Transcript Slide 1

Third-Quarter 2014
Sheep Industry Review
Prepared by the
American Sheep Industry Association
for the American Lamb Board
November 2014
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
On the surface, this has been a very good year for the lamb industry. Through the third quarter,
feeder and slaughter lamb prices were sharply higher than a year ago and above their 5-year
averages. The wholesale and retail markets also saw some 2014 strengthening, posting year-on-year
gains. In addition, slaughter was current and quality was excellent.
However, market fundamentals are responding to an artificially-created supply situation: there is over
40 million lbs. of lamb and mutton sitting in the freezers, four times our monthly production. In doing
the math, we know there was an increase in total supplies this year. Domestic production was down
marginally, but imports were up sharply. However, much of that product was not released to the
markets, but held as stocks.
The million-dollar question is what happens now? As the Livestock Market Information Center (LMIC)
reported in early October: “The question becomes how will these stocks filter into the market and at
what price levels?” Reportedly, if prices move higher then packers would be willing to release more
product (in hopes of covering storage costs) (LMIC, 10/2014). If prices remain stagnant or fall, will
packers be forced to sell at a loss? What will happen to feeder and slaughter lamb prices in this case?
There is no easy fix to the high freezer inventory, but it is possible to reduce stocks without creating a
bulge in supply. It is hypothesized that freezer stocks will be a new, structural component of the
sheep industry for some time.
It is forecasted that 2015 will look a lot like 2014, but with some drawdown in stocks. It is
uncertain, but perhaps unlikely that imports will slow. Australian production will be marginally
lower next year, but the relative profitability of the U.S. market will support its strong exports.
Perhaps by 2016, Australian rebuilding efforts will have a significant impact on its production,
curbing its exports. Further, U.S. domestic production could slow in 2015 which will help the
supply situation.
Perhaps by 2016 the U.S. will see significant income growth which would support higher-priced
lamb at retail. Only then will the higher prices allow for more product to be released from freezers.
Markets Stronger
The 3-market feeder lamb auction price saw a 2-percent quarterly gain to $199.36/cwt., up 75%
year-on-year. Feeder lambs averaged $177.29/cwt. in direct trade in the third quarter, up 14%
quarterly, and up 62% year-to-year.
In the third quarter, live, slaughter lamb prices at auction gained 4% quarterly to $155.44/cwt., 39percent higher year-on-year. Slaughter lamb prices on a carcass-based formula averaged
$298.87/cwt. ($151.40/cwt. live-converted), up 5% quarterly and up 29% year-on-year. Slaughter
lambs in live, negotiated sales averaged $153.02/cwt. in the third quarter, up 3% quarterly and up
29% year-on-year.
Weighted average carcass prices averaged $332.04/cwt. in the third quarter, 2-percent higher
quarterly and up 30% from a year ago. By contrast, the wholesale market weakened in the third
quarter.
The net carcass value (wholesale composite less processing and packaging) averaged $330/cwt.,
down 1% percent quarterly and 32-percent higher year-on-year from $249/cwt. The rack made a
significant recovery in 2014, from $5 per lb. to over $8 per lb. Other primals were mostly stagnant.
Production and Trade
At 40.1 million lbs., September cold storage was 18% higher monthly and 83% higher year-on-year.
Given relatively high wholesale and retail prices, not all that was produced or imported was
available at retail or foodservice. During the first nine months of the year, domestic slaughter was an
estimated 1.476 million head, 0.5% lower year-on-year. At 102.8 million lbs., estimated lamb
production was down 1.1% year-on-year from January to September 2013.
Lamb and mutton imports were up year-on-year. At 125.6 million lbs., lamb and mutton imports in
2014 through August were up 5.3% year-on-year, or 6.3 million lbs. Lamb imports totaled 105.5
million lbs. in 2014 through August, up 6% year-to-year, or up 5.7 million lbs.
Mature Ewe Disappearance
This year has seen an increased mature sheep disappearance from both increased live exports as
well as increased slaughter of culled ewes. The drought in California and surrounding areas might
explain part of this increase.
Mature sheep slaughter was an estimated 12% higher in January through September year-on-year
at 101,323 head. U.S. live sheep exports to Mexico totaled 22,982 head in 2014 through August, up
18% year-on-year. According to LMIC, total ewe disappearance this year is the largest year-over-year
increase since 2010 when drought hit Texas and surrounding areas (10/3/2014).
I. Feeder and Slaughter Lamb
Market Trends
Q3 Auction Feeder Lamb Prices (60- to 90-lb.)
Up Quarterly, and Sharply Higher Year-on-Year
• The 3-market feeder lamb auction price saw a 2percent quarterly gain to $199.36/cwt., up 75% yearon-year.
• Markets included San Angelo, Ft. Collins and Sioux
Falls.
• Prices averaged $187/cwt. in July, $201/cwt. in Aug.
and $209/cwt. in Sept.
Feeder Lamb Prices at Auction Gained in Q3
Feeder Lambs in Direct Trade
Gained 57% Year-on-Year
o Feeder lambs averaged $177.29/cwt. in direct
trade in Q3, up 14% quarterly, and up 62%
year-to-year.
o Feeders averaged $166/cwt. in July, $174/cwt.
in Aug. and $193/cwt. in Sept.
Feeder Prices Posted Sharp Q3 Gains
At 182,050 head, the volume of feeders in direct trade
was down 5% year-on-year in 2014 through September.
At $3.38 per bu., corn was down 37% in
Sept. year-on-year.
At $197 per ton, alfalfa was 2% higher
year-on-year in Sept.
Q3 Auction Slaughter Lamb Prices
45% Higher Year-on-Year
• Live, slaughter lamb prices at auction gained 4%
quarterly to $155.44/cwt., 39-percent higher
year-on-year.
• Prices averaged $148/cwt. in July, $142/cwt. in
Aug. and $157/cwt. in Sept.
Auction Slaughter Lamb Prices Generally Trending
Higher Since Late 2012
Third-quarter slaughter lamb prices
rebounded after summer lull.
Carcass-Based Formula Slaughter Lamb Prices
Gained 29% Year-on-Year
• Slaughter lamb prices on a carcass-based formula
averaged $298.87/cwt. ($151.40/cwt. liveconverted), up 5% quarterly and up 29% year-onyear.
• Weighted-average prices were $289/cwt. in July,
$298/cwt. in Aug. and $310/cwt. in Sept.
By Q3 Prices by Weight Converged
Live, Negotiated Prices Top Formula Prices
• Slaughter lambs in live, negotiated sales averaged
$153.02/cwt. in Q3, up 3% quarterly and up 29% yearon-year.
• Lambs averaged $158/cwt. in July, $146/cwt. in Aug.
and $142/cwt. in Sept.
• Q3 weights were 136 lbs., up 3% quarterly and up 11%
year-on-year.
Slaughter Weights Drop: Quality Current
• Slaughter weights in carcass-based formula trades
down 7% quarterly to 73.95 lbs., down 6% year-onyear.
• Weights in live, negotiated trades also down, down
15% to 135.94 lbs., 1-percent higher year-on-year.
• Federally-inspected weights averaged 68 lbs., down
5% from 72 lbs. in Q2.
Formula Trades Down Year-on-Year
• In Q3 the volume of lambs purchased on formula
was down 23% quarterly to 84,800 head and
down 43% year-on-year.
• Live, negotiated trades 4-percent higher to
82,500 head in Q3, up 30% year-on-year.
Percent of Formula Trades in Total FI Slaughter
Down to 20% from 29% in 2013
II. Carcass and Boxed Lamb
Market Trends
Carcasses Up in Q3
• Weighted average carcass price averaged $332.04/cwt. in
Q3, 2-percent higher quarterly and up 30% from a year ago.
• Carcass price was $313/cwt. in July, $324/cwt. in Aug. and
$332/cwt. in Sept.
Q3 Carcasses Continued to Gain
Q3 Carcass Sharply Higher than
Third Quarters of 2012 or 2013
YG 3s Up with Current Market
% YG3s in 2014 High
• Yield Grade determination is positively correlated
with heavier slaughter lambs.
• Yield Grade 3s in lbs. was 35% of total slaughter
in 2013 and jumped to 49% in January through
August.
Yield Grades for Federally Inspected Lamb and Mutton
Percentages, Fiscal Year
Source: USDA, AMS, Livestock and Seed Division
YG1
YG2
YG3
YG4
YG5
2012
5%
28%
37%
18%
12%
2013
7%
36%
35%
14%
7%
Jan-Aug
2014
6%
32%
40%
16%
7%
Percent Graded Trending Lower
On average, 60% of lambs in commercial slaughter
were graded in January through August 2014.
64% of Lambs Graded in Federally-Inspected
Slaughter in 2014 through August
Q3 Net Carcass Value
Down 1% Quarterly – Compared to Feeder and
Slaughter Lamb Price Gains
• The net carcass value (wholesale composite less processing
and packaging) averaged $330/cwt. in Q3, down 1% percent
quarterly and 32-percent higher year-on-year from $249/cwt.
• The rack made a significant recovery in 2014, from $5 per lb.
to over $8 per lb.
• Other primals mostly stagnant.
• Net carcass value was $325/cwt. in July, $329/cwt. in Aug.
and $336/cwt. in Sept.
September’s Net Carcass Value at 5-Month High
Rack sharply higher in 2014,
other primals’ gains relatively less impressive.
Rack Fell Below $8 per lb. in JuneAug., but Rebound in September
• The rack averaged
$799.63/cwt. in Q3,
down 1% quarterly
and up 58% year-onyear.
• The rack was
$794/cwt. in July,
$795/cwt. in Aug. and
$809/cwt. in Sept.
Loins Gained Seasonably in June
Through the Summer
• Loins, trimmed 4x4,
averaged
$510.96/cwt., up
5% quarterly and
up 13% year-toyear.
• Loins was
$505/cwt. in July,
$509/cwt. in Aug.
and $519/cwt. in
Sept.
Leg, Trotter-Off, Saw an Easter Uptick,
then Weakened
• The leg averaged
$350.36/cwt. in
Q3, down 5%
quarterly and up
17% year-to-year.
• The leg was
$352/cwt. in July,
$350/cwt. in Aug.
and $349/cwt. in
Sept.
Q3 Shoulder, Square-Cut, at 3-Year High
• The shoulder averaged
$298.17/cwt. in Q3, up
1% quarterly and up
32% year-on-year.
• The shoulder was
$290/cwt. in July,
$296/cwt. in Aug. and
$308/cwt. in Sept.
Ground Lamb Up Year-on-Year
• Ground lamb
averaged
$538.06/cwt. in Q3,
up 2% quarterly and
up 3% year-on-year.
• Ground lamb was
$541/cwt. in July,
$537/cwt. in Aug.
and $536/cwt. in
Sept.
III.
At Retail & Food Service
Only Marginal Retail Gain:
In Q3, retail prices averaged $6.98/lb., up 9% from
$6.43/lb. in Q3 2013.
-- Note that cuts featured not constant across time.
Retail Featured Lamb Prices Mixed Depending
Upon Cut
$5.72
$5.46
% Change
Quarterly
-2%
11%
% Change
Year-onYear
1%
15%
$9.36
$15.65
1%
1%
8%
24%
Q3
Leg bone-in
Shoulder
blade chop
Loin chop
Rib chop
IV. Price Spreads
Ralmonline, 2008
The Rack-Loin Price Spread Softened in Q3
• The rack-loin price
spread averaged
$2.89 per lb. in Q3,
down 10% quarterly
and up 426% from
$0.55 per lb. year-toyear.
• The loin has
remained relatively
flat compared to
gains in the rack.
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 dropped in late 2013 as slaughter
lamb prices gained and the meat market lagged,
but rebounded in the first half of 2014 only to
weaken again by Q3.
The live to carcass price spread averaged
$16 per head in Q3, down 28% quarterly and down
60% year-to-year.
Live to cutout spread was $44 per head in Q3,
down 27% quarterly and down 19% year-to-year.
– In Q3, the value of slaughter lambs fell, but by less than the drop in the wholesale
composite.
Carcass to cutout spread was $28 per head in Q3,
down 26% quarterly and up 98% year-on-year.
--The carcass held relatively strong compared to the lower cutout.
Break-Even Analysis
• Mid-year producer break-evens not as robust as earlier in
2014, but by Q3 margins much healthier.
• Recall the breakeven analysis is only one snapshot of feedlot
marketing.
• On average, cost of gain dropped from about $1.10 in Q1 to
about 95 cents per lb. by Q3.
• The September estimated break-even was $165 to $166 per
cwt. compared to $158 per cwt., the live-converted formula
carcass-based price in September.
Cost of Gain in CO Feedlots Continued to Fall,
Reportedly about $0.85-$1.05 per lb. in Q3
--Reportedly cost of gain could fall to 70 cents with 2014 corn harvest.
Sensitivity Break-Even Analysis A:
September kill of July-traded Idaho feeder lambs with a
$0.85 per lb. cost of gain.
Item
1. Total cost of feeder (in mid-July 4,200 head
traded out of ID at 125-lb. @ $165 per cwt.)
Cost
$206.25/head
2. Average freight from ID
$5.00/head
3. Cost of gain in Colorado feedlot
(6 lbs. gained @ $0.85/lb. to 131 lbs.)
$5.10/head
4. Break-even price of slaughter lamb @ 131 lbs.
Break-Even
$216.35/head
$165.15/cwt.
Sensitivity Break-Even Analysis B:
September kill of July-traded Idaho feeder lambs with a
$1.05 per lb. cost of gain.
Item
1. Total cost of feeder (in mid-July 4,200 head
traded out of ID at 125-lb. @ $165 per cwt.)
Cost
$206.25/head
2. Average freight from ID
$5.00/head
3. Cost of gain in Colorado feedlot
(6 lbs. gained @ $1.05/lb. to 131 lbs.)
$6.30/head
4. Break-even price of slaughter lamb @ 131 lbs.
Break-Even
$217.55/head
$166.07/cwt.
V. Pelts
Pelts Fall Further in Q3
• Fall Clips were $4.17 per
piece in Q3, down 41%
quarterly and down 66%
year-to-year.
• No. 1 pelts were $3.38
per piece in Q3, down
41% quarterly and down
63% year-to-year.
International Pelt Market Weakened:
Back-log of old pelts & fewer premium quality pelts
(LMIC, 10/2014).
VI. Replacement Sheep
September Replacement Ewes Averaged
88-Percent Higher Year-on-Year
Ewe Lambs
Yearling Ewes, 12-24 mos.
Running Age Ewes, 2-4 years
Middle Age Ewes, 5-6 years
Aged Ewes, over 6 years
$170.50 per head
$275.34 per head
$268.95 per head
$165.57 per head
$114.05 per head
Do Higher Replacement Ewe Prices Infer Flock
Rebuilding?
--Not sure, mature sheep slaughter and live
sheep exports higher year-on-year.
VII.
Domestic Production and Trade
During the first nine months of the year, lamb
slaughter was an estimated 1.476 million head,
0.5% lower year-on-year.
At 102.8 million lbs., estimated lamb production
was down 1.1% year-on-year from Jan.-Sept. 2013
Slaughter Weights Lower Year-on-Year
--At an average 135 lbs. in Q3, slaughter weights were
down 6% quarterly from 143 lbs.
At 40.1 Mill. Lbs., September Cold Storage was 18%
Higher Monthly and 83% Higher Year-on-Year
Mature Sheep Slaughter was an Estimated 12%
Higher in Jan.-Sept. Year-on-Year at 101,323 Head
Lamb and Mutton Imports Up Year-on-Year
-- At 125.6 million lbs., lamb and mutton imports in 2014 thru Aug.
were up 5.3% year-on-year, or 6.3 million lbs.
Lamb Imports Totaled 105.5 Mill. Lbs. in
2014 Thru Aug., Up 6% Year-to-Year, or 5.7 Million Lbs.
Australian Lamb Up; New Zealand Down
• Australian lamb imports thru Aug. were 75.7 mill. lbs., up 13%
year-to-year.
• NZ’s lamb imports were 29 mill. lbs., down 10% year-to-year.
In the first eight months of 2014, lamb import
value was up 16% to $407.4 million.
Mutton Imports Lower Year-on-Year
• At 20 million lbs., mutton imports were 1-percent lower
in 2014 thru Aug. compared to a year earlier, same
period.
• Mutton imports from Australia were 16.9 million lbs. in
2014 thru Aug., up 23% year-to-year.
• New Zealand mutton imports were down 52% to 2.5
million lbs. in this period.
Mutton Imports Lower Through August
Lamb & Mutton Exports Totaled 4.83 Million Lbs. in
2014 thru Aug., Down 5%
Lamb Exports Up 135% to 830,000 lbs. & Mutton Exports
Down 15% to 4 mill. lbs.
Mutton exports slow relative to higher
lamb export growth.
Total Live Sheep Exports to Mexico Up
• Total live sheep exports through August were 34,867
head, up 16% year-on-year.
• U.S. live sheep exports to Mexico totaled 22,982 head
in the year thru Aug., up 18% year-on-year.
• Persistent drought in western U.S. and surrounding
areas likely contributing factor to increased sheep
exports.
Q3 Cull Ewe Prices Moved Higher
--San Angelo ewe prices
averaged $59.95/cwt. in
Q3, up 8% quarterly and
up 80% year-on-year.
--Culls averaged
$50/cwt. in July,
$60/cwt. in Aug.
and
$71/cwt. in Sept.
XIII. Nontraditional
Market
Andrew, 2006.
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.
The Muslim Festival of Sacrifice -- Eid ul-Adha – held
between October 4- 7, 2014 Boosted New Holland Prices
-- Prices jumped 40% in one week in Sept. to $192.50/cwt. for 90-110 lbs.
-- Volume also swelled: up 137% weekly to 3,605 head.
IX. Total Lamb and Mutton Availability
Total Lamb Availability Up Through August
• Total lamb availability (imports plus domestic production,
subtracting exported lamb) in 2014 through Aug. was
203.18 million lbs., up 2% year-on-year.
• In this period, U.S. domestic commercial lamb supply (less
exports) was down 2% to 97.7 million lbs.
• Imports were up 6% year-to-year to 105.5 million lbs.
• Note: These figures do not include the nontraditional
market estimated volume.
Total lamb availability up,
but due to unknown domestic and import
freezer inventories, it’s difficult to know what
volume is actually sold.
U.S. Gained Mutton Market Share,
but Lost Lamb Market Share
• In 2014 thru August:
Domestic lamb market share was 48%, down 4%
from the same period in 2013.
Domestic lamb & mutton market share was 46%,
up 0.3% year-on-year.
Domestic mutton market share was 28%, up 22%
from a year ago.
U.S. Lamb Market Share Fell About 4%
in 2014 through August
X. Imported Product Price Comparisons
U.S. Competitiveness Against the
AUS Shortloin Grew in Q3
U.S. Rack Sells at a
Premium to AUS
Rack
-- Perhaps a reflection
of different markets-U.S. to foodservice,
AUS to retail--and
different sized racks.
-- $798/cwt. price
spread in Q3.
*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. Fabricated Rack Prices Down Quarterly -Imported Rack Up
• U.S. rack, roast-ready, frenched (204C) averaged
$1,507.65 per cwt. in Q3, down 20% quarterly.
• U.S. rack, roast-ready, special (204D) averaged
$1,956.67 per cwt. in Q3, down 1% quarterly.
• By comparison, the AUS rack cap-off, 28 oz. + was
$1,158.55 per cwt. in Q3, up 10% quarterly.
U.S. Shoulder Lost Competitiveness in Q3
Imported shoulder weakened while the domestic
shoulder gained.
XI. Exchange Rates
Australian & NZ Dollar Weaker Against US$
-- In Q3 the
Australian/U.S. dollar was
down 1% quarterly to
$0.93, 0.9% higher yearon-year from $0.92.
-- In Q3, the New
Zealand/U.S. dollar hit
$0.84, down 2% quarterly
and up 6% year-on-year.
The Stronger U.S. Dollar Boosts Import
Competiveness
XII. Price Projections
and Outlook
Feeder and Slaughter Lamb Prices
Forecasted to Soften into Q4
• In early Oct., LMIC forecasted that slaughter lambs
on a carcass-weight basis could range from $292$298 per cwt. (about $148 per cwt. live), 7-percent
higher year-on-year, but possibly lower quarterly.
• LMIC forecasted 60-90 lb. feeder lambs to range
from $199-$205 per cwt., up 8% over a year ago, but
down about $9 per cwt. lower quarterly.
• Forecasts particularly challenging due to record-high
freezer stocks.
Feeder cost of gain could fall to 70 cents
per lb. by Q4.
• Lower cost of gain – less than $1 per lb. -- can support feeder
lamb prices in Q4 and early 2015.
• USDA forecasting a record corn crop.
• USDA/ERS forecasted that 2014/15 corn prices could average
$3.50 per bu. (USDA/ERS, 9/15/14).
• LMIC forecasted corn in the low-$3 per bu. range (10/2014).
• Hay & forage conditions have improved this year, apart from CA
and surrounding areas (LMIC, 10/2014).
Index Lends Predictive Insight:
Historical Trends Suggest Higher Q4 Feeder and
Slaughter Lamb Prices, but Record-High Cold
Storage Stocks and Continued High Imports
Dominate the Market,
Prices Likely Lower in Q4
• Feeder lamb prices typically fall through the third quarter when supply is
high and feeders are moving into feedlots then strengthen into Q4.
• Slaughter lamb prices typically fall in the third quarter as market-ready
spring feeders come to market.
• 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.
History Tells us Feeder Lamb Prices
Forecasted to Gain through the Year’s End
Slaughter Lamb Prices at Auction Forecasted
to Rise through Q4 According to Past Trends
2015 Outlook a Function of What Happens
to Freezer Inventory
Market Condition
Effect on Stocks
Effect on Prices
Lamb Demand Expands Freezer stocks are
(I.e., Good quality, high slowly released into
beef prices and higher market.
incomes)
Higher prices.
Packers Price to Move
Product
Prices fall.
Domestic market is
flooded with freezer
stocks.
Traditional Demand Factors Still Important
Motivators
• Relatively high beef prices can help support lamb
demand;
• Growing U.S. incomes can help support lamb demand;
and
• Consistently high quality lamb can support prices and
demand.
• Takeaway Message: It is feasible that the industry can
manage continued high freezer inventory. This structural
change coupled with higher lamb prices could be the
new normal.
In Jan.-Aug. all fresh retail beef jumped 11%
year-on-year to $5.43 per lb.
This year, per capita income grew an average
0.26% per month.