Fourth-Quarter 2014Sheep Industry Review

Prepared by the

American Sheep Industry Association

for the American Lamb Board

January 2015

Contents

Executive SummaryI. Feeder and Slaughter Lamb Market TrendsII. Carcass and Boxed Lamb Market TrendsIII. At Foodservice and Retail IV. Price SpreadsV. PeltsVI. Replacement SheepVII. Domestic Production and TradeVIII. Nontraditional MarketIX. Total Lamb and Mutton AvailabilityX. Price Comparison to Imported ProductXI. Exchange RatesXII. Price Projections and Outlook

Executive Summary

Price rallies and excellent quality, the industry couldn’t have asked for a better year. With prices gaining up to 47% year-to-year, yield grades 3s at a 3-year high and lower corn prices, producers, feeders and processors likely breathed a sigh of relief. After price slumps in 2012 and 2013, lamb prices rebounded sharply in 2014 with many averages coming within 90 percent of the record highs enjoyed in 2011.

Figuring out why we saw stronger prices in 2014 can lend predictive insight to 2015’s outlook. Preliminary data suggests that the availability of lamb was about 1-percent higher, but due to data limitations (how much in the freezers), we don’t actually know how much lamb sold last year. If supplies were actually tighter then this alone could support higher prices. However, if supplies were indeed larger, then we have expanded lamb demand to credit for higher prices.  

Taking the optimistic route, higher lamb demand is probable for stronger demand also translates into higher lamb prices. It is hypothesized that lamb demand took a blow after less desirable lamb hit the markets in 2011/2012. It is reasonable that it took this long – 3 years – to rebuild consumer confidence in lamb.

Executive Summary, page 2

Slaughter and production is likely to continue contracting in 2015. Hopefully a couple consecutive years of relatively high feeder and slaughter lamb prices will induce flock rebuilding efforts in 2015 and 2016.

Imports are projected to contract in 2015 according the Livestock Market Information Center in late December 2014. After a couple of years of drought-induced liquidation the Australian flock is expected to grow in 2015.

2014 might have been a turning point for the industry. In December the calculated share of U.S. lamb in total lamb availability including imports and exports fell to an estimated range of 40 to 50 percent. U.S. lamb typically accounts for about half of total supplies, but never has been as low as 40 percent. We don’t know the actual U.S. share in retail and foodservice and we don’t know exact numbers in the nontraditional market, nor the mix in cold storage, but the industry is continually challenged to carve out American lamb’s niche. 2014 proved that our market is one of the strongest lamb markets worldwide, attracting increased import levels with strong consumer willingness to pay for lamb.

2014 Markets RalliedIn 2014 slaughter lamb prices averaged 88% of 2011 record highs and the feeder lamb market was within 93% of its 2011 highs.

Executive Summary, page 3

The 3-market feeder lamb auction price saw a 45-percent annual gain to $205.11 per cwt. Markets included San Angelo, Ft. Collins and Sioux Falls. Feeder lambs averaged $177.29 per cwt. in direct trade in 2014, up 43% annually, and 15% higher than its 5-year average.

Live, slaughter lamb prices at auction gained 31% in 2014 to $156.76 per cwt., 13% higher than its 5-year average. Slaughter lamb prices on a carcass-based formula averaged $300.65 per cwt. ($151.10 per cwt. live-converted), up 27% annually, and 6-percent higher than its 5-year average.

Slaughter lambs in live, negotiated sales averaged $156.06 per cwt. in 2014, up 24% annually, and 9-percent higher than its 5-year average.

The weighted average carcass price averaged $322.71 per cwt. in 2014, 23-percent higher annually. The net carcass value (wholesale composite less processing and packaging) averaged $335.62 per cwt. in 2014, up 26% annually. The rack made impressive gains in 2014, supporting the cutout. The rack (8-rib medium) averaged $816.89 per cwt. in the fourth quarter, up 2% quarterly. For the year, the rack averaged $810.34 per cwt., up 47% annually.

I. Feeder and Slaughter Lamb Market Trends

Auction Feeder Lamb Prices (60- to 90-lb.) Up Quarterly, and Sharply Higher Year-on-Year

• The 3-market feeder lamb auction price saw a 45-percent annual gain to $205.11 per cwt.

•Markets averaged $202.84 per cwt. in Q4, up 2% quarterly.

•Markets included San Angelo, Ft. Collins and Sioux Falls.

Feeder Lamb Prices at Auction Sharply Higher Annually

Feeder Lambs in Direct Trade Gained 43% Year-on-Year

o Feeder lambs averaged $177.29 per cwt. in direct trade in 2014, up 43% annually, and 15% higher than its 5-year average.

o Prices averaged $185.50 per cwt., 5-percent higher quarterly.

After mid-year slump, feeder lamb prices rebound sharply in the second-half of 2014

At 192,950 head, the volume of feeders in direct trade was down 6% year-on-year in 2014 and down 17%

from its 5-year average.

Auction and Direct Trade Feeder Lamb Prices Move Together

• Corn averaged $4.48 per bu. in its 2013/14 marketing year ending August, 35-percent lower year-to-year.

• Corn averaged $3.64 per bu. in Q4, down 19% year-on-year.

Lower Corn Reduces Cost of Gain

Increased Corn Supplies Lowered Prices

Alfalfa averaged $203.50 per ton in the first eight months of its marketing year (May-

Dec.), 2-percent higher year-on-year.

Auction Slaughter Lamb Prices 31% Higher Year-on-Year

• Live, slaughter lamb prices at auction gained 31% in 2014 to $156.76 per cwt., 13% higher than its 5-year average.

•Prices averaged $160.58 per cwt. in Q4, 3-percent higher quarterly.

2014 Saw Sharp Rally

2014 slaughter lamb prices relatively stable compared to recent years.

Carcass-Based Formula Slaughter Lamb Prices Gained 27% Year-on-Year

• Slaughter lamb prices on a carcass-based formula averaged $300.65 per cwt. ($151.10 per cwt. live-converted), up 27% annually, and 6-percent higher than its 5-year average.

• Prices averaged $321 per cwt. in Q4, up 7% quarterly.

Slaughter lambs on formula in 2014 reached 85% of 2011 high.

Lightest carcasses in slaughter lamb formula trade received 2014 premiums.

Auction and Formula Slaughter Lamb Prices Moved Together in 2014

Live, Negotiated Prices Topped Formula Prices

•Slaughter lambs in live, negotiated sales averaged $156.06 per cwt. in 2014, up 24% annually, and 9-percent higher than its 5-year average.

•Fourth-quarter prices averaged $162.87 per cwt., up 6% quarterly.

Slaughter Weights Drop: Quality Current

•Slaughter weights in carcass-based formula trades were down 3% annually to 76.87 lbs. (162.37 lbs. live-weight).

•Weights in live, negotiated trades up 6% to 148.41 lbs.

•By comparison, federally-inspected weights averaged 68.77 lbs. (137.27 lbs. live) in 2014, down 0.6% annually.

2014 dressing percentage for formula lambs averaged 50.22%, up 0.2% annually.

Formula Trades Down Year-on-Year

• In 2014 the volume of lambs purchased on formula was down 25% annually to 416,100 head.

• Live, negotiated trades were 32-percent higher annually to 313,125 head.

Packer-owned Trades Up

•Formula trades dropped from 29% to 20% in 2014, down 30%.

•Negotiated trades jumped from 12% to 16%, up 31%.

•Packer-owned lambs up from 12% to 19% annually, up 66%.

•Auction trade down an estimated 6% to 44%.

Packer Percent Up; Negotiated Trade Up; Formula Down; Auction Down

II. Carcass and Boxed Lamb Market Trends

Carcasses Up 23% in 2014

• Weighted average carcass price averaged $322.71 per cwt. in 2014, 23-percent higher annually.

•Prices average $343.83 per cwt. in the fourth-quarter, up 7 percent quarterly.

2014 Carcass 46% of 2011 High

Carcass trade dropped from 16% of weekly FI slaughter in 2013 to 14% in 2014

--Significant because carcass prices often used to determine formula slaughter lamb prices in a grid.

Quality Excellent: YG 3s at 3-Year High--Yield Grade 3s in lbs. was 41% of total slaughter in 2014 through Nov., up from

37% in 2012 and 35% in 2013.

Yield Grades for Federally Inspected Lamb and MuttonPercentages, Fiscal YearSource: USDA, AMS, Livestock and Seed Division

YG1 YG2 YG3 YG4 YG5

2012 5% 28% 37% 18% 12%

2013 7% 36% 35% 14% 7%

Jan-Nov 2014

6% 33% 41% 14% 6%

Percent Graded Trending LowerIn Jan-Nov. 59.4% of commercial slaughter were graded, compared to 59.2%

Jan-Nov 2013.

64% of Lambs Graded in Federally-Inspected Slaughter in 2014 through Nov.

• The net carcass value (wholesale composite less processing and packaging) averaged $335.62 per cwt. in 2014, up 26% annually.

• In Q4 the net carcass value averaged $344.98 per cwt., up 5% quarterly.

• The rack made a significant recovery in 2014, pulling up the net carcass value.

In 2014 Net Carcass Value was 93% of 2011 High

Q4 Net Carcass Value Nearly at 3-Year High

Rack sharply higher in 2014; other primals’ gains relatively less impressive.

Rack Averaged over $8 per Lb. in 2014

• The rack averaged $816.89 per cwt. in Q4, up 2% quarterly.

• The rack averaged $810.34 per cwt. annually, up 47%.

Loins gained seasonably in June through the summer and then continued to gain through the end of the year.

• Loins, trimmed 4x4, averaged $526.23 per cwt., up 3% quarterly.

• Loins was $501.71 per cwt. in 2014, up 9% annually.

Leg, Trotter-Off, up 13%

• The leg averaged $365.07 per cwt. in 2014, up 13% 5% annually

• The leg averaged $362.59 per cwt. in Q4, up 3% quarterly.

Q4 Shoulder, Square-Cut, at 3-Year High

• The shoulder averaged $300.80 per cwt. in 2014, up 25% annually.

• The shoulder was $313.08 per cwt. in Q4, up 5% quarterly.

Ground Lamb Up 2% Year-on-Year

•Ground lamb averaged $540.30 per cwt. in 2014, up 2% annually.

•Ground lamb was $559.82 per cwt. in Q4, up 4% quarterly.

III. At Retail & Food Service

The most popular featured items in 2014 saw higher prices: Higher rack featured at retail reflected in higher wholesale rack as well.

2014% Change

Year-on-YearBoneless leg $7.38 5%

Shoulder blade chop

$5.22 5%

Loin chop $9.18 4%Rib chop $13.46 10%

December Leg Mixed in Domestic & Imported Combined Retail Featuring

-- In 2014 there was a shift in featuring from domestic & imported boneless leg to bone-in and semi-boneless leg.

-- Prices up for domestic & imported bone-in and semi-boneless leg, but down for boneless.

Bone-in Leg Semi-Boneless Leg Butterfly Boneless

Leg Boneless

Price No. of Ads Price No. of Ads Price No. of Ads Price No. of Ads2013 $5.72 2,470 $5.41 4,570 $7.99 40 $6.46 8,3402014 $6.24 3,270 $6.16 5,250 $6.99 60 $6.25 6,270

% change 9% 32% 14% 15% -13% 50% -3% -25%

Source: USDA/AMS

IV. Price Spreads

Ralmonline, 2008

The Rack-Loin Price Spread Rebounded in 2014

• The rack-loin price spread averaged $3.09 per lb. in 2014, up 241% annually.

• Year-to-year, the rack jumped 47% compared to the 9-percent gain in the loin.

Understanding Packer Spreads• Packer price spreads do not include any costs of processing.

• Packers sell wholesale primals (cuts) which are combined together and called the cutout.

• Packers also sell carcasses, to the processing industry and to one another.

• The price spreads assume that all that is processed sells and no allowance is made for cold storage tonnage.

Packer spreads softened marginally in 2014 as gains in the slaughter lamb market caught up with gains in the meat market.

The live to carcass price spread averaged $16 per head in 2014, down 53% annually. The spread averaged $22 per head in Q4, up 34% quarterly.

Live to cutout spread was $49 per head in 2014, down 16% annually. The spread averaged $45 per head in Q4, up 2% quarterly.

Carcass to cutout spread was $32 per head in 2014, up 32% annually. The spread averaged $23 per head in Q4, down 19% quarterly.

Break-Even Analysis

• Breakeven analysis is only one snapshot of feedlot marketing.

-- Feed cost of gain differs depending upon weight in, weight out and breed.-- Total cost of gain includes feed costs, death loss and other costs.

• On average, total cost of gain dropped from about 95 cents per lb. in Q3 to around 80 cents to $1 per lb. in early January.

• The mid-January estimated break-even was $156 to $163 per cwt. compared to $161 per cwt., the live-converted formula carcass-based price during the first half of Jan.

Cost of Gain in CO Feedlots Continued to Fall: Reportedly about $0.80-$1.00 per lb. in Q4

Sensitivity Break-Even Analysis A: January kill of October-traded Utah feeders with a $0.80 per lb. cost of gain.

Item Cost

1. Total cost of feeder (2,600 head from UT traded in early Oct. at 102.5 lbs. for $193 per cwt.)

$197.83/head

2. Average freight from Utah $5.00/head

3. Cost of gain in Colorado feedlot 56.5 lbs. gained @ $0.80/lb. to 159 lbs.)

$45.20/head

4. Break-even price of slaughter lamb @ 159 lbs. $248.03/head

  Break-Even $155.99 per cwt.

Sensitivity Break-Even Analysis B: January kill of October-traded Utah feeders with a $1.00 per lb. cost of gain.

Item Cost

1. Total cost of feeder (2,600 head from UT traded in early Oct. at 102.5 lbs. for $193 per cwt.)

$197.83/head

2. Average freight from Utah $5.00/head

3. Cost of gain in Colorado feedlot (56.5 lbs. gained @ $1.00/lb. to 159 lbs.)

$56.50/head

4. Break-even price of slaughter lamb @ 159 lbs. $259.33/head

  Break-Even $163.09 per cwt.

V. Pelts

Pelts Weakened Sharply in 2014

• Fall Clips averaged $6.75 per piece in 2014, down 47% annually.

• No. 1 pelts average $5.34 per piece in 2014, down 47% annually.

• In the last half of 2014, No. 2 pelts averaged 25 cents per pelt.

• In the last half of 2014, producers were charged up to a $1 per pelt to discard some No. 3 and No. 4 pelts.

International Pelt Market Weakened: Raw pelt demand from China fell as processing plants under stricter environmental regulations and demand from Russia down.

VI. Replacement Sheep

2014 Replacement Ewe Prices 68% Higher Year-on-Year; Ram Prices Not Well Tested

Ewe Lambs $172 per headYearling Ewes, 12-24 mos. $279 per headRunning Age Ewes, 2-4 years $238 per headMiddle Age Ewes, 5-6 years $158 per headAged Ewes, over 6 years $118 per head

Do Higher Replacement Ewe Prices Infer Flock Rebuilding?--Perhaps not yet: Total mature sheep supplies by head (slaughter, mutton exports and live exports) was up 1.3% in Jan.-Nov. 2014 year-on-year.

VII. Domestic Production and Trade

Jan.- Nov. lamb and mutton slaughter down 1% year-on-year

Lamb/yearling slaughter was down 1% Jan.-Nov. year-on-year; Mature sheep slaughter was up 4% year-on-year.

At 134.9 million lbs., estimated lamb production was down 0.7% in 2014; Lower slaughter numbers were met with heavier weights.

Live Slaughter Weights Up Year-on-YearLive weights up 0.08% to 137.27 lbs.

Historically U.S. Slaughter Weights Trended Heavier through the 1990s and early 2000s

At 31.2 Mill. Lbs., Average Monthly Cold Storage was 48% Higher Annually

Lamb and Mutton Imports Up Year-on-Year -- At 173.7 million lbs., lamb and mutton imports in 2014 though Nov. were up 9% year-on-year.

Lamb Imports Totaled 147.9 Mill. Lbs. in 2014 through Nov., Up 10% Year-to-Year

• Australian lamb imports through Nov. were 108.4 mill. lbs., up 18% year-to-year.

• NZ’s lamb imports were 38.1 mill. lbs., down 8% year-to-year.

Australian Lamb Up; New Zealand Down

In 2014 through Nov., lamb import value was up 16% to $559 million year-to-year.

• At 25.8 million lbs., mutton imports were 5-percent higher in 2014 through November, year-on-year.

•Mutton imports from Australia were 22 million lbs. in 2014 thru Nov., up 20% year-to-year.

• New Zealand mutton imports were down 44% to 3.1 million lbs. in this period.

Mutton Imports Lower Year-on-Year

Mutton Imports Lower Through November

Lamb & Mutton Exports Down 4% Year-on-year Jan.-Nov. to 6.4 Million Lbs.

Mutton exports slow relative to higher lamb export growth.

Total Live Sheep Exports to Mexico Down

•Total live sheep exports to Mexico in 2014 were down 37% annually to 29,040 head.

•Possible U.S. flock rebuilding efforts might have curbed exports.

Total mature sheep supply in lbs. up 1% Jan.-Nov. 2014 year-on-year.-- Mutton production down 2%, mutton exports down 16% and live exports (carcass-equivalent) up 42%

Total mature sheep supply in no. of head up 1.3% Jan.-Nov. 2014 year-on-year.-- Mature sheep slaughter up 4%, mutton exports (converted to no. of head) down 18% and live exports up 31%

2014 Cull Ewe Prices Moved Higher

--San Angelo ewe prices averaged $60.91 per cwt. in 2014, up 46% annually and up 14% from its 5-year average.

--Culls averaged $65.97 per cwt. in Q4, up 10% quarterly.

XIII. Nontraditional Market

Andrew, 2006.

Nontraditional Market Significant Segment of U.S. Sheep Industry

• The nontraditional market is often characterized by a lighter-weight lamb, around 100 lbs., but very variable depending upon customer.

• The nontraditional market is mainly comprised of lambs sold direct to consumers.

• Some nontraditional lambs are processed by state inspected plants and even some FI plants.

• The largest nontraditional markets are the livestock auctions at New Holland, PA and San Angelo, TX, but nontraditional markets exists across most auctions.

In 2014 New Holland prices averaged $179.45 per cwt. for 90-110 lb. lambs, up 36% annually and 2% lower than its 2011 high.

IX. Total Lamb and Mutton Availability

LMIC’s Forecasted Balance Sheet: Total Lamb & Mutton Supplies up 0.8% in 2014

Production ImportsTotal

Supply ExportsEnding Stocks

Total Disappearance

2013 162.9 173.1 417.0 7.2 85.0 324.8

2014 162.6 184.5 471.1 8.8 135.0 327.3

% Change -0.2% 6.6% 13.0% 21.3% 58.8% 0.8%Source: LMIC, 12/31/14

• Total lamb availability (imports plus domestic production, subtracting exported lamb, but excluding freezer stocks) in 2014 through Nov. was 279.85 million lbs., up 4% year-on-year.

• In this period, U.S. domestic commercial lamb supply (less exports) was down 1.3% to 131.9 million lbs.

• Imports were up 10% year-to-year to 147.9 million lbs.

• Note: These figures do not include the nontraditional market estimated volume.

Total Lamb Availability Up Through November

Total lamb availability up, but due to unknown domestic and import freezer inventories, it’s difficult to know

what volume was actually sold.

U.S. Gained Mutton Market Share, but Lost Lamb Market Share

• In 2014 thru November:

Domestic lamb market share was 47%, down 6% from the same period in 2013.

Domestic lamb & mutton market share was 45%, down 3% year-on-year.

Domestic mutton market share was 29%, up 20% from a year ago.

U.S. Lamb Market Share Fell to Lowest Estimated Percentage on Record in Nov. 2014: 40%

Annual Lower Commercial Share Confirms Need for Improved Tracking of Nontraditional and Cold Storage Supplies

X. Imported Product Price Comparisons

U.S. Competitiveness Against the AUS Shortloin Gained in Late 2014

U.S. Rack Premium Stayed High Through 2014

*Note weight differences: U.S. rack 1.5-3.0 lbs. and imported rack 28 oz. +, not a perfect comparison, but useful as a snapshot.

U.S. Fabricated Rack Prices Up Annually; Imported Rack also Up

•U.S. rack, roast-ready, frenched (204C) averaged $1,623 per cwt. in 2014, up 24% annually.

•U.S. rack, roast-ready, frenched, special (204D) averaged $1,986 per cwt. in 2014, up 51%.

•The AUS rack cap-off, 28 oz. + was $1,093 per cwt., up 15% annually.

U.S. Shoulder Lost Competitiveness in Q4 Imported shoulder softer while the domestic shoulder gained.

XI. Exchange Rates

-- In 2014 the Australian/U.S. dollar averaged 90 cents, down 7% from 98 cents in 2013.

-- In 2014, the New Zealand/U.S. dollar hit 83 cents, up 1.2% from 82 cents in 2013.

Australian Dollar Weaker Against US$; NZ$ Stronger

The Stronger U.S. Dollar Boosts Import Competiveness 

XII. Price Projections and Outlook

Feeder and Slaughter Lamb Prices Forecasted to Stay High

• In early January, LMIC forecasted that first-quarter slaughter lambs on a carcass-weight basis could range from $307-$312 per cwt., 3-percent higher year-on-year.

• LMIC forecasted 60-90 lb. feeder lambs to range from $210-$217 per cwt., down 4% over a year ago and an estimated 12-percent higher than feeders in direct trade.

• Forecasts should be used with caution given high freezer stocks.

Feeder cost of gain could stay below $1 with lower corn.

• Lower cost of gain – less than $1 per lb. -- can support feeder lamb prices and provide improved producer returns in early 2015.

• The forecast 2014/15 corn farm price ranges from $3.20 to $3.80 per bu., for an average $3.50 per bushel (USDA/ERS, 12/2014).

• The 2014/15 projected average is 96 cents per bu. lower than the 2013/14 estimate of $4.46 per bu. (USDA/ERS, 12/2014).

• Hay & forage conditions a wild card: Improved conditions nationally in 2014, but some western states and California and Texas, in particular, still dry.

Index Lends Predictive Insight

•Both feeder and slaughterer lamb prices typically strengthen thought the spring before weakening in the summer.

•The index shows the average relationship of prices in each month to the average for the year. An index of 105 means prices are 5% above the annual price average.

History tells us feeder lamb prices are forecasted to gain through late spring before weakening seasonally.

Slaughter lamb prices at auction forecasted to rally through the spring before weakening during the summer.

Aside from higher incomes and high-priced beef, consumer desire for lamb important to demand building efforts.

•The Daily Livestock Report (DLR) found that tastes and preferences for beef likely trumped lackluster income in expanding beef demand last year (12/31/2014).

•Beef prices could stay high through 2015 which can support lamb demand.

•Any gains in U.S. incomes will only support lamb demand.

In Jan.-Nov. 2014. all fresh retail beef jumped 13% year-on-year to $5.57 per lb.

Continued income growth in 2015 can support lamb demand.

-- Disposable income grew 0.62% between Q2 and Q3 last year.

U.S. Market Continually Adjusts to Import Volumes and Prices: 2015 Could See Lower Import Levels

• Australian sheep inventory is forecasted to rise from 72.2 million head in mid-2014 to 75 million in 2015 (Meat & Livestock Australia, 8/2014).

• Australian producers expected to rebuild flocks after “two years of drought-induced higher turnoff and tighter numbers,” (Meat & Livestock Australia, 8/2014).

 After 2 years of import expansion, LMIC forecasted 2015 could see a 6-percent drop (12/31/14).-- Lower lamb supplies can put upward pressure on prices, but are consumers willing to pay higher prices?