Third-Quarter 2015Sheep Industry Review

Prepared by the American Sheep Industry Associationfor the American Lamb BoardOctober 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 SummaryBy the third quarter, the commercial lamb industry had performed an about-face: the overweight lamb problem largely disappeared, harvest weights dropped rapidly and weekly harvest rates slowed considerably. In just a few months, supplies tightened, putting pressure on December meat contracts and raising slaughter lambs prices.

From June to September harvest weights dropped 6 percent to 137 lbs. In formula sales the drop was more pronounced: carcass weights dropped 19 percent to 72.3 lbs. on a carcass basis. Over the summer weekly slaughter was down 2,000 head a week. Lamb harvest was down an estimated 5% January through September to 1.4 mill. head. Estimated lamb production was down 3% to 99.5 mill. lbs.

By early September, old crop lambs in feedlots were about cleaned up, putting packers in a very different, short position. This put pressure on slaughter lamb supplies, and prices rose. However tight the fresh lamb market was, frozen inventory remained record-high. At the beginning of September, 41.9 million lbs. of lamb and mutton were in cold storage, 7-percent higher monthly and 23-percent higher than a year ago.

The third quarter gave hope to an otherwise unspectacular year. Featured retail prices were lower year-on-year and the wholesale market trended down for the first half of the year. The overweight situation earlier this year sapped the industry of potential price gains. However, forecasts for lower imports year-on-year going into the holiday season and estimates of stable lamb demand positions the lamb industry in a good place moving forward.

Executive Summary, page 2

Some industry proponents are concerned that fewer lambs will be sent to pasture this winter given persistently dry conditions in some key feeding areas. This means more lambs in feedlots and a concern that we will have a repeat of this year’s overweight problem, if timely marketing isn’t maintained.

In the MarketsThe 3-market feeder lamb auction price saw a 5% drop quarterly to $186.07/cwt. and was 7% lower year-on-year. In the direct feeder lamb market, feeders averaged $169.31/cwt., up 13% quarterly and down 5-percent year-on-year.

Live, slaughter lamb prices at auction averaged $153.60/cwt. in the third quarter, 3% higher quarterly and 1% lower year-on-year. Slaughter lamb prices on a carcass-based formula averaged $298.03/cwt. ($150.61/cwt. live-converted), up 3% quarterly and 0.3-percent lower year-on-year.

All lamb primals weakened in the third quarter, pulling down the net carcass value.The net carcass value (wholesale composite less processing and packaging) averaged $323.75/cwt., down 0.5% quarterly and down 2% year-on-year. The weighted average carcass price was $326.71 per cwt. in the third quarter, 3-percent higher quarterly and 1-percent higher year-on-year.

The most popular items (domestic and imported) at retail including the loin and shoulder chops were featured at lower prices compared to a year ago.

Executive Summary, page 3

Production & TradeLamb imports totaled 116 million lbs. in January through August, up 10% year-on-year. Australian lamb imports in the first eight months were 81.5 million lbs., up 8% year-on-year.

Domestic lamb harvest down was down an estimated 5% in 2015 through September to 1.4 million head. Estimated lamb production was down 3% to 99.5 million lbs.

Total estimated lamb supplies in January through August was 26.39 million lbs., up 4% year-on-year. The U.S. share in total lamb availability was 46%, down from 48% a year ago.

ForecastsHoliday supplies typically increase and more lamb is featured, but the million-dollar question is at what price? There are several indicators that lamb supplies will be tighter this holiday compared to a year ago. LMIC forecasted that imports will not be as high this year and total supplies could be down 15% year-on-year (9/24/15). Tighter supplies typically mean stronger prices, but this year, beef prices could be down about 3%, challenging lamb demand. To the industry's credit, it is believed that branded lamb products and niche-marketed lamb is isolated, to some extent, from the dynamics of commodity beef.

I. Feeder and Slaughter Lamb

Market Trends

Auction Feeder Lamb Prices (60- to 90-lb.) Lower in Q3

• The 3-market feeder lamb auction price saw a 5% drop quarterly to $186.07/cwt. and 7% lower year-on-year.

• Prices were $189.69/cwt. in July, $184.66/cwt. in Aug. and $183.85/cwt. in Sept.

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

Feeder Lamb Prices Trended Lower into 2015

Feeder Lambs in Direct Trade Lower

o In Q3, feeders averaged $169.31/cwt., up 13% quarterly and down 5-percent year-on-year.

oPrices averaged $174.19/cwt. in July, $169.86/cwt in Aug. and $163.88/cwt. in Sept.

2015 Prices Ran up Through July then Weakened

Jan-Sept feeder numbers down 57% year-on-year

Fall run numbers lower year-on-year

Corn Lower in 2015At $3.69 per bu., corn down 18% in its Sept-Aug season year-on-year.

Alfalfa averaged $174.50 per ton in May-Aug. -- first four months of new season, -- down 20% year-on-year.

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

• Live, slaughter lamb prices at auction averaged $153.60/cwt. in Q3, 3% higher quarterly and 1% lower year-on-year.

• Prices averaged $174.19/cwt. in July, $169.86/cwt. in Aug. and $163.88/cwt. in Sept.

2015 Slaughter Lamb Prices Volatile, Lower

Slaughter Lamb Prices More Competitive with 2014 by Mid-Year

Carcass-Based Formula Slaughter Lamb Prices Up in Q3

• Slaughter lamb prices on a carcass-based formula averaged $298.03/cwt. ($150.61/cwt. live-converted), up 3% quarterly and 0.3-percent lower year-on-year.

• Prices averaged $289.03/cwt. in July, $298.73/cwt. in Aug. and $306.34/cwt. in Sept.

Slaughter lambs on formula up since July

Price spread – lightest to heaviest carcasses – narrowed by September

Formula slaughter lamb prices higher than auction average since mid-2014.

Live, Negotiated Prices Lower Quarterly

• Slaughter lambs in live, negotiated sales averaged $151.96/cwt., up 10% quarterly and down 1% year-on-year.

• Prices averaged $144.71/cwt. in July, $156/cwt. in Aug. and $155.17/cwt. in Sept.

Formula/grid Slaughter Weights Lighter

• Slaughter weights in carcass-based formula trades averaged 80.99 lbs. (154.8 lbs. live-weight) in Q3, 4% lighter quarterly and 9-percent heavier year-on-year.

• Formula weights hit a 12-month high in July at 91.30 lbs. carcass weight (180 lbs. live).

In Jan.-Sept. formula trades up at expense of packer-owned harvest.

II. Carcass and Boxed Lamb Market Trends

Carcasses Lower Quarterly

• Weighted average carcass price was $326.71/cwt. in Q3, 3% higher quarterly and 1% higher year-on-year.

•Prices averaged $320.47 per cwt. in July, $328.78/cwt. in Aug. and $332.44/cwt. in Sept.

Carcass Prices Gained in June after Weakening in the First-Half of 2014

More YG 4s and 5s in 2015 through Aug.

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-Aug 2015 5% 29% 39% 16% 10%

• The net carcass value (wholesale composite less processing and packaging) averaged $323.75/cwt. in Q3, down 0.5% quarterly and down 2% year-on-year.

• The net carcass value averaged $323.96/cwt. in July, $321.70/cwt. in Aug. and $325.59/cwt. in Sept.

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

2015 Net Carcass Value Trended Down Through Most of

2015

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

• The rack averaged $729.81/cwt. in Q3, down 3% quarterly and down 9% year-on-year.

• The rack averaged $736.75/cwt. in July, $722.83/cwt. in Aug. and $729.83/cwt. in Sept.

Loins Higher Year-on-Year

• Loins, trimmed 4x4, averaged $520.59/cwt., up 0.5% quarterly and 2% higher from a year ago.

• Loins were $526.25/cwt. in July, $522.39/cwt. in Aug. and $513.14/cwt. in Sept.

Leg, Trotter-Off, Volatile through Q3

• The leg averaged $346.37/cwt. in Q3, up 3% quarterly and down 1% year-on-year.

• The leg averaged $343.77/cwt. in July, $344.65/cwt. in Aug. and $350.70/cwt. in Sept.

Shoulder saw a June lift after weakening through the year.

• The shoulder averaged $296.30/cwt. in Q3, up 2% quarterly and down 1% year-on-year.

• The shoulder was $293.03/cwt. in July, $295.89/cwt. in Aug. and $299.98/cwt. in Sept.

Ground Lamb Holds its Value

• Ground lamb averaged $568.83/cwt., up 0.4% quarterly and up 6% year-on-year.

• Ground lamb was $563.95/cwt. in July, $576.35/cwt. in Aug. and $566.20/cwt. in Sept.

III. At Retail & Food Service

The most popular retail featured items (domestic and imported) were down year-on-year through Q3.

Q3 2015, $ per lb.

% Change Quarterly

% Change Year-on-

Year

Shoulder blade chop

$5.27 -2% -4%

Loin chop $8.06 -9% -13%

Rib chop $13.47 23% -14%

Ground lamb $7.40 -2% -4%

IV. Price Spreads

At $2.09 per lb., the rack-loin spread was down 11% quarterly as the rack weakened, and down 27% year-on-year.

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

Rack-loin spread often higher in winter months and narrows as the loin gains in the summer.

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 Mixed in Q3; Sharply Lower Year-on-year

Live-to-carcass price spread gained 13% quarterly to $19.41 per head and fell 12% year-on-year.

Live-to-cutout price spread fell 14% in Q3 to $41.63 per head, down 31% year-on-year.

Carcass to cutout spread fell 29% quarterly to $21.83 per head, down 42% year-on-year.--The carcass gained quarterly while the cutout weakened.

Break-Even Analysis

• Breakeven analysis is only one snapshot of feedlot marketing.-- Depends upon time and weight coming into the feedlot, length of time on feed and rate of gain in the feedlot. -- Includes feed costs, death loss and other costs (premium to compensate for last year’s losses).

• On average, total cost of gain dropped about 10 cents per lb. quarterly due to lower feed costs.

Cost of Gain Dropped in Q3

Positive margins estimated for Colorado feeders in September

• By September the industry had mostly cleaned up its old crop of lambs.

• Harvest weight dropped sharply by September.

• The September estimated break-even was $137 to $139 per cwt. compared to $155 per cwt., -- average slaughter lamb price.

• Solid margins can help mitigate the large losses seen last year in the feeder complex.

Sensitivity Break-Even Analysis A:75-cents per lb. cost of gain

Item Cost

1. Total cost of feeder (2,000 head from TX traded in July at 70 lbs. for $185 per cwt.)

$129.50/head

2. Average freight to Colorado $8.00/head

3. Cost of gain in Colorado feedlot 67 lbs. gained @ $0.75/lb. to 137 lbs.)

$50.25/head

4. Break-even price of slaughter lamb @ 137 lbs. $187.75/head

  Break-Even $137.04 per cwt.

Sensitivity Break-Even Analysis B: 80-cent per lb. cost of gain

Item Cost

1. Total cost of feeder (2,000 head from TX traded in July at 70 lbs. for $185 per cwt.)

$129.50/head

2. Average freight to Colorado $8.00/head

3. Cost of gain in Colorado feedlot 67 lbs. gained @ $0.80/lb. to 137 lbs.)

$53.60/head

4. Break-even price of slaughter lamb @ 137 lbs. $191.10/head

  Break-Even $139.49 per cwt.

V. Pelts

U.S. Pelts Weakened Further in Q3

• Fall Clips (previously shorn) averaged $3.63 per piece in Q3, down 15% quarterly and down 13% year-on-year.

• No. 1 pelts (previously shorn) averaged $1.00 per piece in Q3, down 50% quarterly and down 70% year-on-year.

• Shorter pelts still command payment from processors for disposal.

Strong USD & Weak International Pelt Demand Depressed US Market

Pelt Exports Down, but Some Items Exported Saw Higher Values

• Most lambskin export categories saw lower year-on-year exports through August, but some categories saw higher value of exports.

• In the 8 months through August, ‘fancy’ leather exports were up 13% in volume year-on-year and up 168% in value.

• Exports of garment leather without wool on were down 95% through August year-on-year.

VI. Replacement Sheep

Ewe Prices Weaker Quarterly and Lower Year-on-year

Yearling Ewes, 12-24 mos., averaged $171.12 per head, down 15% quarterly and down 36% year-on-year

Running Age Ewes, 2-4 years, averaged $138.61 per hear, down 12% quarterly and down 16% year-on-year.

Middle Age Ewes, 5-6 years, averaged $96.34 per head, down 8% quarterly and down 16% year-on-year.

Ewe Prices Volatile: Flock Rebuilding Efforts Uncertain

Ram prices not well tested for quarterly comparison, but higher year-on-year.

• Black faced rams averaged $766.51 per head in Q3, 37% higher year-on-year.

• White-faced rams averaged $675.00 per head, 60% higher

• Cross-bred rams averaged $662.02 per head, steady year-on-year.

VII. Domestic Production and Trade

Lamb harvest down an estimated 5% in 2015 through Sept. to 1.4 mill. head, estimated lamb production down 3% to 99.5 mill. lbs.

Federally-inspected sheep and lamb harvest weights were 140 lbs. in Q3, down 2% quarterly and up 2% year-on-year.

Formula/grid lambs (about 20% of market) pulled average down.

--In July-Sept. weights fell 14% to 152 lbs.

Cold storage record-high: 41.9 mill. lbs. in Sept., 7% higher

monthly and 23% higher year-on-year.

Cold storage volume equivalent to about 4 months production.

Lamb and Mutton Imports Up 9% Through Aug. Year-on-Year to 136.6 Mill. Lbs.

Lamb imports totaled 116 million lbs. in Jan.-Aug., up 10% year-on-year.

• Australian lamb imports in Jan.-Aug. were 81.5 mill. lbs., up 8% year-on-year.

• NZ’s lamb imports were 33 mill. lbs., up 14% in the year-to-year.

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

• At 20.55 million lbs., mutton imports were 2% higher in Jan.-Aug. year-on-year.

• Mutton imports from Australia totaled 15.5 million lbs. in this period, down 8% year-on-year.

• Mutton imports from NZ totaled 5.0 mill. lbs. in this period, up 95% year-on-year.

Mutton Imports Higher Year-on-Year

At 20.5 million lbs. in Jan.-Aug., mutton imports were up 2% year-on-year.

--Lamb exports were 365,000 lbs. in Jan.-Aug., down 56% year-on-year.

--Lamb & mutton exports were 2.9 mill. lbs., down 39%.

Total Live Sheep Exports to Mexico Down

•Total live sheep exports to Mexico in Jan.-Sept. totaled 5,928 head, down 76% year-on-year.

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

Q3 Cull Ewe Prices Lower

--San Angelo ewe prices averaged $60.69/cwt. in Q3, 9% lower quarterly and 1% higher year-on-year.

XIII. Nontraditional Market

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 Lower in Q3

--Nontraditional price averaged $164.90/cwt in Q3, 9% lower quarterly and 9% lower year-on-year.

--Market saw a price boost in September due to Rosh Hashanah and the Muslim Eid ul-Adha, Festival of the Sacrifice.

Prices Rebounded in August after 2015 Downward Trend

Note: New Holland lambs don’t typically grade, but AMS reporters assign a grade to distinguish higher-quality lambs.

IX. Total Lamb and Mutton Availability

Total estimated lamb supplies in Jan.-Aug. was 26.39 mill. lbs., up 4% year-on-year.

U.S. Share in Total Lamb Availability 46% in Jan.-Aug., Down from 48% a Year Ago

U.S. Commercial Lamb Market Share – Nationally and at Wholesale -- Slipped Further in 2015

• In January-August 2015:

Domestic lamb market share was 46%, down from 6% year-on-year from 48%.

Domestic lamb & mutton market share was 43%, down 6% from a year ago.

Domestic mutton market share was 24%, down 14% year-on-year.

Domestic Lamb Share Trending Down

X. Imported Product Price Comparisons

U.S. Competitiveness Against the AUS Shortloin at Wholesale Gained in Q3

U.S. Rack Maintained Premium to Imported Rack at Wholesale in Q3

*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 $1,422/ cwt. in Q3, up 0.6% quarterly and down 6% year-on-year.

• U.S. rack, roast-ready, frenched, special (204D) averaged $1,867/cwt. in Q3, up 0.2% quarterly and down 5% year-on-year.

• The AUS rack cap-off, 28 oz. + was $938/cwt., down 1% quarterly and down 19% year-on-year.

U.S. shoulder competitiveness fell in Q3 against AUS shoulder at wholesale.

XI. Exchange Rates

-- In Q3 the Australian/U.S. rate was 73 cents, down 7% from 78 cents in Q2 and 92 cents a year ago.

-- In Q3 the NZ/U.S. rate was 65 cents U.S. per NZ dollar, down 11% from 73 cents in Q2 and down from 84 cents a year ago.

Australian & NZ Dollars Weaker Against US$

Stronger U.S. Dollar Boosts Import Competiveness 

XII. Price Projections and Outlook

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 price is forecasted to weaken 3% from its annual average in the fourth quarter.

Slaughter lamb prices at auction forecasted to fall 4% below annual average in fourth quarter.

Livestock Market Information Center (LMIC) Q4 Forecasts:

• Slaughter lambs on a carcass-basis: $312-$324 per cwt., up 5% quarterly and down 0.6% year-on-year (9/24/15)

• Feeder lambs: $200-$208 per cwt., up 1% quarterly and up 1% year-on-year.

Fourth-Quarter Supply Forecasts

• LMIC forecasted:

Q4 production down 1% quarterly, down 5% year-on-year;

Imports up 8% quarterly, down 24% year-on-year;

Total supply up 1% quarterly, down 15% year-on-year; and

Total disappearance (‘consumption’) up 5%, down 19% year-on-

year (10/20/15).

Bottom line: If more lamb is sold in Q4 and prices

are stable or higher, then demand has maintained or

expanded.

Recent softening in beef prices doesn’t mean beef demand is faltering, ….

but it does mean lamb demand might suffer at expense of lower-priced beef (and already more competitive poultry and pork).

Substitute Proteins Provide Stiff Competition to Lamb

Demand

However, lamb is well-positioned:

• Premium beef brands showed strong growth during the 2008-09 recession while other items suffered significantly in price.

• Why?

• Quality.

• Consumers are willing to pay for high, consistent quality. It is about fulfilling a pleasurable eating experience, with less sensitivity to price.

• Consumer preferences towards for meat and poultry has increased, particularly for high quality protein, (Daily Livestock Report, 10/15/15).