Second-Quarter 2015Sheep Industry Review

Prepared by the American Sheep Industry Association

for the American Lamb BoardJuly 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 SummaryIn the second quarter of 2015, the commercial feeding industry was battling the all-too- familiar scenario of sluggish demand at retail causing harvest to get backed up and forcing lambs to feed longer than optimal. However, by June old crop lambs were getting to market and the demand for lighter weight supplies picked up, filling orders. By the end of June, the price spread between the lightest and heaviest carcasses on formula had narrowed sharply indicating market movement.

The industry is in a good position moving into the third quarter. Rising income and higher beef prices will promote lamb demand and support prices, as will the U.S. Department of Agriculture lamb purchase program. In late June, the USDA opened its first invitation of 640,000 pounds of lamb leg roasts, bone-in and boneless to kick off its $10 million commitment to support lamb producers in a period of high imports, high freezer inventories and lower prices. At the beginning of June, 39.2 million lbs. of lamb and mutton was in cold storage, up 6% monthly and 48-percent higher year-on-year. Lamb imports totaled 58 million lbs. in January to April, up 8% year-on-year with an unusually sharp spike of fresh product over Easter.

Executive Summary, page 2

Higher imports, coupled with high freezer inventory, prompted a slowdown in harvest rates this year. In June, an estimated 7-percent fewer lambs were sent to harvest compared to a year ago. Lower harvest rates inevitably meant many lambs got heavier. Forty-three percent of lambs priced on a grid or formula were 85 lbs. carcass weight (170 lbs. live weight) and heavier in June. In the commercial lamb market, yield grades (percent of saleable meat from the carcass) had drifted higher representing increased back fat deposits. In January through May, 39% of lambs going to harvest were yield grade 3s (often the most preferred yield grade) compared to 43% during the same time a year ago. This means that slightly more than one-third of lambs going to harvest were optimal quality.

In the Live MarketsSlow slaughter rates and lackluster demand at wholesale dragged on the feeder market this spring. The 3-market feeder lamb auction price saw a 6-percent drop quarterly to $195.80/cwt. yet 0.52% higher year-on-year. In the second quarter, feeders in direct trade averaged $150.29/cwt., down 7% quarterly and down 3-percent year-on-year.

Auction prices saw a late second-quarter boost due to Ramadan. Lambs committed in feedlots saw lower prices due to limited demand at wholesale and retail and a glut of heavier, older lambs. Lightweight lambs will come increasingly under demand at commercial feedlots as old crop lambs slowly get cleaned up.

Executive Summary, page 3

Live, slaughter lamb prices at auction averaged $149.51/cwt. in the second quarter, 5% higher quarterly and 0.4% higher year-on-year. Slaughter lamb prices on a carcass-based formula averaged $288.16/cwt. ($137.59/cwt. live-converted), down 6% quarterly and 2-percent higher year-on-year.

In the Meat MarketsAll lamb primals weakened in the second quarter, pulling down the net carcass value. The net carcass value (wholesale composite less processing and packaging) averaged $325.43/cwt. in the second quarter, down 4% quarterly and down 2% year-on-year.

The weighted average carcass price was $315.98/cwt. in the second quarter, 5-percent lower quarterly and 1-percent higher year-on-year.

Retail lamb prices in grocery specials saw generally lower prices quarterly and year-on-year. The lower retail prices year-on-year was unexpected given higher incomes and higher beef prices. It might suggest that the quality, packaging and/or convenience of lamb offered at retail is not desired by consumers. It is hopeful that lamb restaurant sales can help support lamb moving into the third quarter.

I. Feeder and Slaughter Lamb Market Trends

Auction Feeder Lamb Prices (60- to 90-lb.) Lost 6% Quarterly, Yet Saw Ramadan Spike in June

◦The 3-market feeder lamb auction price saw a 6-percent drop quarterly to $195.80/cwt. yet 0.52% higher year-on-year.

◦Prices were volatile: $197.69/cwt. in April, $188.07/cwt. in May and $201.63/cwt. in June.

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

Feeder Lamb Prices at Auction Volatile

Feeder Lambs in Direct Trade Lower

o In Q2, feeders averaged $150.29/cwt., down 7% quarterly and down 3-percent year-on-year.

oPrices averaged $142.88/cwt. in April, $149.60/cwt in May and $158.40/cwt. in June.

2015 Prices Slumped Since $198/cwt. last October

Feeder lambs in direct trade totaled 22,700 head in the first-half of 2015, down 73% year-on-year.

Price Spread Widened Between Auction and Direct Feeders in 2015

Corn Lower in 2015At $3.76/bu. corn down 17% in Jan-May year-on-year.

Alfalfa averaged $194.25 per ton in its May-April season, down 9% year-

on-year.

Auction Slaughter Lamb Prices Higher Quarterly; Steady Year-to-Year

◦Live, slaughter lamb prices at auction averaged $149.51/cwt. in Q2, 5% higher quarterly and 0.4% higher year-on-year.

◦Prices averaged $138.45/cwt. in April, $154.15/cwt. in May and $155.94/cwt. in June.

2015 Slaughter Lamb Prices Volatile

May-June 2015 Slaughter Lamb Prices Gained

Carcass-Based Formula Slaughter Lamb Prices Weakened in Q2

◦Slaughter lamb prices on a carcass-based formula averaged $288.16/cwt. ($137.59/cwt. live-converted), down 6% quarterly and 2-percent higher year-on-year.

◦Prices averaged $288.61/cwt. in April, $288.96/cwt. in May and $286.92/cwt. in June.

Slaughter lambs on formula weakened since Nov. 2014

Price spread – lightest to heaviest carcasses – narrowed by June.

Auction and Formula Slaughter Lamb Prices Move Together, but Can Flip-flop

Live, Negotiated Prices Lower Quarterly

◦Slaughter lambs in live, negotiated sales averaged $137.59/cwt., down 3% quarterly and down 8% year-on-year.

◦Prices averaged $130.67/cwt. in April, $136.19/cwt. in May and $145.91/cwt. in June.

Slaughter Weights Heavier

◦Slaughter weights in carcass-based formula trades averaged 84.6 lbs. (161.7 lbs. live-weight) in Q2, 6% heavier quarterly and 3-percent heavier year-on-year.

◦By comparison, federally-inspected weights averaged 72 lbs. (145 lbs. live) in Q2.

Auction trades down at expense of packer-owned and formula lambs.

II. Carcass and Boxed Lamb Market Trends

Carcasses Lower Quarterly

◦ Weighted average carcass price was $315.98/cwt. in Q2, 5-percent lower quarterly and 1-percent higher year-on-year.

◦Prices averaged $323.73 per cwt. in April, $311.77/cwt. in May and $313.48/cwt. in June.

◦The percent of carcasses in total FI harvest was up 13% year-on-year in Q2 to 15%.

Carcass Prices Gained in June after Weakening Through the Year

2014 Quality Excellent, but More YG 4s and 5s in 2015

Yield Grades for Federally Inspected Lamb and MuttonPercentages derived from yield grade by lbs.Source: USDA, AMS, Livestock and Seed Division

YG1 YG2 YG3 YG4 YG5

2013 7% 36% 35% 14% 7%

2014 6% 33% 41% 14% 6%

Jan-May 2015 5% 30% 39% 17% 8%

Percent Graded Trending Lower

◦The net carcass value (wholesale composite less processing and packaging) averaged $325.43/cwt. in Q2, down 4% quarterly and down 2% year-on-year.

◦The net carcass value averaged $331.03/cwt. in April, $323.82/cwt. in May and $321.42/cwt. in June.

All lamb primals weakened in the second quarter, pulling down the net carcass value.

2015 Net Carcass Value Down from Late-2014’s High

Except for Lower Rack, Primals Remain Flat

Rack, 8-Rib Medium, Down Quarterly and Down Year-to-year

◦The rack averaged $753.30/cwt. in Q2, down 7% quarterly and down 7% year-on-year.

◦The rack averaged $770.89/cwt. in April, $751.23/cwt. in March and $737.77/cwt. in May.

Loins Weakened in Early 2015, but Rebounded Some by June

◦Loins, trimmed 4x4, averaged $518.01/cwt., down 1% quarterly and 6% higher from a year ago.

◦Loins were $516.82/cwt. in April, $514.92/cwt. in May and $522.27/cwt. in June.

Leg, Trotter-Off, Down 7% Year-on-Year

◦ The leg averaged $336.73/cwt. in Q2, down 4% quarterly and down 9% year-on-year.

◦ The leg averaged $327.78/cwt. in April, $345.12/cwt. in May and $337.30/cwt. in June.

Shoulder saw a June lift after weakening through the year.

◦The shoulder averaged $290.85/cwt. in Q2, down 3% quarterly and down 1% year-on-year.

◦The shoulder was $291.30/cwt. in April, $286.57/cwt. in May and $294.70/cwt. in June.

Ground Lamb Up 7% Year-on-Year

◦Ground lamb averaged $566.52/cwt., down 1% quarterly and up 7% year-on-year.

◦Ground lamb was $567.49/cwt. in April, $565.22/cwt. in May and $566.84/cwt. in June.

III. At Retail & Food Service

The most popular featured items (domestic and imported) in Q2 saw mixed trends at retail: Rib chop prices fell sharply year-on-year.

Q2 2015, $ per lb.

% Change Quarterly

% Change Year-on-

Year

Shoulder blade chop

$5.40 -3% +5%

Loin chop $8.85 -3% -5%

Rib chop $10.95 -1% -29%

Ground lamb $7.15 -2% -3%

IV. Price Spreads

Ralmonline, 2008

At $2.35 per lb., the rack-loin spread was down 18% quarterly as rack

weakened.

Comparing wholesale cuts: rack, medium, 8-rib and 4x4 trimmed loins.

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 Increased in Early 2015, but Narrowed as the Meat Market Softened

Live-to-carcass price spread fell 59% quarterly to $17.22 per head.

Live-to-cutout price spread fell 32% in Q2 to $48.60 per head.

Carcass to cutout spread gained 8% in Q2 to $30.77.

Break-Even Analysis

◦Breakeven analysis is only one snapshot of feedlot marketing.-- Cost of gain is variable depending upon time and weight coming into the feedlot, length of time on feed and rate of gain in the feedlot. -- Total cost of gain includes feed costs, death loss and other costs.

◦On average, total cost of gain jumped 10 cents quarterly in Q2 due to longer time on feed (older lambs) to gain one lb. and higher corn prices.

Cost of Gain Increased in Q2

One Snapshot of Colorado Feeders: About 10% Profit

◦The mid-July estimated break-even was $133 to $136 per cwt. compared to $144 per cwt., the actual live-converted formula carcass-based price.

Sensitivity Break-Even Analysis A: July harvest of October-traded feeders from NM at 80 lbs. for $200/cwt. with an 85-cent per lb. cost of gain.

Item Cost

1. Total cost of feeder (3,900 head from NM traded in Oct. at 80 lbs. for $200 per cwt.)

$160/head

2. Average freight to Colorado $4.00/head

3. Cost of gain in Colorado feedlot 120 lbs. gained (about 0.5 per day) @ $0.85/lb.

to 200 lbs.)

$102/head

4. Break-even price of slaughter lamb @ 200 lbs. $266/head

  Break-Even $133 per cwt.

Sensitivity Break-Even Analysis B: July harvest of October-traded feeders from NM at 80 lbs. for $200/cwt. with an 90-cent per lb. cost of gain.

Item Cost

1. Total cost of feeder (3,900 head from NM traded in Oct. at 80 lbs. for $200 per cwt.)

$160/head

2. Average freight to Colorado $4.00/head

3. Cost of gain in Colorado feedlot 120 lbs. gained (about 0.5 per day) @ $0.90/lb.

to 200 lbs.)

$108/head

4. Break-even price of slaughter lamb @ 200 lbs. $272/head

  Break-Even $136 per cwt.

V. Pelts

U.S. Pelts Weakened Further in Q2 – Strong US$ Doesn’t Help Pelt Exports

◦Fall Clips (previously shorn) averaged $4.28 per piece in Q2, compared to $5.75 in Q1 and $7.04 a year ago.

◦No. 1 pelts (previously shorn) averaged $2.03 per piece in Q2, down from $3.50 in Q1 and down from $5.69 a year ago.

◦The never shorn pelts typically command a premium, receiving $1.50 per pelt more than Fall Clips in Q2.

International Pelt Market Depressed

VI. Replacement Sheep

Ewe prices weaken quarterly. Ram prices not established.

Second-QuarterEwe Lambs Not established.Yearling Ewes, 12-24 mos. Not established. Running Age Ewes, 2-4 years $201 per headMiddle Age Ewes, 5-6 years $158 per headAged Ewes, over 6 years $104 per head

Ewe Prices Volatile: Flock Rebuilding Efforts Uncertain

VII. Domestic Production and Trade

First-half 2015 estimated lamb harvest down 5% year-on-year to 943,068 head;--Lamb production down 4% to 67.2 mill. lbs.

Q2 Federally-Inspected Harvest Weights Steady with a Year Ago at 143 Lbs.

At 85 lbs. carcass weight, weights 6% higher year-on-year for harvest lambs priced on formula. Heaviest weight in over 2 ½ years.

At 39.2 mill. lbs., monthly cold storage at the end of May was up

6% monthly and 48-percent higher year-on-year.

Cold storage volume equivalent to about 3 months production.

Lamb and Mutton Imports Up 9% Year-on-Year in First Trimester

Lamb imports totaled 58 million lbs. in Jan.-April, up 8% year-on-year with unusually sharp spike for Easter.

◦Australian lamb imports in Jan.-April were 40.5 mill. lbs., up 3% year-on-year.

◦NZ’s lamb imports were 16.6 mill. lbs., up 15% in the first trimester from a year ago.

In Jan.-April, lamb imports were $204 million, up 4% year-on-year.

◦At 6 million lbs., mutton imports were 18-percent lower in Jan. and Feb. compared to Nov. and Dec. and 86% higher year-on-year.

◦Mutton imports from Australia totaled 5.3 million lbs. in this period, down 20% from Nov. and Dec. and up 90% year-on-year.

◦Mutton imports from NZ totaled 770,000 lbs. in this period, up 3% from Nov. and Dec. and up 73% year-on-year.

Mutton Imports Higher Year-on-Year

At 13.8 million lbs., mutton imports were up 16% from January-April

year-on-year.

--Lamb exports were 99,000 lbs. in the first trimester, down 70% year-on-year.

--Lamb & mutton exports were 1.4 mill. lbs., down 36%.

Total Live Sheep Exports to Mexico Down

◦Total live sheep exports to Mexico in Q2 totaled 2,706 head, down 58% year-on-year.

◦Reportedly, export market to Mexico price sensitive so lower Peso/stronger US$ makes it less competitive.

◦Also, cull ewe prices in San Angelo auction higher year-on-year.

Q1 Cull Ewe Prices Higher

--San Angelo ewe prices averaged $67.04/cwt. in Q2, 26% lower quarterly and 17% higher year-on-year.--Prices down seasonally in the second quarter.

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.

New Holland 90-110 lb. slaughter lambs trended higher in Q2. --Nontraditional price $219.63/cwt in Q2, 8% higher quarterly and 12% higher year-on-year.

IX. Total Lamb and Mutton Availability

Total (domestic & imports) lamb supplies in Jan.-April up 4% year-on-year to 106.33 million lbs.

Lamb Imports Spiked for Easter-- 68% of Easter spike was from AUS

U.S. Share in Total Lamb Availability 46% in First

Trimester, Down from 48% a Year Ago

U.S. Commercial Lamb Market Share – Nationally and at

Wholesale -- Slipped Further in 2015

◦In January-April 2015:

Domestic lamb market share was 46%, down from 48% in Jan-April 2014.

Domestic lamb & mutton market share was 42%, down from 45% a year ago.

Domestic mutton market share was 17%, down from 24% a year ago.

X. Imported Product Price Comparisons

U.S. Competitiveness Against the AUS Shortloin at Wholesale Gained in Q2

U.S. Rack Maintained Premium to Imported Rack at Wholesale

*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. & AUS Fabricated Rack Prices Softened Quarterly

◦U.S. rack, roast-ready, frenched (204C) averaged $1,413/ cwt. in Q2, down 7% quarterly and down 26% year-on-year.

◦U.S. rack, roast-ready, frenched, special (204D) averaged $1,864/cwt. in Q2, down 3% quarterly and down 6% year-on-year.

◦The AUS rack cap-off, 28 oz. + was $952/cwt., down 6% quarterly and down 10% year-on-year.

U.S. shoulder competitiveness increased in Q2 against AUS shoulder at wholesale.

XI. Exchange Rates

-- In Q2 the Australian/U.S. rate was 78 cents, down from 79 cents in Q2 and 93 cents a year ago.

-- In Q2 the NZ/U.S. rate was 75 cents U.S. per NZ dollar, steady with 75 cents in Q1 and down from 86 cents a year ago.

Australian & NZ Dollars Weaker Against US$

Stronger U.S. Dollar Boosts Import Competiveness 

XII. Price Projections and Outlook

Feeder and Slaughter Lamb Prices Forecasted to Remain High Year-on-

Year

◦Demand for new crop lambs will rise as old crop lambs are sent to harvest.

◦According to LMIC, feeder and slaughter lambs could soften seasonally between Q2 and Q3, but remain higher year-on-year.

◦ LMIC forecasted that total lamb and mutton supplies in Q3 could contract by 10% quarterly which will help support prices.

◦U.S. production could drop 2% quarterly, but the squeeze in supplies could come primarily from a 20-percent quarterly drop in imports. However, a 3 month supply of frozen lamb (what is currently in freezers) could soften/offset any effects of a drop in imports.

Index Lends Predictive Insight

◦Both feeder and slaughterer lamb prices typically weaken seasonally in the summer and early fall.

◦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 weaken by 6% from their annual average in the third quarter.

Slaughter lamb prices at auction forecasted to fall 3% below annual average in third quarter.

Lamb is a Niche Market

◦ Lamb can’t be all things to all people, so who is the target

audience?

◦ Fundamentals of lamb demand remain, regardless of market:

higher incomes help demand, as does higher beef prices.

◦ “Consumers voiced in the first half of 2015 the largest and

most sustained increase in economic optimism since 2004,” (U.

of Michigan, 7/2015).

◦ Lamb prices could soften seasonally in the third quarter, but

stay higher year-on-year.

Higher Beef Supports Lamb DemandAll-fresh retail beef averaged $6.11 per lb. in June – highest on record.

Income Growth Supports Lamb Demand