(March 1, 2012) Erica Rosa-Sanko, agricultural economist at the Livestock Market Information Center (LMIC), presented an upbeat market analysis given recent price weakening at this year’s American Sheep Industry Association (ASI) annual meeting in Arizona. In January, the wholesale market succumbed to what the slaughter and carcass market had been predicting for months. Rosa-Sanko explained market softening was due to the market adjusting to a new norm. The current market is likely at a higher demand level, is coming into seasonality again and will likely be volatile in the near future. Recent price weakening is likely seeing demand weakening, but from a higher demand point than seen in recent years. Increased demand could be due to higher incomes, high-priced substitutes, population growth and/or an expanded preference for lamb and mutton. Rosa-Sanko recommended that advertising the lamb attributes that consumers want can support lamb demand at this new, higher price level.

Rosa-Sanko commented that retail has been losing money in the meat case. In a period of high-priced proteins, consumers are making substitutes. However, consumers are making the substitution from lamb racks to shoulder, not from lamb to beef. The industry thus is encouraged to think about a lamb cut market, not simply a lamb market. Consumers want loin chops, not just lamb. An improved understanding of the demand drivers for specific cuts might help improve demand overall. However, Rosa-Sanko felt that consumers are also making the substitute from lamb to mutton and goat as well. In 2011, mutton imports through November were up 31 percent year-to-year to 31.6 million lbs.

Retail ads put specific lamb cuts in front of the consumer, further defining this unique cut demand. Consumers react differently to prices and promotions of each cut. Lamb ads were much more commonplace on the East Coast compared to the West. For example, loin chops and shoulder blade chops were the most heavily promoted last year in the East with more than 44,000 advertisements each (U.S. Department of Agriculture (USDA)/Agricultural Marketing Service (AMS), current data).

The semi-boneless leg was a distant third with 18,000 ads. By comparison, the rack had only 8,000 advertisements. Loin chops were promoted heaviest in the summer, as expected, but the next highest promotional period was January. Perhaps the early 2011 loin promotions were trying to move excess product, but it is also possible that it also built some out-of-season demand.

Rosa-Sanko noted that lamb end meats and middle meats were significantly high last year, and to lamb’s credit, this was not the case for other meats. The lamb neck and breast were ground in response to the gourmet burger trend which resulted in these items capturing a larger percentage of the total wholesale lamb value in 2011.

Rosa-Sanko conceded that the retail market has been volatile and lending volatility to the rest of the industry. Risk management is advisable, at least on a quarterly basis. Current forecasts for expected corn acreage expansion this year and good harvests worldwide suggest we could see $4 per bu. corn. In addition, hay stocks are at a 25-year low and could increase this year. Increased corn and hay production could create a stronger feeder market.

Rosa-Sanko reminded us that although commercial lamb production was down annually there is perhaps one-quarter of total lamb consumption not counted and channeled through the nontraditional market. In coming years, this market might be squeezed as more Halal lamb is available in commercial sectors. Dennis Stiffler, Ph.D., chief executive officer of Mountain States Rosen and American Lamb Board (ALB) member, remarked at the ASI conference that major retailers are looking for Halal lamb and that Halal business had jumped more than 60 percent last year.

Halal lamb remains a very small portion of his business, but I project it will grow exponentially. As the younger Muslim population become wage-earners they will most likely demand the convenience of buying lamb in a grocery store rather than travel to a farm or auction and arrange for slaughter.

Weights Gained as Slaughter Slowed
Undoubtedly the greatest industry concern early this year was that supply was backing up. Ample supply of lambs on feed — prompted by early placements last fall — and a retail slowdown meant that reduced slaughter levels had to be maintained for packers to hold onto margins. However, that’s not the whole story.

Packer-owned slaughter was also a factor with 14 percent of weekly slaughter in January — the highest January percentage on record. It is likely that packers slaughtered their own supply first in light of slower demand while market supplies got heavier.

In the first three weeks of January, weekly slaughter averaged 33,672 per week, down 6 percent year-to-year and below what the 2.5-percent contracted inventory would indicate. Average live weights at slaughter gained 4-lbs. monthly in January to 144 lbs. (72 lbs. hanging weight). Colorado feeders, however, report slaughter weights up to 185 lbs. Average weights of slaughter on formula saw a 4-percent jump to 85 lbs. in January, 9-percent higher than 78 lbs. last January.

There are concerns that the backlog of lambs will continue through the next six months. Insufficient feed in California’s Imperial Valley means that lambs will be moving into Colorado feedlots soon. Compounding the problem is that cold storage stocks in January were 17 million lbs., up 11 percent year-on-year.

It will be particularly tough time for the middle meats. Legs didn’t move as hoped last Christmas. Sluggish sales might be due to the fact that the leg was up to $2 per lb. higher than last Easter (USDA’s Economic Research Service (ERS), Advertised Livestock and Grain Prices). Nick Forrest, ALB board member and Kroger representative, commented at the ASI convention that typical seasonal products didn’t sell last December: Prices are high and consumer budgets are tight.

The backlog of heavier carcasses presents a problem to the industry as a whole, but also to individual producers. Many producers selling on a formula or a grid could be docked for lambs over 85 lbs. and for every Yield Grade 4 or 5 (increased backfat) slaughtered. Packer trim costs have likely increased and thus the discounts. On the flip side, the fatter Yield Grade 4s and 5s can produce Prime loins and rack, worth more at retail.

There is a place for every lamb in the marketplace and the method of packer valuation should reflect this. Thus, a one-size-fits-all formula or grid might not be the answer. Large-framed and smaller-framed breeds perform differently as they add fat.

Electronic carcass evaluation might revolutionize how slaughter lambs are valued, bought and bred. Lawrence Yates, Ph.D., USDA Standardization Division, Livestock and Seed Program, explained at the ASI convention that the service can provide a measure of cutability and it also allows packers to predict exactly how wholesale cuts will perform in the fabrication room while still on the kill-floor. This means improved efficiencies in sorting and achieving the highest-valued market for each lamb. This could mean higher returns to producers, but the message has to be sent back to producers through grids and formulas.

Feeders Up, Corn Down
The three-market feeder lamb average at auction was $217.46 per cwt. in January, up 1-percent monthly and up 12 percent year-on-year. Prices in Ft. Collins and Sioux Falls weakened into January but the San Angelo average jumped 13 percent to $240 per cwt. Only 400 head of feeders were reported in direct trade out of Texas at an average $182 per cwt.

In January, corn averaged $5.90 per bu., up 1-percent monthly and 19 percent year-on-year (LMIC, 1/31/12). Backed by higher corn acreage and yield forecasts, the USDA-forecasted 2011/2012 season average farm price is projected to be 20-cents lower on both ends of the range to $5.70 to $6.70 per bushel (USDA/ERS, 1/17/12).

Projected food, seed and industrial (FSI) use, including ethanol production, for 2011/2012 is unchanged at 6,405 million bushels. In spite of the ethanol subsidy removals, the Renewable Fuel Standard remains which mandates the minimum amount of ethanol that must be blended into the domestic gasoline supply.

Hay, other than alfalfa, averaged $127 per ton in January, up $1 per ton monthly and up 30 percent year-on-year (LMIC, 1/17/12). Stocks of all U.S. hay stored on farms totaled 91 million tons on Dec. 1, 2011, down 11 percent from a year ago (USDA/ERS, 1/17/12).

Erica Rosa-Sanko, agricultural economist at the Livestock Market Information Center (LMIC), presented an upbeat market analysis given recent price weakening at this year’s American Sheep Industry Association (ASI) annual meeting in Arizona. In January, the wholesale market succumbed to what the slaughter and carcass market had been predicting for months. Rosa-Sanko explained market softening was due to the market adjusting to a new norm. The current market is likely at a higher demand level, is coming into seasonality again and will likely be volatile in the near future. Recent price weakening is likely seeing demand weakening, but from a higher demand point than seen in recent years. Increased demand could be due to higher incomes, high-priced substitutes, population growth and/or an expanded preference for lamb and mutton. Rosa-Sanko recommended that advertising the lamb attributes that consumers want can support lamb demand at this new, higher price level.

Rosa-Sanko commented that retail has been losing money in the meat case. In a period of high-priced proteins, consumers are making substitutes. However, consumers are making the substitution from lamb racks to shoulder, not from lamb to beef. The industry thus is encouraged to think about a lamb cut market, not simply a lamb market. Consumers want loin chops, not just lamb. An improved understanding of the demand drivers for specific cuts might help improve demand overall. However, Rosa-Sanko felt that consumers are also making the substitute from lamb to mutton and goat as well. In 2011, mutton imports through November were up 31 percent year-to-year to 31.6 million lbs.

Retail ads put specific lamb cuts in front of the consumer, further defining this unique cut demand. Consumers react differently to prices and promotions of each cut. Lamb ads were much more commonplace on the East Coast compared to the West. For example, loin chops and shoulder blade chops were the most heavily promoted last year in the East with more than 44,000 advertisements each (U.S. Department of Agriculture (USDA)/Agricultural Marketing Service (AMS), current data).

The semi-boneless leg was a distant third with 18,000 ads. By comparison, the rack had only 8,000 advertisements. Loin chops were promoted heaviest in the summer, as expected, but the next highest promotional period was January. Perhaps the early 2011 loin promotions were trying to move excess product, but it is also possible that it also built some out-of-season demand.

Rosa-Sanko noted that lamb end meats and middle meats were significantly high last year, and to lamb’s credit, this was not the case for other meats. The lamb neck and breast were ground in response to the gourmet burger trend which resulted in these items capturing a larger percentage of the total wholesale lamb value in 2011.

Rosa-Sanko conceded that the retail market has been volatile and lending volatility to the rest of the industry. Risk management is advisable, at least on a quarterly basis. Current forecasts for expected corn acreage expansion this year and good harvests worldwide suggest we could see $4 per bu. corn. In addition, hay stocks are at a 25-year low and could increase this year. Increased corn and hay production could create a stronger feeder market.

Rosa-Sanko reminded us that although commercial lamb production was down annually there is perhaps one-quarter of total lamb consumption not counted and channeled through the nontraditional market. In coming years, this market might be squeezed as more Halal lamb is available in commercial sectors. Dennis Stiffler, Ph.D., chief executive officer of Mountain States Rosen and American Lamb Board (ALB) member, remarked at the ASI conference that major retailers are looking for Halal lamb and that Halal business had jumped more than 60 percent last year.

Halal lamb remains a very small portion of his business, but I project it will grow exponentially. As the younger Muslim population become wage-earners they will most likely demand the convenience of buying lamb in a grocery store rather than travel to a farm or auction and arrange for slaughter.

Weights Gained as Slaughter Slowed
Undoubtedly the greatest industry concern early this year was that supply was backing up. Ample supply of lambs on feed — prompted by early placements last fall — and a retail slowdown meant that reduced slaughter levels had to be maintained for packers to hold onto margins. However, that’s not the whole story.

Packer-owned slaughter was also a factor with 14 percent of weekly slaughter in January — the highest January percentage on record. It is likely that packers slaughtered their own supply first in light of slower demand while market supplies got heavier.

In the first three weeks of January, weekly slaughter averaged 33,672 per week, down 6 percent year-to-year and below what the 2.5-percent contracted inventory would indicate. Average live weights at slaughter gained 4-lbs. monthly in January to 144 lbs. (72 lbs. hanging weight). Colorado feeders, however, report slaughter weights up to 185 lbs. Average weights of slaughter on formula saw a 4-percent jump to 85 lbs. in January, 9-percent higher than 78 lbs. last January.

There are concerns that the backlog of lambs will continue through the next six months. Insufficient feed in California’s Imperial Valley means that lambs will be moving into Colorado feedlots soon. Compounding the problem is that cold storage stocks in January were 17 million lbs., up 11 percent year-on-year.

It will be particularly tough time for the middle meats. Legs didn’t move as hoped last Christmas. Sluggish sales might be due to the fact that the leg was up to $2 per lb. higher than last Easter (USDA’s Economic Research Service (ERS), Advertised Livestock and Grain Prices). Nick Forrest, ALB board member and Kroger representative, commented at the ASI convention that typical seasonal products didn’t sell last December: Prices are high and consumer budgets are tight.

The backlog of heavier carcasses presents a problem to the industry as a whole, but also to individual producers. Many producers selling on a formula or a grid could be docked for lambs over 85 lbs. and for every Yield Grade 4 or 5 (increased backfat) slaughtered. Packer trim costs have likely increased and thus the discounts. On the flip side, the fatter Yield Grade 4s and 5s can produce Prime loins and rack, worth more at retail.

There is a place for every lamb in the marketplace and the method of packer valuation should reflect this. Thus, a one-size-fits-all formula or grid might not be the answer. Large-framed and smaller-framed breeds perform differently as they add fat.

Electronic carcass evaluation might revolutionize how slaughter lambs are valued, bought and bred. Lawrence Yates, Ph.D., USDA Standardization Division, Livestock and Seed Program, explained at the ASI convention that the service can provide a measure of cutability and it also allows packers to predict exactly how wholesale cuts will perform in the fabrication room while still on the kill-floor. This means improved efficiencies in sorting and achieving the highest-valued market for each lamb. This could mean higher returns to producers, but the message has to be sent back to producers through grids and formulas.

Feeders Up, Corn Down
The three-market feeder lamb average at auction was $217.46 per cwt. in January, up 1-percent monthly and up 12 percent year-on-year. Prices in Ft. Collins and Sioux Falls weakened into January but the San Angelo average jumped 13 percent to $240 per cwt. Only 400 head of feeders were reported in direct trade out of Texas at an average $182 per cwt.

In January, corn averaged $5.90 per bu., up 1-percent monthly and 19 percent year-on-year (LMIC, 1/31/12). Backed by higher corn acreage and yield forecasts, the USDA-forecasted 2011/2012 season average farm price is projected to be 20-cents lower on both ends of the range to $5.70 to $6.70 per bushel (USDA/ERS, 1/17/12).

Projected food, seed and industrial (FSI) use, including ethanol production, for 2011/2012 is unchanged at 6,405 million bushels. In spite of the ethanol subsidy removals, the Renewable Fuel Standard remains which mandates the minimum amount of ethanol that must be blended into the domestic gasoline supply.

Hay, other than alfalfa, averaged $127 per ton in January, up $1 per ton monthly and up 30 percent year-on-year (LMIC, 1/17/12). Stocks of all U.S. hay stored on farms totaled 91 million tons on Dec. 1, 2011, down 11 percent from a year ago (USDA/ERS, 1/17/12).

Slaughter Lamb Prices Weaken Further
Since the middle of 2011, slaughter lamb prices at auction and on formula have diverged with prices at auction falling more sharply. It appears that in a period of slowing slaughter that packers might slaughter their own supplies first, lambs on a grid or formula second and fill remaining quotas with auction lambs. For the first half of 2011, the two slaughter lamb series held steady but then diverged up to $25 per cwt. in January.

Slaughter lamb prices at auction slipped 2 percent in January to land at $150.05 per cwt. and were 6-percent lower than a year ago. Most lamb prices from slaughter to carcass to cutout weakened in January, but prices still remain substantially higher than last January’s prices. However, slaughter lamb prices at auction have been the hardest hit, dropping 6-percent below last January’s value.

In January, packer-owned slaughter contracted sharply from 18 percent in December of weekly slaughter to 14 percent. Purchases on formula gained 6 percentage points to 32 percent of weekly slaughter and auction purchases slipped from 47 to 43 percent.

Slaughter lamb prices on a carcass-based formula dropped 3 percent in January to $343.91 per cwt. ($175.48 per cwt. on a live basis).  Although we saw some monthly weakening, formula prices were still 16-percent higher year-on-year.

Pelts Weakened
The Australian pelt trade slowed in January with tanners having difficulty moving last season’s stock and this season’s supply has been limited and seedy (Meat and Livestock Australia (MLA), 1/27/12). Eastern European interest slowed, but the Chinese market has remained steady. In the United States, pelts were seeing some weakening as “seasonal factors such as mud and over-grown wool length are beginning to decrease the value of some pelts,” (USDA’s Agriculture Marketing Service (AMS), 2/3/12).

MLA reports pelts based upon length, weight, whether the skin is from a lamb, Merino or a cross-bred sheep and whether the pelt is free of vegetable matter (VM).

Within the VM heading there is still a minimum and maximum price which suggests that small differences in VM still affect price.

In early February in Australia, 2” to 3” pelts weighing 24 kgs (53 lbs.) and over received 1,275 cents per skin (U.S. $13.77 ) for pelts free of VM and 1,100 cents per skin (U.S. $11.88) for pelts with heavy vegetable matter (MLA, 2/3/12).

In January, USDA-reported fall clips, No. 1 and No. 2 pelts weakened by 7-percent monthly, but were still 77-percent higher year-on-year. No. 1 pelts ranged from $13 to $16 per pelt with only a single qualifying factor, length.

Meat Market Softened
The East Coast carcass value gained a marginal 0.5 percent in January to $378.41 per cwt. after falling for four consecutive months. January’s carcass value was still up 19 percent from a year ago. Recall that while Mountain States Lamb Cooperative slaughter lamb prices are not reported by USDA, they are captured indirectly in the carcass report. The marginal gain in the carcass value might be a reflection of co-op lambs moving to slaughter in preparation for Easter.

The January wholesale cutout was $392.64 per cwt., down 3-percent monthly, yet up 13 percent year-on-year. The leg, trotter-off, fell a marginal 0.20 percent in January to $442.92 per cwt., but was up 17 percent year-on-year. The eight-rib rack, medium, was down 3 percent in January to $818.44 per cwt. The loins, trimmed 4x4, saw a 3-percent decline to $532.31 per cwt., up 15 percent year-on-year. The shoulder, square-cut, averaged $289.11 per cwt., down 8 percent monthly, up 5 percent year-to-year.