jan-Apr at 20 head.
Q2 Cull Ewe Prices Lower --San Angelo ewe prices averaged $61.04/cwt. in Q2, 17% lower quarterly and 9% lower year-on-year.
XIII. Nontraditional Market
Nontraditional Market Significant Segment of U.S. Sheep Industry 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.
Slaughter lamb prices at New Holland in Q2 averaged up 2% quarterly and down 1% compared to a year ago. Price trends differed by weight class.
IX. Total Lamb and Mutton Availability
Total estimated lamb supplies in Jan-Apr was 119.15 mill. lbs., up 12% year-on-year. Note: We don t know how much lamb domestic & imported actually is available in meat cases and at foodservice. Reportedly, a significant portion of cold storage stock is imported.
U.S. Commercial Lamb Market Share Nationally and at Wholesale Has Slipped Further in 2016 In January-April 2016: Domestic lamb market share was 40%, down from 46% year-on-year. Domestic lamb & mutton market share was 37%, down from 42% a year ago. Domestic mutton market share was 14%, down from 17% year-on-year.
Domestic Lamb Share Trending Down
X. Imported Product Price Comparisons
By May 2016, the AUS Shortloin Gained While the U.S. Loin Weakened
U.S. Premium to the AUS Shortloin Maintained through 2015, but then Narrowed in 2016
Although AUS Rack Weakened in Q2, the U.S. Premium Maintained *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.
U.S. Rack Premium Exceeded 100% in Jan-May 2016
U.S. Fabricated Rack Prices Lower Year-on-Year U.S. rack, roast-ready, frenched (204C) averaged $1,238.61/ cwt. in Q2, down 8% quarterly and 12% weaker year-on-year. U.S. rack, roast-ready, frenched, special (204D) averaged $1,776.83/cwt. in Q2, up 1% quarterly and down 5% year-on-year. The AUS rack cap-off, 28 oz.+ was $859.14/cwt., down 6% quarterly and 10% weaker year-on-year.
U.S. and AUS Shoulder Trended Lower in 2016 while the U.S. Shoulder Maintained its Premium
In 2016 through May, the U.S. shoulder averaged a 29% premium.
XI. Exchange Rates
Australian Dollar Stronger Against US$ in Q2 2016 -- In Q2 the Australian/U.S. rate strengthened by 3% to 74 cents, down 4% year-on-year from 78 cents. -- In Q2 the NZ/U.S. rate gained 4% to 69 cents U.S. per NZ dollar, down 6% year-on-year from 73 cents.
Stronger U.S. Dollar Boosts Import Competiveness; but in Recent Months AUD and NZD Weaker
XII. Price Projections and Outlook
Index Lends Predictive Insight The third quarter is historically the lowestpriced quarter of the year for both feeder and slaughter lambs. 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 forecasted to fall 6% below annual average in Q3.
Slaughter lamb prices at auction forecasted to fall 2% below annual average in Q3. LMIC forecasted higher Q3 prices, likely due to tight domestic and imported supplies.
Livestock Market Information Center (LMIC) Q3 Forecasts: Tight supplies in Q3 could support the live slaughter lamb market although the meat market could remain stagnant to lower. LMIC expects the third-quarter lamb supply to be the tightest in three years with lower production and lower imports. LMIC forecasted that in Q3, --slaughter lamb prices could strengthen by 6% quarterly, and --feeders could weaken by 12% (6/17/16).
Price Forecasts Cold storage record high, and we don t know the composition product-- domestic or imported. The national, direct slaughter lamb price is forecasted at $262 to $267 per cwt. on a carcass basis, 11% lower year-on-year (LMIC, 6/17/16). Slaughter lamb prices at auction historically weaken into the third quarter, but for the past couple years we ve seen prices move higher. LMIC forecasted that 60 to 90-lb. feeders are forecasted to range from $169 to $174 per cwt., 8% lower year-on-year. LMIC s feeder forecast is in keeping with historical trends: Feeder lambs typically hit their annual low in the third quarter before rising sharply through the fall.
Further Down the Road Cold storage inventories don t hold their quality forever, product in replaces product out. At some point, liquidation of the record-high freezer inventory could impact the live market, weakening prices, unless establishments continue to maintain high freezer tonnage. How well the industry absorbs the freezer inventory is a function of lamb demand. The lack of strength in the meat market is a concern given recent gains in the live lamb market. Meat market weakening could be a symptom of higher imports to date, the slow release of freezer stock, lower beef prices and cautious consumer spending.