Third-Quarter 2012

Sheep Industry Review

Prepared by the

American Sheep Industry Association

for the American Lamb Board

November 2012

Contents

Executive Summary

I. Feeder and Slaughter Lamb Market Trends

II. Feeder and Slaughter Lamb Price Projections

III. Carcass and Boxed Lamb Market Trends

IV. Retail Feature Activity

V. Price Spreads

VI. Pelts

VII. Replacement Sheep

VIII. Domestic Production and Trade

IX. Total Lamb and Mutton Availability

X. Price Comparison to Imported Product

XI. Exchange Rates

Executive Summary

 2012 has been a tumultuous year for the lamb industry with a dramatic loss in value for feeder and slaughter lambs, lower meat prices, high feed costs and backed up lambs in feedlots.

Retail and wholesale lamb prices hit record highs last November, putting pressure on consumers. Consumers rebelled at the higher price point and retail and foodservice orders began to slow. Consequently, lambs on feed began to get backed up and got heavier. It wasn’t until early November 2012 that reportedly Old Crop lambs were “cleaned up.” Through 2012 consumer income growth and consumer expenditures grew slowly; insufficient advances to put the much-needed boost back into lamb demand.  The recent U.S. Department of Agricultural lamb purchase program and good sales through the December holidays should get the feedlots back to current weights and move inventories product. 2013 will likely see tight slaughter lamb supplies, reduced slaughter weights and lower production. Even with higher feed costs, feeder lamb prices could rebound with accelerated consumer income growth.

Feeder lamb prices took the brunt of the market downturn in the past year. Feeder lamb prices at auction hit $99 per cwt. in September—the lowest level in four years. It was a little over a year, May 2011, when we saw the record $228 per cwt. average at auction. In the third quarter, the 3-market feeder lamb auction price saw a 44-percent quarterly decline and a 53-percent year-on-year drop.  

Executive Summary, page 2

Feeder lamb prices in direct trade hit a three-year low in the third quarter. Feeder lambs averaged $105.87 per cwt., 27-percent lower quarterly and 53-percent lower year-on-year. Feeder offers were constrained by high feed costs, uncertain slaughter dates and great uncertainty in the slaughter lamb market.

In 2012 the U.S. lamb industry had a lot more product to take to market then the market was accepting at those prices. Total lamb availability to consumers through August (in which last import data is available) was down 1% year-to-year to 184.34 million lbs. While domestic production was up 4% in this period, imported product shrank 6%. Lower lamb supplies suggest higher prices at foodservice and retail, not lower. Consumer lamb demand apparently faltered. Lamb prices in retail grocery features saw an estimated 5% drop in the past year.  Slaughter lamb prices at auction saw a 15-month downward slide by September. Live, slaughter lamb prices at auction lost 30% to $98.20 per cwt. between quarters and lost 45% year-to-year. Slaughter lamb prices on a carcass-based formula averaged $251.11 per cwt. ($127.83 per cwt. live-converted) in the third quarter, down 17% quarterly, and down 33% year-on-year.

A concern among many industry proponents is that the meat market doesn’t seem to have fared as bad as the feeder and slaughter lamb market in this current downturn. Carcass prices averaged $313.30 per cwt. in the third quarter, 14-percent lower quarterly and a down 19% from a year ago. The gross carcass value averaged $322.24 per cwt., down 10% quarterly and down 21% year-to-year.

Executive Summary, page 3 

All primals weakened through the year. The loins, leg and shoulder saw muted losses at wholesale compared to the losses experienced by the higher-valued rack. The rack averaged $593.20 per cwt., down 13% quarterly and down 34% year-on-year. Loins, trimmed 4x4, averaged $543.54 per cwt., up 4% quarterly and down 6% year-to-year. The leg averaged $358.37 per cwt. in the third quarter, down 14% quarterly and down 16% year-to-year. The shoulder averaged $231.38 per cwt. in the third quarter, down 8% quarterly and down 26% year-on-year.  Relative to the primals, ground lamb held its value for much of 2012 before weakening in the summer. Ground lamb averaged $552.42 per cwt. in the third quarter, down 7% quarterly and down 6% year-on-year.

I. Feeder and Slaughter Lamb Market Trends

Auction Feeder Lamb (60- to 90-lb.) Prices Weakened Sharply

• The 3-market feeder lamb auction price saw a 44-percent quarterly decline to $102.13/cwt., down 53% year-on-year.

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

• Prices not established in Ft. Collins in September.

• Prices averaged $112.21/cwt. in July, $94.48/cwt. in Aug. and $99.69/cwt. in Sept.

Three Markets Moved Together

Feeders Hit a Three-Year LowFeeder Lambs in Direct Trade Averaged $105.87/cwt., 27% Lower Quarterly, 53% Lower Year-on-Year

Volume of Direct Feeder Lambs More than Doubled Quarterly (up 124%) to 100,800 Head, Up 82% Year-on-Year

Feed Costs Still High• Corn averaged $6.36 per bu. in its 2011/12 marketing

year through August, 15% higher year-to-year.

• Corn averaged $6.37 per bu. in June, $7.14 per bu. in July and $7.63 per bu. in Aug.

• Alfalfa averaged $202 per ton in Q3, 3% lower quarterly, 4% higher year-on-year.

• Alfalfa averaged $198 per ton in July, $203 per ton in Aug. and $205 per ton in Sept.

15-Month Downward Trend for Auction, Slaughter Lambs

• Live, slaughter lamb prices at auction lost 30% to $98.20/cwt. between quarters and lost 45% year-to-year.

• Prices averaged $108.93/cwt. in July, $98.15/cwt. in Aug. and $87.53/cwt. in Sept.

Q3 was 18-Percent Lowerthan its Third-Quarter 5-Year Average

of $120.24/cwt.

Third-Quarter Prices for Slaughter Lambs at Auction Fall to a Four-Year Low

Carcass-Based Formula Slaughter Lamb Prices Lower Quarterly & Year-to-Year

• At 140,400 head, formula trades were up 3% quarterly and up 68% year-on-year.

• Slaughter lamb prices on a carcass-based formula averaged $251.11/cwt. ($127.83/cwt. live-converted) in Q3, down 17% quarterly and down 33% year-on-year.

• Weighted-average prices were $268.84/cwt. in July, $251.85/cwt. in Aug. and $232.65/cwt. in Sept.

Formula Prices Supported Higher than Auction Prices

Heavier-Carcass Discount Widened

II. Feeder and Slaughter Lamb Price Projections

• Lamb demand in the third quarter could get a boost from possible higher beef prices and possible continued, but slow, income growth.

• The ALB is challenged to boost consumer preference for lamb through continued taste samplings and promotions.

Consumer Demand is Key to Stronger Feeder and Slaughter Lamb Prices… and

Ultimately to Industry Growth

Income Growth, but also Ethnic Population Growth, Could be Key to Expanded Lamb Demand

• From 2000 to 2010, population growth in the United States was driven almost exclusively by racial and ethnic minorities (Pew Research Center).

• Middle Eastern and Eastern European prioritize lamb quality (Williams, Capps, 2011) and will react to lamb promotions which will help boost demand.

• Hispanics were responsible for 56% of the nation's population growth over the past decade. • Hispanics will respond to lower-priced lamb (Williams,

Capps, 2011).

• Ethnic groups consume 58% of lamb (Williams, Capps, 2011).

Higher Trending Beef Prices Support Lamb Demand

Sustained Positive Income Growth Can Promote Lamb

Demand

• Inflation-adjusted per capita disposable income gained 0.7% and 0.6% in the first two quarters of 2012, after three quarters of contractions.

Feeder & Slaughter Lamb Forecasts

• These volatile times means any price forecast should be used with caution.

• In mid-October LMIC forecasted: Slaughter lambs on a carcass-based formula and feeder lamb prices could fall 25% to 46% year-to-year, respectively.

• By Q1 slaughter lamb prices could range from $285-$295 per cwt., 12% lower year-to-year.

• By Q1 60-90 lb. 3-market ave. (CO, SD, TX) feeders could range from $135-$145 per cwt., down 34% year-to-year.

Seasonal Price Indices Lose Confidence

• In 2012 seasonality in price trends was trumped by a backlog of market-ready lambs and lower consumer demand.

• The predictive power of seasonal analysis might thus be compromised.

• 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.

The index for feeder lamb prices at auction estimated a 9% price gain quarterly in Q1 from its annual average.

The index for converted formula carcass-based slaughter lamb prices estimated a 0.01% gain in Q1.

The index for live, auction, slaughter lamb prices forecasted an 7-percent gain--from its annual average--- in Q1.

No Relief in Sight for High Lamb Feed Costs

• The drought-inflicted 2012 corn crop is forecasted to be the lowest in six years.

• USDA reported that September U.S. corn stocks were 988 million bushels, the lowest carryout since 1995/96.

• The USDA Economic Research Service forecasted the 2012/13 corn average at $7.10-$8.50 per bu.

• Higher corn forecasts were partly explained by lower-than-expected early season cash and futures prices.

•

III.Carcass and Boxed Lamb Market Trends

Carcass Prices Lower, Yet Still 16% Higher than its 5-Year Q3 Average

• Carcass prices averaged $313.30/cwt. in Q3, 14-percent lower quarterly and down 19% from a year ago.

• Carcass price was $333.46/cwt. in July, $313.21/cwt. in Aug. and $293.22/cwt. in Sept.

Carcass Trade as Portion of Weekly Slaughter Contracting: 13% in Q3, Down from 22% in 2010 & 2011

YG 1 and 2 Up by August

• Yield Grade determination is positively correlated with heavier slaughter lambs and increased deposits of back fat.

• Yield Grade 1 & 2 in lbs. was 27% of total slaughter in May –the lowest level since late 2005--but rose to 37% by August.

Affect of Heavier Carcasses• Larger carcass will have a larger loin eye/rib eye area,

which can make them more valuable.

• Plant throughput is inherently higher with larger carcasses.

• However, the shoulder is one item that is difficult to remove fat from when the carcasses are Yield Grade 4 or 5. Trimming it can be labor intensive and will squeeze packer margins.

• Legs and loins primarily carry fat on the outside of the cut.

YG1 YG2 YG3 YG4 YG5

2007 4% 32% 47% 12% 3%

2008 5% 31% 47% 14% 3%

2009 4% 34% 45% 14% 4%

2010 5% 38% 43% 13% 2%2011 4% 27% 49% 17% 3%1-8/2012 5% 28% 36% 19% 13%

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

YG 1s & 2s Increased in Mid-2012

• The gross carcass value averaged $322.24/cwt. in Q3, down 10% quarterly and down 21% year-to-year.

• Gross carcass price was $332.95/cwt. in July, $320.18/cwt. in Aug. and $313.59/cwt. in Sept.

Q3 Gross Carcass Value (Wholesale Average) Weakened

Quarterly and Year-to-Year

Third-Quarter Gross Carcass Value was 7% Higher than its 5-Year Average

Gross Carcass Value Down $96/cwt. Since Record-High Last November

Wholesale Rack Dropped Below $6/lb. for First Time Since April 2010

• The rack averaged $593.20/cwt. in Q3, down 13% quarterly and down 34% year-on-year.

• The rack was $625/cwt. in July, $592.83/cwt. in Aug. and $561.78/cwt. in Sept.

September Rack Falls to Lowest Level in 2 ½ Years

Q3 Loins Gained Quarterly

• Loins, trimmed 4x4, averaged $543.54/cwt., up 4% quarterly and down 6% year-to-year.

• Loins were $550.57/cwt. in July, $544.56/cwt. in Aug. and $535.50/cwt. in Sept.

Q3 Loins Higher Than 2010

Leg, Trotter-Off, Down Quarterly and Down Year-to-Year

• The leg averaged $358.37/cwt. in Q3, down 14% quarterly and down 16% year-to-year.

• The leg was $376.49/cwt. in July, $357.52/cwt. in Aug. and $341.12/cwt. in Sept.

Leg Treaded Downward Thru 2012

Shoulder Gained Sharply in 2011

• The shoulder averaged $231.38/cwt. in Q3, down 8% quarterly and down 26% year-on-year.

• The shoulder was $230.34/cwt. in July, $224.58/cwt. in Aug. and $239.21/cwt. in Sept.

Q3 Shoulder at 3-Year Low: Shoulder is an expensive cut to remove fat from when the carcasses are heavier, Yield Grade 4 or 5.

2012 Ground Lamb Held Value Before Weakening in Q3

• Ground lamb averaged $552.42/cwt. in Q3, down 7% quarterly and down 6% year-on-year.

IV. Retail Feature Activity

Retail Prices Move Up Quicker Than They Come Down

• When wholesale prices drop, retailers are reluctant to drop prices, but will increase featuring.

• Feature activity was up 19% from September 2011 to mid-October 2012.

• Prices listed in lamb features were down 5% over this same period to mid-October.

• Product and quality wasn’t necessarily constant over this period. Mix of products at retail could have changed over time.

V.Price Spreads

The Rack-Loin Price Spread Fell Sharply

• The rack-loin price spread fell 69% in Q3 to $0.60 per lb., down 84% year-on-year.

Feeders in the Red due to Heavy Lambs, Prolonged Days on Feed & Higher Feed Costs

• Industry still killing Old Crop (OC) lambs in October when OC lambs typically finished slaughtering by mid-summer.

• Producers losing an estimated $65 per cwt. or $264 per head.

• September estimated break-even was $163 to $176 per cwt. compared to a price range of $88 to $119 per cwt. (auction & live-converted formula slaughter lamb price).

By Q3, cost of gain rose 28% in a year and more than doubled in two years.

Sensitivity Break-Even Analysis A: September kill of Old Crop lambs with a $1.40 per lb. cost of gain.

Item Cost

1. Total cost of feeder (92.5-lb. feeder @ $197 per cwt. in Nov./Dec. 2011)

$182/head

2. Average Freight from CA, TX, ID $6.00/head

3. Cost of Gain in Colorado feedlot (162.5 lbs. gained @ $1.40/lb. to 255 lbs.)

$228/head

4. Break-even price of slaughter lamb @ 255 lbs. $416/head

  Break-Even $163/cwt.

Sensitivity Break-Even Analysis B: September kill of Old Crop lambs with a $1.60 per lb. cost of gain.

Item Cost

1. Total cost of feeder (92.5-lb. feeder @ $197 per cwt. in Nov./Dec. 2011)

$182/head

2. Average Freight from CA, TX, ID $6.00/head

3. Cost of Gain in Colorado feedlot (162.5 lbs. gained @ $1.60/lb. to 255 lbs.)

$260/head

4. Break-even price of slaughter lamb @ 255 lbs. $448/head

  Break-Even $176/cwt.

Live to Carcass & Cutout Price Spreads Positive

• Margins do not include packer costs: Lamb sale value minus its purchase value.

• Positive margins partly because the value of live slaughter lambs fell more sharply than carcass & cutout values.

The live to carcass price spread averaged $99 per head, up 16% quarterly and up 128% year-to-year.

Live to Cutout Spread was $106/head, up 35% in Q3 and up 86% Year-to-Year-- Live slaughter lambs fell more sharply than the cutout.

Packers Sell Carcasses & Primals-- Carcass to Cutout (Ave. Wholesale Values) Price Spread Rebounded from Negative

• The mid-year carcass value exceeded the cutout.

• In Q3, the cutout halted its downward fall and held steady--even increased in some weeks--while the carcass continued its weakening trend.

Carcass to cutout spread was $6/head in Q3, up from -$7/head and down 56% year-on-year.

VI. Pelts

Sharply Lower Pelt Values Encumbered Slaughter Lamb Price Support

• The Agricultural Marketing Service reported that the October pelt trade was light to moderate with some interest in top quality large square footage pelts (USDA/AMS, 10/2012).

• Fall Clips were $12.90 per piece in Q3, down 15% quarterly and down 30% year-to-year.

• No. 1 pelts were $10.48 per piece in Q3, down 24% quarterly and down 32% year-to-year.

• Recall pelt prices are prices received by packers for slaughter lambs processed.

VII. Replacement Sheep

Replacement Ewes and Rams Down Year-to-Year

• Q3 ewe prices not well tested: Not reported in either July or August.

• In September, ewes averaged $138.32 per head, down 36% year-on-year. The high was $216 per head for 12-14 month yearling ewes and the low was $68 per head for aged ewes.

• In Q3, rams were about 34% lower than a year ago. Black-faced rams averaged $694 per head and white-faced rams brought $930 per head.

VIII. Domestic Production and Trade

Commercial Lamb & Mutton Production Up Year-to-Year

• At 1.43 million head, commercial slaughter was down 1% through August year-to-year.

• Live slaughter weights were up 3% through August to 146 lbs.

• Heavier weights boosted production.

• Production was 101.2 million lbs., up 6% through August year-to-year.

Estimated Q3 Lamb Slaughter was Down 5% and Production was Up 2%

September 1 Cold Storage was 23.9 Mill. Lbs., Down 2% Monthly and Up 13% Year-on-Year

Lamb Imports Totaled 86.9 Mill. Lbs. Through August -- Down 6% Year-to-Year

• Australian lamb imports through Aug. were 60.9 Mill. Lbs., Down 1% Year-to-Year

• Through Aug., NZ’s lamb imports were 25.8 Mill. Lbs., Down 16% Year-to-Year

• At 14.2 million lbs., mutton imports were 50% lower though August compared to the same period a year ago.

• Mutton imports from Australia were 9.6 million lbs., down 27% in this period.

• New Zealand mutton imports were down 69% to 4.6 million lbs.

Mutton Imports Sharply Lower Year-to-Year

Lamb & Mutton Exports were 6.8 Million Lbs. through August, down 47% Year-on-Year

• At 198,000 lbs., lamb exports were down 68% through August year-to-year.

• Mutton exports totaled 6.6 million lbs. through August, down 46% year-on-year.

617 12,173 12,790198 6,553 6,751

-68% -46% -47%

Total Live Sheep Exports Down 42% Through August Year-to-Year

• U.S. live sheep exports to Mexico were zero through August. Last live exports to Mexico were in early November 2011.

• Live exports to Canada were down 15% through August to 28,913 head.

Q3 Cull Ewe Prices Remained Competitive with Recent Years

San Angelo ewe prices averaged $44.62/cwt. in Q3, down 18% quarterly and up 0.4% year-on-year.

IV. Total Lamb and Mutton Supplies

• Through August, total lamb availability (imports plus domestic production, subtracting exported lamb) was 184.34 million lbs., down 1% year-on-year.

• Through August, U.S. domestic lamb supplies were up 4% year-to-year and lamb imports were down 6%.

Total Lamb Availability Contracted Through August Compared to a Year

Ago

Total Lamb Availability Contracted an Annual Average of 3% from 2007 to 2011

U.S. Lamb & Mutton Gained Market Share

• In the eight months through Aug., domestic lamb market share was 53%, up 4% year-to-year.

• Through Aug., domestic lamb & mutton market share was 51%, up 11% year-to-year.

• Through Aug, domestic mutton market share was 33%, up 25% year-on-year.

X. Imported Product Price Comparisons

Domestic & Imported Cuts not Identically Specified: Challenges an “Apples to Apples” Comparison

• U.S. Commerce data only offers broad cut categories.

• There are limitations to USDA/AMS/MRP import data:

• Confidentiality measures can sometimes prohibit price reporting.

• The volume threshold might not be met if smaller importers/reduced volumes are imported.

Imported Cuts Follow Trend of U.S. Cuts-- Recall imported product is lighter weight.

Domestic & Imported Legs Trend Together

Note: 1.) Imported product is lighter weight.2.) Prices reported in Commerce data could be established in forward pricing.

U.S. Leg Gained Competitiveness in Q3

Insufficient Import Boneless Leg Comparisons to Estimate U.S. Competitiveness

Insufficient Partial Boneless Prices for Comparison

U.S. Rack Less Competitive –U.S. rack fell 35% in the year through Sept.; Imported rack fell 26%.--Note weight differences: U.S. rack 1.5-3 lbs. and imported rack 28 oz.+

U.S. Rack Less Competitive than Rack

Imported loins from Commerce data suggests price was previously established in a forward contract.

U.S. Loins Lost Competiveness in Q3

Loins MRP Imported Data Missing

Domestic & Imported Shoulder Trend Together

XI. Exchange Rates

U.S. Dollar Remained Relatively Weak

• A weakened dollar means U.S. importers must now pay more for a unit of foreign currency, which increases prices to U.S. consumers.

• Sustained--albeit weak--U.S. economic growth and signs of housing sector recovery could add strength to U.S. dollar.

• In Q3 the U.S./Australian dollar was $1.04, up 3% quarterly and down 1% year-to-year.

• In Q3 the U.S./New Zealand dollar hit $0.809, up 2% quarterly and down 3% year-to-year.