(November 1, 2010)  Perhaps to the surprise of many, lamb prices continued to set records in 2010. The combination of lower domestic supplies and reduced imports supported bullish prices across lamb sectors. Looking ahead, higher corn could squeeze feeders’ cost of gain, but a continued weak dollar will likely keep lamb and mutton availability tight, supporting prices across sectors into 2011. If the momentum to restock isn’t already in motion, next year will likely see more lambs and ewes held and inventory gains a few years ahead.

Record-High Prices
Unprecedented price levels have been observed this year. Domestic supplies are lower, but the real story is that lamb imports were 13-percent lower in the first trimester. Going into Easter – the highest commercial demand period of the year – imports were off about 7 million lbs. Lamb imports later rebounded some into the summer, but total supplies in the pipeline were already too low to affect prices. Total Australian lamb imports for January to August were down 6 percent year-on-year (Meat and Livestock Australia (MLA), 9/3/10). Wholesale prices were also high. The weak U.S. dollar rendered imported product more expensive, perhaps allowing domestic processors to leave more money on the table.

Equity Electronic Auction set records domestically. It saw slaughter-lamb prices clear $150/cwt. in mid-September with a September average of $146/cwt. Dave Johnson, vice president of marketing for sheep and veal at Equity, contributed high prices to the heightened competition that stems from a true auction setting in addition to tighter supplies. The largest lamb packers bid against one another on limited supplies whereas in the live auctions or in the country, competition is limited. Perhaps also packers are willing to bid up prices because procurement costs are much lower in bidding from one’s office compared to sending a buyer out to the field. Johnson added that Equity prices are an important bellwether of prices across the country.

Slaughter-lamb prices in live auctions and on formula also set records, but not as high as Equity. Slaughter-lamb prices on formula averaged $117/cwt. live in 2010 – up 65 percent from $71/cwt. in 2002. In general, the 2000s witnessed year-on-year slaughter-lamb price increases apart from a dip in 2006 and an even smaller, recession-induced, weakening in 2009.

Reduced lamb supplies are playing a role in supporting prices. In the 10 years to 2009, federally inspected lamb slaughter contracted an average 4-percent annually. Likewise for lamb production, at 1-percent annually, sheep-slaughter contractions have been less severe.

If prices are so high, why is the industry losing inventory? The American Sheep Industry Association (ASI) coordinated a collaborative effort to examine rebuilding the sheep and lamb industry. Lamb and wool processors, lamb feeders and producers have gathered to prioritize and address crucial items needed to increase sheep production, stimulate infrastructure and determine how to attract new producers. Johnson is optimistic saying, “We will be hard pressed to see a major correction in the market before 2013 or 2014,” (10/4/10). Thus, we will likely see another three to five years of strong producer prices. This strong trend will likely induce widespread restocking activity down the road.
 
Ethnic Demand
In addition to the online auction, Johnson oversees sheep and lamb ethnic trades in the Midwest. This ‘phenomenal’ market – from Muslims and Jews of all descents to Hispanics – has grown from a holiday-specific market to a year-round market. Perhaps the most underestimated market lies from Minneapolis to Detroit (10/4/10). One halal lamb and goat plant in northwestern Illinois reportedly processes 500 to 1,000 head per week.

Indeed, national inventory totals don’t reveal pockets of growth. Growth occurred in breeding inventory in Wisconsin, Illinois, Indiana and Ohio where net breeding inventory grew 15,000 head between 2008 and 2009. Breeding ewes were down 1,000 head in Michigan.

The Northwest also represents an area of growth. In the five states, Nevada, Oregon, Washington, Idaho and Montana, 17,000 additional breeding ewes were counted in 2009.
However, these numbers pale against the significant contractions in the largest sheep producing states. In 2009, the nation saw a 1.5-percent drop in breeding ewes. Texas lost 10,000 ewes, California lost 27,000 head, Wyoming lost 20,000 head and Colorado lost 12,000 head.

ASI discovered that national lamb crop numbers significantly exceed federally inspected (FI) lamb and mutton slaughter numbers (less losses for predator and non-predator deaths). This difference was coined the non-traditional market.

By calculating the difference between FI slaughter and lamb crop, it can be estimated that in the 10 years, 2000 to 2009, FI slaughter declined 30 percent and the non-traditional market grew 7 percent. This means that in 2000, 25 percent of total slaughter was channeled into the non-traditional market and by 2009 that portion increased to 34 percent. .
The net supply effect of this growing non-traditional market and contracted FI growth is that total pounds of lamb consumed nationally declined faster than lower FI slaughter numbers would suggest. This is because non-traditional lambs average lighter weights.

Two features distinguish the ethnic market. Lamb is generally preferred less than 100-lbs. live, compared to an average 140 lbs. in the commercial market. Second, ethnic consumer markets fall outside

national commercial supermarkets and franchise restaurants. Marketing outlets range from farmer direct to small, ethnic butchers and retailers.

In general, the non-traditional market is known for buying available quality, but ethnic demands during religious holidays can be specific. Nov. 17 is the Muslim festival of sacrifice, Eid ul-Adha. For this holiday, Muslims typically demand yearlings greater than 60 lbs. A larger lamb is required relative to other Muslim holidays because it is shared with friends and family and a portion might be donated to the poor. Dec. 8 is the Muslim Muharramn, or Islamic New Year. In addition, during this week lies the Jewish holiday, Chanukkah, in which a kosher lamb is served.

Lower Lamb Supplies
Total lamb and mutton production were down 3 percent in the nine months through September, year-on-year to 114 million lbs. In this time, lamb and sheep slaughter were down 1 percent to 1.67 million head. Lamb slaughter was down 2 percent through September to 1.56 million head and lamb production was down 5 percent. This means that in the nine months through September, 5.4 million lbs. less lamb was produced year-on-year.

Mutton slaughter was up 15 percent in the months through September, to 115,163 head. Sheep slaughter might be up for two reasons. Some producers have used the current high prices to sell ewes. Additionally, JBS is reportedly selling mutton carcasses to Mexico, replacing some of the live trade.

U.S. consumption (supplies) of domestic and imported lamb declined 14 percent between 2007 (323.6 million lbs.) and 2009 (278.6 million lbs.).

Reduced Import Competition
After year-on-year increases in lamb imports for most of the 2000s, lamb imports declined annually since 2007. Total lamb and mutton imports were down 2 percent in the seven months through July. Lamb imports started off the year sharply lower, but regained momentum by the summer such that by July, lamb imports were 3-percent higher year-on-year. Mutton imports were down 21 percent through July.

In the seven months through July, Australian lamb imports were down 8 percent year-on-year to 56.3 million lbs. New Zealand’s lamb imports in this period were up 29 percent to 32.5 million lbs.

Record-high lamb and mutton prices and lower supplies in Australia in addition to the weak U.S. dollar likely affected import volumes and prices. In the last two years, the average price of fresh- and chilled-lamb imports jumped from about $3/lb. to $4.25/lb. U.S. lamb has been historically more expensive than imported product, but in recent months, trends have reversed. For example, between January and June, the Australian leg averaged $3.15/lb. and the U.S. leg was $3.12/lb. The Australian loins were $4.85/lb. and the U.S. loins were $4.16/lb.

This reversal has not been the case for the U.S. rack, however. The U.S. rack was 27-percent higher than imported fresh product between January and June 2010.

Inventory Gains?
Although the stage is set, the industry might not see inventory gains at the national level for a couple years; it takes that long for an expansion decision to translate into a ewe with her lambs on the ground. While some producers will use the current hot market to sell out, there is anecdotal evidence that some middle-aged ewes in Ft. Collins that are typically auctioned for slaughter are being taken back out to the country.

Sequential years of high feeder- and slaughter-lamb prices, as is forecasted, will likely help induce restocking. Ewe-lamb prices strengthened for the past three years. In 2008, ewe lambs averaged $94/head and this year through September ewe lambs averaged $117/head, 25-percent higher. Young ewes, 2 to 4 years, averaged $152/head; middle aged ewes, 5 to 6 years, averaged $120/head and aged ewes averaged $90/head.

Record-High Feeders
August and September are historically the heaviest trading months for feeder lambs in direct sales. This year was different, however, with marketings down to a trickle. In September, 7,200 head were reported traded, down from 71,700 head last September and 58,000 head in September 2008. Where were all the feeders?

Feeders were forward contracted early this year, to take advantage of record-high prices and before possible market cooling. In May, 111,990 head were traded, up 50 percent year-on-year. Prices averaged a record $127/cwt. in April and May, softened to $125/cwt. in June and July before gaining again in August. By September, feeder-lambs in direct trade averaged $137.20/cwt., up from $130.59/cwt. in August and up from $93.93/cwt. last September.

Feeder-lamb prices at auction also hit record highs. September’s average for 60-lb. to 90-lb. feeders was $142.22/cwt. – up 4 percent from August and up 41 percent from last September. San Angelo, Texas, Newell, S.D., Ft. Collins, Colo., and Sioux Falls, S.D., were all strong feeder markets this early fall.

In early September, corn yields were estimated lower than expected. This news, combined with strong projected exports, means lower supplies domestically and thus, higher price forecasts. In the 2010/2011 marketing year, corn is expected to range from $4/bu. to $4.80/bu. (U.S. Department of Agriculture’s (USDA) Economic Research Service (ERS), 9/14/10). This is up sharply from the $3.55/bu. average for the 2009/2010 year ending last May. The last time corn rose above $4/bu. was in the winter of 2008/2009.

Higher feed prices could mean producers will keep sheep and lambs on forage longer. However, tight supplies will likely continue to trump higher feed costs in supporting current high feeder-lamb prices.

It is uncertain, but corn prices might not be the bellwether of feed costs they once were. As becoming more common in the cattle industry, some feeders might substitute distillers’ grain – an ethanol co-product – in feed.

Slaughter-Lamb Prices Strong
On average, slaughter-lamb prices on a carcass-based formula were $232.92/cwt. in the nine months through September, up 15 percent year-on-year. 

In September, 38,100 head of lambs sold on formula, down 45 percent year-on-year. Slaughter-lamb prices on a carcass-based formula averaged $262.69/cwt. in September, up 5 percent from August and up 32 percent year-on-year. On a live basis, the formula slaughter-lamb price averaged $134.22/cwt. in September.

The lightest carcasses, 55-lb. and lighter, continued to fetch price premiums in September. For the last couple years the lightest carcasses received a noticeable premium, compared to analogous prices in most years. The 55-lb. and lighter category received $277.06/cwt. in September compared to the heaviest 85-lb. and heavier weight class at $244.34/cwt. If corn prices rise, as forecasted, the price premium afforded lighter-weight lambs might shrink.
While formula purchases decreased, negotiated purchases rose to 20,700 head – up 34 percent year-on-year. Monthly negotiated trades only exceeded 20,000 head a few times in the last five years. It might be cost effective for packers to purchase lambs live by the pound and avoid paying for quality on a formula when prices are high.

Slaughter-lamb prices at auction averaged $137.16/cwt. in September, up from $128.98/cwt. in August and up from $91.58/cwt. last September. As mentioned, Equity Electronic Auction continued to set records with a September average of $145.06/cwt. South Dakota was also high at $143.47/cwt., the Kalona, Iowa, average was $141.25/cwt. and at $121.25/cwt., even the historically lowest market, San Angelo, prices were above $120/cwt., a first for the 2000s.

Wholesale Boom
The wholesale lamb market enjoyed three consecutive years of price gains before falling 6 percent to $249/cwt. in 2009 due to the economic recession. However, in the nine months through September 2010, wholesale values rebounded, up 16 percent to $290/cwt. year-on-year.

The economic downturn tempered lamb consumption in the foodservice sector in 2009 and 2010, reducing demand. MLA explained, “While there was a modest improvement in U.S. restaurant trade over the U.S. spring and early summer, the restaurant tracking index recently trended lower in September,” (9/2010). By comparison, supermarket sales were more resilient as consumers turned to more in-home food preparation.
By September, the wholesale market revealed much stronger retail positioning. Prices gained month-to-month apart from some weakening in August. In September, the gross carcass value (average wholesale value) averaged $323.13/cwt., 7-percent higher monthly and 30-percent higher year-on-year.

Making headlines is the record September average of $7.05/lb. for the eight-rib rack, medium. The rack hasn’t seen $7/lb. since early 2003. In September, the rack was 8-percent higher monthly and 52-percent higher year-on-year. 
From January to June, the frenched rack, cap-off, remained higher-priced than the Australia rack at $1,072/cwt. compared to $845/cwt., yet the volume of imported racks was down, bidding prices up.

Unprecedented highs were not enjoyed by the rack alone. The leg hit a record $346/cwt. this year – the highest price on record since the inception of Mandatory Price Reporting in mid-2001. In the nine months through September, the leg, trotter-off, jumped 18 percent year-on-year to $312.44/cwt. In September, the leg averaged $325.41/cwt., up 8 percent monthly and up 30 percent year-on-year.

Among primal cuts, the loins exhibit the sharpest and most pronounced seasonality. Last winter, the loins, trimmed 4x4, averaged $325/cwt. but strengthened to $533/cwt. at the peak of the summer grilling season. This past summer, the loins enjoyed about $5/lb., up sharply from the peak of about $4/lb. last summer and more in line with the summer of 2008. In September, the loins averaged $513.95/cwt., a 1-percent gain monthly and up 28 percent year-on-year.

The lamb shoulder has been supported through USDA’s lamb purchase program, but also because it provides a good alternative for budget-conscious lamb consumers in an economic downturn. USDA’s Agricultural Marketing Service (AMS) purchased 216,000 lbs. of lamb shoulder chops at a cost of approximately $1 million in early September.

The shoulder, square-cut, hit a record high in September of $258.81/cwt., 8-percent higher than August and up 15 percent year-on-year. MLA reported, “Despite U.S. consumers having cheaper protein options, such as pork and chicken, at their disposal this year, exports of shoulder cuts, mainly prepared as chops, increased 1 percent on the same period last year,” (10/2009).

MLA also noted that boneless shoulders are reportedly being used as ground or minced lamb in retail and foodservice for burgers (10/2009). At the end of September, the wholesale price of ground lamb was $4.36/lb., up from $3.55/lb. a year ago. 

Carcass Market Hot
Except for some cooling in July, the carcass market steamed forward into 2010 with month-on-month gains. In the year through September, the carcass market averaged $20/cwt. higher than 2009 and $32/cwt. higher than 2008. The East Coast carcass market averaged $265.53/cwt. in September, up from $264.91/cwt. in August and up from $234.16/cwt. last September.

Slaughter Lamb Byproducts Strong
Another factor likely supporting strong slaughter-lamb prices this year is the substantial growth in the pelt market. Export demand has been solid from China and Russia. If packers are receiving more for their pelts, they are more apt to offer higher producer prices. Fall clips jumped 40 percent from January to $8.75/piece in September. No. 1 clips gained 45 percent to $7.25/piece and No. 2s (shorter wool length) gained $3.50/piece to $5.50/piece.

The U.S. pelt market relies heavily upon relative exchange rates for its competitiveness. The weak U.S. dollar likely supported recent pelt price runs. Pelt prices are a far cry from the $12/piece to $14/piece enjoyed in the early 2000s, but current highs have not been seen since 2005.

USDA’s ERS recently reported on the often-overlooked variety meat market which can help support slaughter lamb prices, similar to pelt values. Edible offal such as liver and hearts are not often consumed domestically, but rather exported to higher-value markets. ERS reported that edible offal exports constituted 25 percent of the volume of total beef-product exports in 2009 (9/17/10). USDA reported variety meats are forecasted up over $100 million in 2010 to $1 billion (meatingplace.com, 9/2/10).

More research is warranted, but the edible offal lamb market in the United States is likely growing, particularly among ethnic consumers. This market might get a further boost if the U.S. dollar strengthens, rendering exports less competitive.

Forecasts
There is no reason to suspect that the current market momentum will not continue into 2011 – keeping prices strong. 

The Livestock Market Information Center (LMIC) forecasted in late September that total lamb and mutton supplies could contract 4 percent this year to 410 million lbs. and another 5 percent next year. LMIC added that domestic production is likely to fall 3 percent to 172.5 million lbs. and another 2 percent in 2011. That said, this forecast is for the commercial sector. It is difficult to track possible growth in the non-traditional market due to lack of national statistics.

A possible rise in imports in 2011 will not likely compensate for lower domestic supplies and thus sustain pressure on prices. LMIC forecasted that lamb and mutton imports could fall 1 percent this year to 169.5 million lbs. before gaining 1 percent in 2011 (10/1/10). However, LMIC might revise its estimate in light of recent news that  New Zealand faced a spring blizzard, with mortality up to 15 percent for some producers’ lambs (meattradenewsdaily.com, 10/5/10). Both New Zealand and Australia are facing tight supplies. Additionally, China is becoming a real competitor in the lamb export market.

Slaughter-lamb prices typically peak in the lean, summer months then weaken as supplies become more ample during the late fall. A seasonal price index for live-converted carcass-based formula prices revealed that slaughter-lamb prices could fall up to 8 percent between the third and fourth quarters and then gain marginally in the new year.

A seasonal index for live slaughter-lamb prices at auction revealed that prices could soften 6 percent between the third and fourth quarters and then gain 6 percent in the first quarter.

LMIC forecasts more specific slaughter-lamb prices. In early October, it found that Western direct slaughter-lamb prices by carcass weight could fall 8 percent between the fourth and first quarters; yet remain up to 11 percent higher year-on-year.

Feeder-lamb prices historically weaken through the third quarter as spring lambs are sent to feedlots before rebounding in the fourth quarter as supplies tighten once again. A seasonal price index found that between the third and fourth quarter feeder-lamb prices can gain 1 percent before jumping another 8 percent in the first quarter.

LMIC forecasted in early October that 60-lb. to 90-lb. Texas feeder lambs could weakened by 2 percent into the New Year.

Exports Up

Live ewe exports were up 14 percent through Oct. 1 year-on-year to 67,239 head. The weak U.S. dollar makes U.S. exports relatively more competitive in Mexico.

After a sharp drop in 2007, lamb and mutton (meat) exports experienced three years of consecutive gains. In the first nine months of the year, lamb and mutton exports increased 14 percent year-on-year to 10.72 million lbs. However, lamb exports dropped in this time by 5 percent to 1.5 million lbs. while mutton exports jumped 18 percent to 9.3 million lbs.