By JULIE STEPANEK SHIFLETT, PH.D.
Juniper Economic Consulting

(June 1, 2012) In recent months lower prices have been observed across lamb sectors, often falling below last year’s highs, but still high historically. It is speculated that price levels will remain at historical highs due to a contracted inventory and stronger demand.

However, the industry might face increased volatility. The market is thin with a few packers handling reduced supplies and unknown import levels. Demand can be uncertain, but will find support in the rising consumer loyalty to lamb and higher beef prices. Continued economic sluggishness and lower incomes will be a concern this summer. 

On a positive note, the National Restaurant Association’s (NRA) Restaurant Performance Index rose to its highest level since 2007, before the beginning of the current economic slowdown (NRA, 4/30/12). Sixty-five percent of survey respondents reported higher same-store sales in March 2012 versus March 2011. March also represented the seventh consecutive month that the expectations index stood above 100, which signifies a positive outlook among restaurant operators for business conditions in the months ahead.

Another factor that could support prices is continued tight lamb supplies. The Livestock Market Information Center (LMIC) maintains that the lamb industry continues to operate under contracted supplies which will likely support prices. Tyson Foods Inc. – the nation’s largest meat processor – reported recently that it expected industry-wide domestic production of chicken, beef, pork and turkey to decrease by about 4 percent this year, which should continue to support better pricing (Reuters, 5/7/12). Executives also reported that meat consumption on Memorial Day weekend should outpace last year’s holiday. However, Tyson is nervous about lower incomes and higher-priced gas.

An underlying concern remains that meat demand has softened (Meyer, S. and Steiner, L., 5/4/12). Americans have less money to spend at restaurants and in the meat aisle. After-tax incomes shrank 1.3 percent in 2012 (Meyer, S. and Steiner, L., 5/4/12). If the aberrant growth of nearly 1 percent in April 2011 is ignored, incomes grew by zero percent in the 12 months ending March. A secondary concern is that the lean finely-textured beef (LFTM) consumer negativism likely spread to other proteins (Meyer, S. and Steiner, L., 5/4/12). Consumer trust of meat suppliers is critical to demand. The more information lamb consumers have regarding the source, production and environmental impact of domestic lamb, the more loyal American lamb consumers will be. The American Lamb Board is doing just this in its current sustainability project.

A recent survey found that there is a growing preference for sustainably raised animal products (Sustainable Food News from Animal Welfare Approved, 4/27/12).  Consumers are willing to pay $1 to $2 extra for sustainable animal products. The survey also found that about half of all consumers eat one to five meals per week from sustainably raised meat, eggs and dairy. In another study, the American Meat Institute found that 57 percent of respondents in a Mintel survey say they are willing to pay more for local and sustainable fare at restaurants and that the majority of those are willing to pay 1 percent to 5 percent more (11/15/11). Other studies have found that consumers won’t necessarily pay more green when it comes to the checkout counter. However, a more serious and growing consumer movement is expanding, that of the “conflicted consumer,” (Winston, A. 6/2008). These consumers demand more sustainable products at the same or lower price.

Average Slaughter Weights Drop
Average slaughter weights in federally inspected slaughter fell 3-percent monthly to 149 lbs. in April. The weekly slaughter weight was 155 lbs. in late March and fell to 140 lbs. by late April. The average is comprised of feedlots across the United States and also across marketing methods. Slaughter lambs sold on a formula weight, comprising one-quarter of the weekly slaughter, weighed 174 lbs. in April, up 1.5-percent monthly. Lambs often enter feedlots at about 85 lbs. and are fed for about 100 days before slaughter at about 150 lbs. to 160 lbs. Reportedly, some lambs have been on feed for 200 days in April.

Heavier weights helped boost production. Estimated lamb slaughter was down 3 percent through April year-on-year to 608,705 head. Estimated lamb production was up 0.5 percent year-on-year to 45.64 million lbs.

As slaughter weights decline, reduced U.S. slaughter numbers will mean lower production levels. It is unknown whether imports will fill the void to maintain total lamb availability. In January and February (last data available), total lamb availability was up 5 percent year-on-year to 37.46 million lbs. Part of the rise was due to higher imports. Total lamb imports in January and February were 17.2 million lbs., up 10 percent year-on-year.

Australian lamb supplies in 2012 are expected to increase and prices soften so we could see increased Australian imports at more competitive rates. Meat and Livestock Australia Chief Economist Tim McRae reported, “Lamb exports now generate a much higher proportion of income than in previous years, with a record 49 percent of total lamb production sent off shore in 2011. The Middle East was the largest export market with 22 percent, followed by the U.S. with 21 percent and the growing Greater China with 18 percent. These markets are expected to continue to grow, with the U.S. starting to recover in 2012,” (2/6/12).

Pelts Weakened
Progress toward more current market weights can also be seen in the pelt market. In January, 75 percent of pelts reported were fall clips (with the longest wools). This portion dropped steadily to 49 percent by April.

Previously shorn pelts weakened in April. Packers received $17.50 per piece for fall clips, down 3 percent monthly.  No. 1s held at $15 per piece and No. 2s dropped 2 percent to $12.75 per piece.

The U.S. Department of Agriculture (USDA) Agricultural Marketing Service (AMS) reported in April, “As a good portion of heavy lambs remain on feed, they continue to near or have passed the threshold to become old crop lambs which, in turn, are more likely to be carrying overgrown, open (less dense) wooled pelts that could decrease the quality of that pelt,” (4/13/12).

Reportedly there have been incidences of pulled wool this spring. Processors will pull wool off a pelt to sell a double-faced leather product if the wool is of inadequate quality to sell as a wool-on product. The wool is typically lower quality and sold separately. Pulled wool isn’t a significant volume in the United States, but can be a result of heavier lambs. As lambs age, and particularly as the summer warms up, lambs can rub against fences producing open and patchy wool. 

Feeders Down
Feeder lambs in direct trade averaged $156.67 per cwt. in April, down 10-percent monthly, down 18 percent from a year ago, yet up 24 percent from its April five-year average. Feeders fell 32 percent from a record high of $228.88 per cwt. last August to April.

Sixty to 90-lb. feeders in Sioux Falls – the only auction market for which prices were reported – fell 5 percent monthly to $218.41 per cwt. which was 8-percent lower year-on-year. Prior to the downturn, feeders were bid up for nearly two years, from late 2009 to mid 2011.

Many feeders were likely in the red this spring due to high feed costs, increased days on feed and a softer slaughter lamb market. In April, corn averaged $6.14 per bu., down monthly and down from a year ago. Corn has been volatile, however. In the first trimester of 2012 it was 11-percent higher year-on-year. Alfalfa was $198.08 per ton in its 2011/2012 season ending April, 56-percent higher than a year ago. The cost of gain for feeders ranged from about $1.10 per lb. to $1.25 per lb. in April, double from a year ago.

Export Demand Supports Corn
The recent shipment of U.S. corn to China reminded us that U.S. corn prices are a function of strong export demand and not solely a function of ethanol and feed demand. In late April, China purchased 1.472 million metric tons of corn (58 million bu.), which is the largest one-time corn purchase on record. China has historically been a net exporter; however, feed demand has recently surpassed its supply increases.

USDA’s Economic Research Service (USDA/ERS) reported, “High ethanol stocks occurring as consumption approaches the E-10 (10-percent ethanol/90-percent gasoline) blend wall level suggest continued production declines in the near future. However, recent progress toward E-15 (15-percent ethanol/85-percent gasoline) implementation may sustain ethanol refiners in the long run although numerous hurdles still exist,” (USDA/ERS, 4/12/12).

USDA/ERS forecasted the 2011/2012 corn price range received by farmers from $6 per bu. to $6.40 per bu. in mid-April. Historically high acres planted and early plantings promises to yield a bountiful harvest this year and perhaps lower corn for feeders. In mid-April, the forecasted December corn was $5.30 per bu. (CME Group, 4/18/12).

Slaughter Lamb Prices Weakened
Slaughter lamb prices weakened in April and were sharply lower than a year ago. At auction, prices were down 18 percent from a year ago, down 11 percent on formula and down 20 percent on a negotiated basis.

Packer-owned slaughter was 15 percent of total weekly slaughter in April, down from its record high of 27 percent last July, but up from its first-quarter average of 14 percent. Formula sales were 25 percent of total weekly slaughter in April, down from 31 percent in the first quarter. In the 10 years, 2002 to 2011, the formula-based average in slaughter was 38 percent with a high of 41 percent in 2005 and a low of 22 percent in 2011.

Slaughter lamb prices at auction averaged $147.89 per cwt. in April; nearly 1-percent lower monthly. Markets were very mixed, however with the only late-April sale in San Angelo distorting the average. Prices were down 4 percent in San Angelo to $136 per cwt., up 1 percent in Sioux Falls to $148.06 per cwt., up 3 percent in Ft. Collins to $161.50 per cwt. and up 8 percent in Kalona, Iowa, to $167.50 per cwt.

Slaughter lamb prices on a carcass-based formula averaged $315.38 per cwt., down 1.3-percent monthly ($157.38 per cwt. live). Lambs 85 lbs. and heavier comprised 45 percent of total formula sales in April, down from 50 percent in the first quarter. The heaviest lambs continued to be discounted, down 2 percent to $307.78 per cwt. in April. By contrast, the lightest-weight lambs on formula (55 lbs. and under) continued their upward trajectory, averaging $397.40 per cwt., which was up 5-percent monthly.

Slaughter lamb prices on a live, negotiated basis brought $150.46 per cwt., down 1.6 percent monthly.

Meat Market
In early April, Agriculture Secretary Tom Vilsack announced USDA’s intention to purchase up to $2 million of lamb products for federal food nutrition assistance programs, including food banks. The purchase will help support prices which could boost slaughter rates, accelerating slaughter of heavy feedlot lambs. 

By April the wholesale market had weakened for the fifth consecutive month. The gross carcass market weakened 2 percent in April to $367.25 per cwt., down 8 percent year-on-year. All primals lost monthly, but ground lamb gained 1 percent to $594.92 per cwt. The loins were the only primal that gained over last year’s values. The eight-rib rack, medium, was $715.18 per cwt. in April, down 4-percent monthly and down 20 percent from last April. The loins, trimmed 4 x 4, averaged $513.34 per cwt., down 1-percent monthly and up 5 percent year-on-year. The leg, trotter-off, was $426.03 per cwt., down 1-percent monthly and down 6 percent year-on-year. The shoulder, square-cut, was $265.03 per cwt., down 6-percent monthly and down 18 percent year-on-year.

Unlike the gross carcass value’s steady downward trend, the East Coast carcass market has been volatile in the past five months. Since November it has bounced up and down within $10 per cwt. April’s average was $377.70 per cwt., up 0.4-percent monthly and down 5 percent from a year ago. The carcass market represents carcasses sold for further processing—to small butchers as well as to other large packers.

Price spreads between live slaughter lambs and lamb wholesale values have also been volatile. For example, the live slaughter lamb to carcass price spread averaged between about $10 per cwt. and $40 per cwt. from 2008 to 2011, but in 2012 it shot up to above $80 per cwt. The spread widened because as slaughter lamb prices declined, the carcass and pelt value strengthened. We haven’t seen the live to carcass spread this high since a one-month spike in mid-2000.