|Sheep Industry Healthy as 2006 Draws to a Close
(Dec. 2006) It is a good time to be in the sheep business. Returns are healthy from producer to breaker and demand seems to be steady and robust. Slaughter numbers are catching up after concerns of tight supplies for the upcoming holidays. More important perhaps, there are no indicators that prices will crash in January as they did this year. After volatile prices in early 2006, poor feed conditions and an unexpected slow-down in inventory gains, 2007 holds promise.
For industry growth, it is vital that all sheep sectors are profitable. Profits mean investments, and investments can mean anything from promoting sheep and lamb or building inventory. Breakers often go straight to chefs of fine-dining restaurants to demonstrate how to cut and prepare lamb cuts. This kind of promotional activity may get cut if a breaker is operating in the red for long periods of time. Similarly, a producer will not rebuild his herd if there are no profits to re-invest into the business.
By the end of October, packers and breakers were operating in the black. The live-to-carcass price spread, including pelt and $2 drop credit, was $12 in the first quarter, $13 in the second, $11 in the third and $12 in October. The packer kill cost is $7.25 per head, so spreads around $10 are considered ‘healthy.’
After falling steadily since mid-May, the carcass to cutout price spread fell below $10 in August and September, but climbed up to $21.95 in the last two weeks of October. With the estimated cost of break at $21.90, this puts breakers in the black.
Whether the price spread is narrow or wide, it says nothing about the profits received by that sector. All costs are subtracted from that price margin, be it transport or preparing grill-ready, pre-marinated lamb loins. As consumers demand more convenience in their food preparation at home and as they eat out more, marketing costs increase.
Marketing costs comprise of 81 percent of consumer expenditures on food (U.S. Department of Agriculture’s (USDA) Economic Research Service (ERS), 2000). This means that 19 percent of the value of what you eat from grocery stores and restaurants goes to the producer. Labor is the largest component of marketing costs. Labor use by processors and restaurants accounted for 40 percent of the total consumer food expenditures (USDA/ERS, 2000). Packaging, transportation and fuel/energy followed in order of importance in total marketing costs.
Estimating profits in the sheep industry is difficult because I have found that the sheep industry is anything but homogenous. Producers market lambs at different weights and into different markets, be it direct to a packer or direct to a restaurant. Additionally, each packer and breaker may have unique marketing practices. Some breakers sell wholesale cuts to restaurants while others sell a greater proportion of retail-ready cuts.
I forecast that the break-even price for feeders in early 2007 would be in the low to mid $90s per hundredweight, but this is only a rough generalization. Returns are a function of breed, weight and cost of gain – all of which will differ from producer to producer. According to the Livestock Market Information Center (LMIC), Texas feeder lambs are forecasted to fall marginally, year-to-year, to $105/cwt from $110/cwt. in the first quarter of 2007. If these prices are realized, it will put feeders in the black.
Lamb and Meat Prices Gain Seasonally
Average feeder-lamb prices gained 1 percent to $104.92/cwt. in October as supplies tightened and average weights dropped 4 lbs. In October, feeder-lamb trade slowed considerably, and by November, feeders were “cleaned up.” In fact, feeder-lamb trade was tight throughout the year. Between January and October, the number of feeder lambs in direct trade was down 30 percent year-to-year to 572,840 head.
Live slaughter-lamb prices were mixed in October. In the Midwest, prices gained almost 1 percent to $95.47/cwt., and in the Intermountain region, prices gained just more than 1 percent to $92.44/cwt. In Iowa, prices dropped 3 percent to $91.47/cwt. and fell 5 percent to $91.63/cwt. in the Midwest computer auction.
Formula lamb purchases by carcass weight gained almost 1 percent in October. The 75-lb. to 85-lb. weight category gained the most, almost 3 percent to average $196.82/cwt. Fifty-five lb. to 65-lb. carcasses gained almost 1 percent to land at $195.85/cwt., 65-lb. to 75-lb. carcasses increased 0.5 percent to average $199.28/cwt. and 85-lb. and heavier carcasses lost almost 1 percent at $189.30/cwt.
The gross carcass value gained 4 percent to $248.95/cwt. between September and October. Its gain was propelled by the 11-percent seasonal gain in the leg price to $223.68/cwt. At $575.56/cwt., the medium eight-rib rack gained 4 percent in October. The trimmed 4x4 loins lost marginally to $511.29/cwt. Shoulders gained just more than 1 percent to $177.32/cwt.
Average meat prices in October were about 1-percent higher compared to last October. The loins this year were 18-percent higher than last October, but the rack was 8-percent lower.
We know that lamb is a seasonal meat, but I believe its seasonal volatility is dampening. About half of the domestically produced lamb is sold to the foodservice sector. Restaurants, particularly fine-dining restaurants, will have a lamb item on their menu throughout the year. The recent spike in the price of loins, during a period when we typically see a seasonal downturn, may be because the loin is coming into favor at fine restaurants.
The Domestic Supply Puzzle
In the fourth quarter, the number of head slaughtered will likely be down by as much as 6 percent year-to-year and production could be down by 3.4 percent year-to-year (LMIC). Imports will be up in the fourth quarter, but not enough to prevent reduced supply. LMIC forecasted that total lamb and mutton supply in the fourth quarter would reach 105.5 million lbs. – almost 3-percent lower than last year.
Slaughter numbers were often below 50,000 head a week during the summer and early fall but increased in October. In October, 13.4 million lbs. of lamb and mutton were produced, down from 16.1 million lbs. during the five weeks of September and dressed weights were almost 0.5-lb. heavier at 66.25 lbs.
This fall, feeder lambs went into feedlots at relatively light weights and will be on feed longer but will still be slaughtered at relatively light weights to meet the holiday’s demand.
Total lamb and mutton supply in 2006 will likely exceed 2005’s volume. This is because although domestic production levels were down year-to-year, the increase in imports made up for and exceeded the shortfall.
Australian lamb imports during October increased 14 percent from last October (Meat and Livestock Australia (MLA), 11/3/06). However, lamb imports during the 10 months to October were 2-percent below the same period last year (MLA, 11/3/06).
What’s in Store for 2007?
In 2007, we may not see the inventory gains we had hoped for a year ago. There was a terrible drought during this summer in some of the larger sheep states. Therefore, we may not see a year-end increase in inventory. In July, inventory numbers revealed almost a 0.5-percent drop in numbers from the previous July. It is hard to say whether January numbers will be down this much. An economist at USDA/ERS forecasted that inventory might drop as much as 1 percent in January from a year ago. I think, at most, we may see a 0.4-percent drop in inventory.
What will happen to imports is unknown. ERS forecasted a decline in imports, yet the LMIC forecasted a rise. I agree with ERS. New Zealand will not likely increase its imports to the United States because it is committed to import quotas in Europe. Australia was able to increase its exports to the United States this year but only because its increase in production was drought-induced. Record production levels are due to “earlier and increased lamb turn-off this year in comparison to previous seasons, with drought conditions across most lamb-producing regions,” (MLA, 11/6/06). Its inventory numbers do not support much of an increase in production in 2007.
ERS forecasted that lamb and mutton imports would fall almost 3 percent in 2007 – from 189 million lbs. to 184 million lbs. (10/19/06). Indeed, imports may be slowing. In the first 10 months of 2006, lamb imports were down about 0.2 percent year-to-year to 98 million lbs. After seeing some double-digit annual gains, the year-to-year gain between 2004 and 2005 was not even 1 percent.
In mid-October, corn prices jumped 16 percent in one week – the largest gain since 1988. According to LMIC, cash corn prices could reach $3/bu. by next year (AgJournal, 10/20/06). This may mean that feeder-lamb prices are forecasted to decline. As mentioned, Texas feeder lambs (60 lbs. to 90 lbs.) are forecasted to range between $105/cwt. and $110/cwt. in the first quarter of 2007 – slightly lower than last year (LMIC).
Slaughter-lamb prices are likely to gain in the first quarter of the New Year. For the first quarter of 2007, LMIC forecasted that Western Direct slaughter lambs by carcass weight could price from $186/cwt. to $196/cwt. – about 22-percent above last year’s crash.
Unfortunately, stocks in cold storage and import levels remain a wild card. Reportedly, cold-storage numbers may not be accurate. In addition, imports are counted in cold-storage numbers, making it difficult to get a handle on the domestic supply situation
Editor’s Note: Julie is open to comments and questions and can be reached by e-mail at firstname.lastname@example.org or by phone: 303-619-9975.