(September 1, 2011)  Producers Livestock Auction at San Angelo, Texas, has been bustling. In June and July, sheep receipts were 37-percent higher than a year ago. More than 20,000 slaughter ewes sold in eight weeks and more than 10,000 feeder lambs. Benny Cox, a 40-year veteran of Producers and sheep sales manager, reported it’s as bad as it gets, producers are exiting the business. If producers are not selling, most Texas livestock is being fed heavily as water sources are drying up and hay production is limited, which is not likely to be sufficient for the winter.

Unlike past droughts in Texas, this time livestock prices are staying high. Cox reported that out-of-state sheep buyers are helping to support the market. Sheep are being shipped in droves from Texas to greener pastures further north where rain has been plentiful. Justin Lumpkin, Sioux Falls Agriculture Marketing Service (AMS) reporter, said even eastern South Dakota is green (8/2/11). Barney Barnes, sheep yard manager at St. Onge Livestock in western South Dakota, commented that he knows at least a couple sheep producers rebuilding flocks (8/3/11).

Dry conditions in many parts of the country will likely continue to support sheep and lamb prices for some time as winter feeding conditions are also under threat. Pasture and range conditions among western range flocks, which account for half of the U.S. lamb crop, are two- to five-times drier this year (derived from Livestock Market Information Center (LMIC) data). Seventeen percent of U.S. sheep, or nearly 1 million head, are located in Texas in which 86 percent of pasture is ranked poor and very poor (U.S. Department of Agriculture (USDA), 7/11/11).

Industry Commended for Maintaining Quality 
The portion of lamb ranking Choice – a measure of palatability – held steady through June year-on-year under conditions of higher-priced forage, hay and corn. Larry Corah, vice president of Certified Angus Beef, explained to cattlemen, “Always remember the ultimate driver of consumer satisfaction is tenderness and flavor,” (The BeefSite.com, 7/29/11). While Corah has a product to promote, his message is good advice for lamb producers as well. In a time of higher-priced red meat there is an underlying concern whether higher production costs can be passed onto consumers. Corah reassured: Consumers will increasingly pay more for better-quality product.

As higher lamb prices hit retail it is important that quality is consistent or else demand could slump. Ground lamb, a more competitive product, was an average $1/lb. higher this year compared to last at an average $5.52/lb. on feature (USDA/AMS, 8/4/11). At the higher end, rack of lamb on feature was up an average $3/lb. year-on-year to $13.25/lb.

Higher-priced lamb is not alone. Fresh retail beef was up 11 percent year-on-year through mid-2011. USDA’s Economic Research Service (ERS) forecasted that meat prices will be up about 6.5 percent this year and gain another 5 percent next year (7/25/11).

Promotional Activities Face Cutbacks
In a period of higher-priced lamb it is essential that the American Lamb Board (ALB) continue promoting lamb’s quality and tenderness. However, reduced sheep inventory challenges ALB which relies upon slaughter numbers to fund promotional activities. The year-to-year contraction of more than 100,000 head slaughtered through June meant revenue was down 12 percent to just more than $1 million. Since 2003, ALB’s revenue contracted 3-percent annually.

ALB’s ongoing efforts in the field, which includes explaining ALB’s function and goals, have boosted compliance from nontraditional sources such as from San Angelo auction ethnic buyers. Marketing agencies (sale barns) are not assessed but are required to collect assessments from the producer, feeder or seedstock producer and pass it on to the subsequent purchaser. Two-thirds of ALB’s revenue stems from the half cent per pound on the sale of live lambs or sheep by producers, seedstock producers, exporters and feeders. Another 30 cents per head is collected from commercial, custom or ethnic processors. Lamb importers are not assessed.

Economic Impact of Sheep Industry Contraction
Total lamb available on the market (domestic plus imports) was 113.83 million through May, down 5 percent year-on-year. Domestic lamb production was down 11 percent through July year-on-year. The loss in producer revenue from nearly 200,000 fewer lambs slaughtered through July compared to a year ago meant a loss of $30 million (at last year’s prices). The losses don’t stop there. For the industry, offal, pelt, wool and lanolin revenues are all down with fewer sheep numbers. There can also be a loss of jobs through infrastructure consolidation.

A ripple effect of income flows and employment means the losses to the sheep industry are also losses to related industries. Every $1 of lamb produced by a producer can yield $1.80 in extra product in backward linked industries such as at a local feed store, and up to $0.84 in extra spending in the local economy, perhaps for a haircut (American Sheep Industry Association, 4/2011). Additionally, an estimated employment multiplier for the sheep industry tells us that for every 25 jobs created in the sheep industry, 10 jobs will be created in backward-linked industries, and six jobs will be created as a result of increased consumer spending by sheep-industry related persons.

In early August, LMIC forecasted that third-quarter commercial slaughter could be down 9 percent year-on-year and down 7 percent in the fourth quarter. LMIC forecasted that slaughter-lamb prices could soften in the third quarter and post further losses in the fourth quarter, but remain sharply higher than a year ago (LMIC, 8/3/11). Feeder-lamb prices are expected to gain in the third quarter before weakening toward the year’s end (LMIC, 8/3/11).

Feeders Set New Records
Historically feeder lambs are contracted in late summer for fall placements. However, in the last couple years a lower volume of feeders have sold and much earlier in the year. Through July, 166,390 head were direct traded, 46-percent lower year-on-year. Tight supplies and higher corn likely encourage risk-mitigation measures.

Feeder lambs in direct trade totaled 19,000 head in July and set new price records. Prices averaged $224/cwt., 18-percent higher monthly and up 79 percent from a year ago. Most feeders, mostly from Montana and Wyoming, were contracted for September and October delivery with some for November shipments.

Feeder-lamb prices at auction for 60- to 90-lb. feeders saw a 3-percent gain to $223.50/cwt. in July in San Angelo while feeders at Sioux Falls experienced a 9-percent drop to $218.19/cwt.

Corn and Hay Push Higher
By early August, corn futures had advanced on the back of continued hot weather and nervousness surrounding corn yields at harvest. The December corn future was $7.13/bu. and the March 2012 settlement was $7.25/bu. (CME Group, 8/3/11).
In July, ethanol producers and livestock feeders competed for the last of the 2010 crop driving cash-corn prices higher. Corn grain prices received by farmers averaged $6.46/bu. in July, up from $6.38/bu. in June and up from $3.49/bu. a year ago.

Higher-priced corn and hay might have reversed slaughter-lamb values by weight. By the end of July, heavier-weighted slaughter lambs were bringing more per pound than lighter-weight lambs.

The season-average farm price for corn is projected at $5.50/bu. to $6.50/bu., (USDA/ERS, 7/14/11). Strong corn exports (aided by the weak U.S. dollar) and robust ethanol demand have put pressure on corn prices, outpacing production gains.
Continued expansion in the ethanol sector, favorable margins for refiners and long-term upward trends in fuel consumption mean ethanol’s corn demand will only increase in the coming year. According to Joseph Glauber, chief economist at USDA, corn will be at least $4/bu. in the next five to 10 years, (agweb, 7/21/11).

Hay production across the United States has been very mixed. In general, harvested area for alfalfa and alfalfa mixtures is expected to the lowest since 1949 and harvested area for all other hay is expected to be the lowest since 2000 (USDA/ERS, 7/14/11). In May through July 2010, hay, other than alfalfa, averaged $98.80/ton, but jumped to $114.67/ton this year.

Fall placements of heavier-than-usual lambs coming out of the northern plains might mitigate the pinch from higher-priced corn for feeders. Some feeders will face higher feed bills from early and light-weight placements from dry regions, but growing conditions are very mixed across the Midwest and West. 

Feeder to Processor Margins Squeezed
Feeder margins likely slipped into the red in July. Higher-priced corn forced the cost of gain from about $0.65/lb. a year ago to up to $1.20/lb. for some feeders. The estimated break-even was $189/cwt. to $190/cwt. compared to a slaughter-lamb price of $193/cwt. (the July live-converted formula slaughter lamb average). The cost of gain will differ across feeders with their ability to buy corn forward and the mix of feeders in the lots. The scenario estimated here was for 112-lb. California springers entering feedlots in March at $200/cwt. and harvested in July at 140 lbs.  

Estimated processor margins are positive, yet down 14 percent compared to last June and July.  In this period, slaughter-lamb prices gained about 53 percent while the cutout (wholesale average) gained 33 percent. In coming months perhaps increased nervousness about retail sales will force lower slaughter-lamb offers.

July Slaughter Lamb Gained
Slaughter-lamb prices were mixed during July. On average, slaughter-lamb prices at auction fell 1-percent monthly to $183.2/cwt. San Angelo gained 7 percent to $165.75/cwt. while South Dakota fell 6 percent to $194.33/cwt. Kalona, Iowa, was also high at $195.50/ cwt., but fell 3 percent in July.

Slaughter-lamb prices on a carcass-based formula gained 3-percent monthly to $384.52/cwt. This averages $192.95/cwt. on a converted-live basis.

Through August we will likely see heighted demand and higher-priced lightweight slaughter lambs. The Muslim holiday Ramadan began on Aug. 1 and lamb is often the preferred choice for breaking the fast. The concluding celebration, Eid ul-Fitr, festival of fast breaking, is on Aug. 31. Muslims prefer lambs 60 lbs. to about 107 lbs. (ASI, 2010; National Research Council, 2008). Muslims will buy processed halal lamb, but also visit auctions and farms/ranches to select their own lamb. We might again see price support from the Jewish New Year, Rosh Hashanah, held Sept. 29-30, but for heavier, kosher lambs.

Meat Market Softened
Wholesale lamb saw a 1-percent dip in July to $401.80/cwt., but remained 30-percent higher year-on-year. While the loins gained, other primal cuts held or weakened. The loin, trimmed 4x4, was up 5 percent to $569.54/cwt. The leg, trotter-off, fell 4 percent to $420.03/cwt., the eight-rib rack, medium, fell 2 percent to $887.34/cwt., and the shoulder, square-cut, held about steady at $316.28/cwt.
Carcass prices slipped 1 percent in July to $382.90/cwt., but remained 45-percent higher year-on-year.

Imports Rebound
In April and May, lamb imports did a quick turn-around. In the first quarter of the year, lamb imports were down 15 percent year-to-year. Australia’s lamb imports were down 10 percent and New Zealand’s were off by 24 percent. By May, lamb imports were unchanged year-to-year at 58.8 million lbs. In this period, Australia’s lamb imports were up 7 percent to 38.6 million lbs. and New Zealand’s lamb imports were down 12 percent at 20.1 million lbs.

Australia posted record July lamb exports. Lamb exports to the United States were down 8 percent year-on-year in July, but were up 20 percent to the Middle East and up 47 percent to China (Meat and Livestock Australia, 8/3/11).  Higher July lamb slaughter enabled increased lamb export orders. The Middle East has become Australia’s largest export destination. Middle Eastern demand is particularly high this summer as lamb is the preferred meat for breaking the fast during Ramadan.   
Through May lamb exports were down 57 percent year-to-year at 530,000 lbs. Mutton exports, on the other hand, were up 7 percent at 7.6 million lbs. In general, the weaker U.S. dollar boosts the competitiveness of our exports while increasing our import bill.

At 4.5 million lbs., mutton production saw a 16-percent drop through July year-on-year. However, production figures don’t reveal that the mutton share of slaughter is growing disproportionally as total slaughter numbers shrink. Ewes going to slaughter have increased. This year, the percent of federally inspected slaughter that was mutton gained 0.8 percent per week over last year’s averages. 

Live slaughter-ewe exports to Mexico through July were about one-fifth of their volume compared to last year. Culled ewes can also be sold from the farm. Twenty-nine percent of producers surveyed reported that they have sold adult sheep to Muslims, Hispanics and other ethnicities (ASI, 2010). Sheep might be slaughtered at state-inspected facilities (and not counted in national data) or slaughtered on farm.