Annual 2011

Sheep Industry ReviewPrepared by the

American Sheep Industry Association

for the American Lamb Board

February 2012

Contents

Executive Summary

I. Inventory

II. Feeder and Slaughter Lamb Market Trends

III. Feeder and Slaughter Lamb Price Projections

IV. Carcass and Boxed Lamb Market Trends

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

Last year was another record-breaking year for the lamb market. Significant price appreciation was seen across most lamb sectors for about 18 months before the market began an abrupt correction in mid-2011. Market weakening was expected given skepticism whether retailers could continue to pass higher prices on to consumers. This year we might see lower year-on-year prices, but at a higher level than the mid-2000s given lamb supplies worldwide are tight and demand is at a new, stronger base.

Total U.S. sheep and lamb inventory declined 2.5% to 5.5 million head and breeding inventory was down 2.6 percent according to USDA. However, 14 states saw inventory gains including Idaho, Nevada, Colorado, Utah and Wyoming in the West and Michigan, Illinois and Indiana in the Great Lakes Region. Fifteen states saw gains in replacement breeding lamb inventory. Inventory contracted in the two largest sheep states: Texas was down 26% to 650,000 head and in California, numbers were down 7% to 570,000 head.

Last year, the Southwest faced one of the most severe droughts in decades, making feed and water prohibitively expensive for many. Significant numbers of sheep were shipped to greener pastures up north and, given the hot market, prices saw little weakening. By summer’s end, higher prices of all feed including forage meant lambs were sent to feedlots early. Pasture was in short supply in the Imperial Valley California as farmers took advantage of the strong market so many lambs were sent direct to feedlots. By the end of the year, inventory supplies began to back up and weights got heavier as retail sales weakened and packers turned to their own supplies to fill limited contracts.

Executive Summary, page 2

Higher valued replacement sheep last year was a good indicator many producers were rebuilding flocks. In 2011, replacement ewes averaged $215.58 per head, up 54% annually. Yearling ewes, 12-24 months, were the highest-valued ewes at $287 per head. White-faced rams were up to 119% higher annually at $1,035 per head. Black-faced rams averaged $717 per head and crosses were $768.

In the last five years, commercial lamb consumption slid from 1 lb. per capita to 0.9 lbs. In 2011, total lamb availability (imports plus domestic production, subtracting exported lamb volume) totaled 261.82 million lbs., down 5% year-on-year. Last year U.S. commercial lamb slaughter was 1.86 million head, down 12% annually and commercial lamb production was 142.1 million lbs., down 9% annually. Lamb imports were down 4% last year to 129.3 million lbs.

Commercial lamb supplies do not account for the sizable nontraditional lamb market. In recent years the estimated volume of the nontraditional market was static or downward trending, but increased in 2011. The nontraditional market is defined as the lamb crop--less a percentage for losses and retention--minus commercial lamb slaughter. Two factors explaining the increase in the nontraditional market volume last year might be the severe weather in the Northwest increasing lamb losses as well as the severe drought in Texas creating a flood of lightweight lambs into the ethnic market.

Feeder lamb prices started 2011 very hot, but quickly cooled in the second-half of the year. The 3-market feeder lamb auction price saw a 51-percent annual jump in 2011 to $218.87 per cwt. Feeder lambs in direct trade averaged $197.23/cwt., 49% higher annually.

Executive Summary, page 3

In the first six months of its 2011/12 marketing year since August, corn averaged $5.94 per bu. , up 31% year-on-year. Hay production and stocks were lowest in 25 years. In the first eight months of its 2011/12 marketing year since May, hay—other than alfalfa--was $122.78 per ton, up 29% year-on-year.

Slaughter lamb prices set records again in 2011, driven by lower imports and tighter supplies, yet by mid-year change was in the air. Consumer resistance to higher-priced lamb began to trickle back to producers. Live, slaughter lamb prices at auction jumped 35% annually to $172.22/cwt. However, prices slipped 17% in the second half of the year to $153.32/cwt. in December. Slaughter lamb prices on a carcass-based formula gained, but under sharply lower trade. In 2011, the volume of formula slaughter lamb trade dropped 41% annually to 443,700 head. Dressed weights for formula slaughter increased 5% in 2011 to 79.28 lbs. Formula prices gained 43% annually to $353.12/cwt. ($177.94/cwt. live basis).

The 2011 East Coast carcass price was 39-percent higher year-to-year at $371.79/cwt. and 65-percent higher than its 5-year average. Carcass prices peaked at $397.14 per cwt. in April and weakened through the remainder of the year.

After two years of strengthening, wholesale lamb generally held steady through mid-2011, then weakened by the end of the year. The gross carcass value averaged $393.99/cwt. in 2011, up 30% annually. The leg was the only primal cut that strengthened into the December holidays while the rack and shoulder weakened. The loins weakened seasonally towards the year’s end. .

I. Inventory

Total Sheep & Lamb Inventory Down 2.5%

to 5.530 Million Head

Breeding Ewe Inventory Down 2.6% to 3.255 Million Head

14 States with Inventory Gains

Inventory Contracted in Two Largest Sheep States

14 States with Replacement Breeding Lamb Inventory Gains in 2011

II. Feeder and Slaughter Lamb

Market Trends

Auction Feeder Lamb (60- to 90-lb.) Prices Gained in 2011, but Volatile

• The 3-market feeder lamb auction price saw a 51-percent annual jump in 2011 to $218.87 per cwt.

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

Sioux Falls set record $271/cwt. in April and still high at $232/cwt.

in December.

Feeder Lambs in Direct Trade: Prices in 2011 averaged

$197.23/cwt., 49% higher annually.

Volume of Direct Feeder Lambs Down 36% in 2011 Annually

Corn & Hay Higher in 2011• Corn averaged $5.51 per bu. in its 2010/11 marketing year

through August, up 51% annually.

• In the first 5 months of its 2011/12 corn year, the average was $5.94 per bu. , up 31% year-on-year.

• Hay production and stocks were lowest in 25 years.

• Hay – other than alfalfa – averaged $105 per ton in its 2010/11 marketing year through April, up 9% annually.

• In the first 8 months of its 2011/12 marketing year, hay—other than alfalfa--was $122.78 per ton, up 29% year-on-year.

Auction Slaughter Lamb Prices Jumped 35% in 2011

• Live, slaughter lamb prices at auction jumped from $127.33/cwt. to $172.22/cwt. in 2011.

• However, prices slipped 17% to $153.32/cwt. by December.

Auction slaughter lamb prices were 35% higher year-to-year in 2011 and

72% higher than its 5-year average.

Carcass-Based Formula Slaughter Lamb Prices Gained,

but Sharply Lower Trade

• In 2011, the volume of formula slaughter lamb trade dropped 41% annually to 443,700 head.

• 2011 dressed weights for formula slaughter increased 5% in 2011 to 79.28 lbs.

• Prices gained 43% annually to $353.12/cwt. ($177.94/cwt. live basis).

• The light-weight carcass lost its premium in second-half of 2011: $6/cwt. and $5/cwt. less than the 55-lb. to 65-lb. carcass in Q3 and Q4, respectively.

• Prices signal that supplies (and margins) especially tight and weights up.

Slaughter Lamb Relative Prices by Weight Upside Down

II. Feeder and Slaughter Lamb

Price Projections

Weaker Lamb Prices Possible in 2012, but Still High

Historically

• Tighter lamb numbers in 2011 should support higher prices year-on-year, but by mid-January:– Wholesale values fell $14/cwt. (3.5% ) in the past 8 weeks,

– Formula slaughter lambs hit $176/cwt. (lowest point in 41 weeks),

– Colorado feedlots were full,

– Slaughter weights were on the rise, and

– There was talk that Imperial lambs might come into feedlots early.

Tight Stocks and Strong Worldwide Demand for Corn Keep 2011 Prices High, but Volatile

• The U.S. Department of Agriculture forecasted corn farm gate prices to average around $6.50 per bushel over the coming months (2/13/12).

• Tight U.S. stocks – and unfavorable growing conditions in other key corn countries -- set the stage for continued corn price volatility and the potential for significantly higher prices at least well into the spring months (LMIC, 1/9/12).

Possible Q1 Demand Correction Might Thwart Predictive Power of Seasonal

Price Indices

• In 2010 and 2011, increasingly tight supplies trumped other seasonal factors, overwhelming seasonal patterns.

• In early 2012, seasonality again began to show itself with a slaughter lamb price weakening in February.

• 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 an 7% price strengthening in Q1 from its

annual average.

The index for converted formula carcass-based slaughter lamb prices estimated a

2% weakening in Q1.

The index for live, auction, slaughter lamb prices forecasted an 7-percent strengthening

—from its annual average--- in the first quarter.

Strong Consumer Demand Can Support Retail Prices, Feeder &

Slaughter Lamb Prices

• Recall that demand is not lamb consumption or quantity.

• High prices seen last year doesn’t mean “demand destruction,” (Meyer, S. & L. Steiner, 2/20/12).

• Lower consumption and higher prices can occur at the same or higher level of demand.

Expanded Lamb Demand Likely in 2011

• Higher beef prices likely supported lamb demand.

• Higher income also likely supported expanded lamb demand.

• No reason to believe tastes and preferences for lamb has declined. Tastes and preferences can supersede or complement the income and substitution (price of beef) effect.

• As producers respond to higher-priced lamb and inventory expands only higher lamb demand will maintain current high prices.

Higher-Priced Beef Can Support Lamb Demand

Fresh Retail Beef Averaged $4.44 per lb. in 2011, Up 11% Year-on-Year.

Higher Income Can Support Expanded Lamb Demand

Per Capita Disposable Income 3% Higher Annually at $148,138 in Current $s.

III.Carcass and Boxed Lamb

Market Trends

Carcass Prices Higher Annually, but Trended Downward by Mid-Year

• Carcass prices peaked at $397.14/cwt. in April and weakened through the remainder of the year.

• 2011 East Coast carcass price was 39% higher annually at $371.7/cwt. and 65% higher than its 5-year average.

YG 1 and 2 Down Year-on-Year

• The pressure to keep slaughter chains moving and high-priced corn might have affected when lambs are slaughtered and thus Yield Grade distributions.

• Yield Grade 1 & 2 in lbs. was 39% in 2011 compared to 42% a year ago.

• YG 4 & 5 was 19% of total lbs. in 2011, up from 15% year-on-year.

YG1 YG2 YG3 YG4 YG5

2006 4% 32% 47% 13% 3%

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%

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

YG 1 & 2 Down Mid-2011

• The gross carcass value averaged $393.99/cwt. in 2011, up 30% annually.

2011 Gross Carcass Value (Wholesale Average) at Record High

After two years of strengthening, wholesale lamb generally held steady through mid-

2011, then weakened by the end of the year.

2011 Wholesale Rack Topped $9 per Lb.

• The rack averaged $864.11/cwt. in 2011, 37-percent lower annually.

Loins Trumped its Historic Seasonality in 2011,

Strengthened Earlier in the Year

• In 2011, loins, trimmed 4x4, averaged $532.89/cwt., up 17% annually.

Leg, Trotter-Off, Gained for the Holidays

• The leg averaged $426.82/cwt. in 2011, up 31% annually.

Shoulder Gained Sharply in 2011

• The shoulder averaged $310.17/cwt. in 2011, up 26% annually.

Ground Lamb Up in 2011• Ground lamb averaged $565.73/cwt.

last year compared to $532.02/cwt. for the loins, trotter-off.

• A continued gourmet burger craze likely fueled ground lamb prices.

IV.Price Spreads

The Rack Made Stronger Gains than the Loins in 2011,

Widening the Spread

• The rack-loins price spread jumped 88% in 2011 to $3.31 per lb.

Feeders in the Red in January

• Estimated break-even was $179 to $185 per cwt. compared to $159 per cwt. slaughter lambs (auction & live-converted formula slaughter lamb price in early January).

• Cost of gain about $1.20 to $1.35 per lb. – double from a year ago.

• Scenario estimated for 97.5-lb. Wyoming feeders entering feedlots in early October at $225 per cwt. for January slaughter.  

Sensitivity Break-Even Analysis A: January kill of WY feeders that entered CO

feedlots in early Oct. at $1.20 cost of gain.

Item Cost

1. Total cost of feeder (97.5-lb. Wyoming feeder @ $225 per cwt.)

$219.38/head

2. Freight from Wyoming $3.00/head

3. Cost of Gain in Colorado feedlot (82.5 lbs. gained @ $1.20/lb. to 180 lbs.)

$99/head

4. Break even price of slaughter lamb @ 180 lbs. $321.38/head

  Break-Even $178.54/cwt.

Sensitivity Break-Even Analysis B: January kill of WY feeders that entered CO

feedlots in Oct. at $1.35 cost of gain.

Item Cost

1. Total cost of feeder (97.5-lb. Wyoming feeder @ $225 per cwt.)

$219.38/head

2. Freight from Wyoming $3.00/head

3. Cost of Gain in Colorado feedlot (82.5 lbs. gained @ $1.35/lb. to 180 lbs.)

$111.37/head

4. Break even price of slaughter lamb @ 180 lbs. $333.75/head

  Break-Even $185.42/cwt.

Slaughter Lambs Lost Greater Value Relative to Meat Market: Live to Cutout (Ave. Wholesale Values) Price Spread Gained in 2011

• The live to cutout price spread averaged $34.46 per cwt., up 94%.

Carcass to Cutout (Ave. Wholesale Values) Price

Spread Narrowed

• The carcass to cutout price spread was $15.33 per cwt., 39% lower annually.

V. Pelts

Stronger 2011 Pelt Market Supported Lambs

• Pelt prices are only reported on slaughter lambs sold on formula. Pelt volume dropped as did reported formula sales.

• Anecdotal reports revealed pelt prices reported were much higher last year than captured by USDA reporting, up to $26 per piece for clean, large wooled or shorn pelts.

• On average, USDA-reported pelts were up 81% last year to $10.20 per skin.

USDA reported Fall Clips averaged $16.19 per piece last year, up 97% annually.

USDA reported No. 1 pelts gained 99% annually to $13.48 per piece.

VI. Replacement Sheep

Ewe Prices Stronger• 2011 replacement ewes averaged

$215.58 per head, up 54% annually.

• Yearling ewes--12-24 months--were the highest-valued ewe at $287 per head.

• Black-faced rams were $717 per head, white-faced were $1,035 per head and crosses were $768.

Note: Replacement ewe prices not reported in Dec. 2011.

VII. Domestic Production and Trade

Commercial Lamb & Mutton Numbers Down in 2011

• 2011 commercial lamb slaughter was 1.86 million head, down 12% annually.

• Commercial lamb production was 142.1 million lbs. in 2011, down 9% annually.

• 2011 commercial mutton slaughter was 140,600 head, down 10% annually.

• Commercial mutton production was 10 million lbs. in 2011, down 9% annually.

2011 Live Slaughter Weights Averaged 141 Lbs. in 2011, Up 3% Annually

Packer-Owned Slaughter Up in Past 5 Years

2011 Cold Storage Monthly Average was 16.9 Mill. Lbs.,

Down 2% Annually

Nontraditional Lamb Market Estimate Up

• The estimated share of the nontraditional market jumped from 38% to 48% of commercial lamb slaughter in 2011.

• Nontraditional market is estimated by subtracting commercial lamb slaughter from the lamb crop (less 15% in 2011 for losses and retention).

• Increased share might be due to: – Heightened lamb losses in the Northwest due to severe

weather, and – An increased supply of lightweight lambs out of Texas due to

extremely dry weather.

2011 Lamb Imports Down 4% Year-on-Year to 129.3 Million Lbs.

Typical Late-Year Holiday Import Increase Didn’t Occur in 2011

2011 holiday imports were historically low. December imports were 25% lower than Dec. 2010.

• Australian lamb imports were up 6% to 82.6 million lbs. in 2011.

• New Zealand’s lamb imports were down 16% to 36.5 million lbs. in 2011.

• Mutton imports from Australia were 15.5 million lbs., down 5% in this period.

• New Zealand mutton imports were up 117% to 16.0 million lbs.

Mutton Imports were 31-Percent

Higher in 2011 Annually to 31.6 Million Lbs.

Lamb & Mutton Exports Up 16% in 2011 Annually to

18.6 Million Lbs.

• At 575,000 lbs., lamb exports were down 57% 2011 annually.

• Mutton exports totaled 17.8 million lbs. in the year, up 25% annually.

Live Sheep Exports Down Sharply in 2011

• U.S. live sheep exports fell 41% annually to 86,684 head.

• Exports to Mexico were down 77% and exports to Canada were down 28%.

Cull Ewe Prices Stronger in 2011 San Angelo ewe prices averaged

$57.08/cwt. in 2011, up 8% annually.

VIII. Total Lamb and Mutton Supplies

• In 2011, total lamb availability (imports plus domestic production, subtracting exported lamb volume) totaled 261.82 million lbs., down 5% year-on-year.

• In this period, domestic lamb supplies (less lamb exports) were 132.5 million lbs., just above 129.3 million imported lbs.

Total Lamb Availability Down 4%

2011 Lamb Available was Down for 4th Consecutive Year

U.S. Market Shares Slip in 2011

• In 2011, domestic lamb market share was 51%, down from 52% a year ago.

• Domestic lamb & mutton market share averaged 47% in 2011, down from 49% annually.

• In 2011 the domestic mutton share was 31%, down from 33% a year ago.

IX. Imported Product Price Comparisons

U.S. Lamb Increasingly Competitive: US$ Weak and Aust. & NZ Lamb Prices High

U.S. Leg Remained CompetitiveIn 2011, the wholesale leg (trotter-off, boneless) averaged 6 cents per lb. more competitive than the imported leg.

However, imported leg still very seasonal and more competitive than

U.S. leg for December holidays.

U.S. Loins Competitive In 2011, the U.S. wholesale loins was an average 59 cents per lb. more competitive than imported loins.

U.S. Loins Gained Competitiveness since 2006, but

Lost its Edge in 2011

2011 Anomaly for Loins Competitiveness

• Since 2005, the summer U.S. loins premium narrowed.

• Since 2005, the December holiday U.S. loins premium flipped, became more competitive than the imported loins, but…

• In 2011 the trend bucked. U.S. loins was more competitive than the imported loins in the summer, but less so in December.

Anomaly or new trend?

U.S. Rack Less Competitive The U.S. rack premium was about $4 per lb. in 2011.

The U.S. rack-Australian rack margin seasonal. .

IX. Exchange Rates

Weak U.S. Dollar Raises the Cost of Imports

• Australian lamb imports more competitive; NZ lamb imports less competitive in U.S. market.

• In 2011 the U.S./Australian dollar was $1.0321 up 11% annually.

• In 2011, the U.S./New Zealand dollar hit $0.7913, up 10% annually.

Exchange Rates Drive Import & Export Competitiveness

• It is forecasted that the U.S. dollar will likely stay weak in 2011.

• In early Feb., investors were less nervous about a Euro break up which could lead to the US$ appreciating.