Third-Quarter 2013 Sheep Industry Review Prepared by American Sheep Industry Association

1. Third-Quarter 2013 Sheep Industry Review Prepared by American Sheep Industry Association for the American Lamb Board October 2013

2. Contents Executive Summary • Feeder and Slaughter Lamb Market Trends • Feeder and Slaughter Lamb Price Projections • Carcass and Boxed Lamb Market Trends • At Foodservice and Retail • Price Spreads • Pelts • Replacement Sheep • Domestic Production and Trade • Nontraditional Market • Total Lamb and Mutton Availability • Price Comparison to Imported Product • Exchange Rates

3. Executive Summary By late in the third quarter there was rising optimism on the part of producers and feeders with strengthening feeder and slaughter lamb prices. Feeder and slaughter lamb offers were likely higher due to lower feed costs and concerns over tightening supplies. Feed costs for both corn and hay were lower than a year ago and good moisture through the summer in many sheep regions lends itself to promising winter grazing. Overall, improved feed conditions and higher feeder lamb prices was the necessary impetus for some reported flock rebuilding – retaining ewe lambs and higher replacement stock prices. A major winter storm in South Dakota and neighboring states in early October resulted in the loss of hundreds of sheep and lambs, a significant set-back for some highly populated sheep sates. The loss of lambs might mean further price increases if concerns heighten about the availability of supply. On a more cautionary note, while feeder and slaughter lamb prices saw significant gains in the third quarter, the carcass and wholesale market saw little movement.

4. Executive Summary, page 2 In early October, the government shutdown meant the suspension of U.S. Department of Agriculture (USDA) sheep and lamb price and production data. Fortunately for the sheep industry, the market was in an upswing at the time of the shutdown and continued to gain through the reporting cessation. In the Markets The 3-market feeder lamb auction price saw a 1-percent quarterly drop to $113.02/cwt., up 12% year-on-year. Feeder lambs in direct trade averaged $109.85/cwt. in the third quarter, up 11% quarterly, and up 4% year-to-year. Live, slaughter lamb prices at auction gained 9% quarterly to $111.47/cwt. , 14-percent higher year-on-year. Slaughter lamb prices on a carcass-based formula averaged $231.46/cwt. ($116/cwt. live-converted), up 3% quarterly and down 8% year-on-year. The gross carcass value averaged $279.28/cwt. in third quarter, down 2% quarterly and down 13% year-to-year. The weighted average carcass price averaged $258.54/cwt. in the third quarter, 4-percent higher quarterly and down 11% from a year ago.

5. Executive Summary, page 3 • Domestic lamb market share was 49%, down from 53% year-on-year. Contracting market share challenges reinvestment and innovation in the industry. • An increased number of slaughter lambs has more than compensated for lower slaughter weights in maintaining (even increasing) production. In the first-nine months of the year, estimated lamb slaughter was 1.48 mill. head, up 8% year-on-year. Lamb production was 1.04 mill. lbs., up 0.8% year-on-year. In the third quarter, cold storage averaged 21.5 mill. lbs., up 10% quarterly and down 9% year-on-year. • Forecasts • Lamb retail prices should increase toward the December holidays, bolstered by improved incomes and higher beef prices. Quality consistency and tight supplies will help support prices. The Livestock Marketing Information Center (LMIC) forecasted both slaughter and feeder lamb prices to increase quarterly, up to 11 and 32 percent higher than a year ago, respectively. • LMIC forecasted in late September that commercial production could be 5-percent lower in the fourth quarter year-on-year. Imports could fall 2 percent year-to-year and total supply could be down 7 percent year-to-year.

6. I. Feeder and Slaughter Lamb Market Trends

7. Auction Feeder Lamb (60- to 90-lb.) Prices Up 12% in a Year • The 3-market feeder lamb auction price saw a 1-percent quarterly drop to $113.02/cwt., up 12% year-on-year. • Markets included San Angelo, Ft. Collins and Sioux Falls. • Prices averaged $108/cwt. in July, $110/cwt. in Aug. and $121/cwt. in Sept.

8. Three Markets Gained Thru 2013

9. Feeder Lambs in Direct Trade Gained Quarterly • Feeder lambs averaged $109.85 per cwt. in Q3, up 11% quarterly, and up 4% year-to-year. • Feeders averaged $102/cwt. in July, $107/cwt. in August and $120/cwt. in September.

10. Sept. Feeders in Direct Trade Down 17% from Sept. 5-Year Ave.

11. September Direct Feeder Trade 40% Higher Year-on-Year; 92% Higher than its 5-Year High

12. Feed Costs Coming Down • Corn averaged $6.88 per bu. in its 2012/13 marketing year, 8-percent higher year-on-year. • Corn averaged $6.97 per bu. in June, $6.79 per bu. in July and $6.21per bu. in August. • The early-October Omaha corn prices moved into the $4.00 per bu. range, the lowest for any week since early October 2010.

13. Corn Began to Fall in June

14. Alfalfa averaged $201per ton in Q3, down 0.5% year-on-year, and fell from $209 to $194 per ton within the quarter.

15. Q3 Auction Slaughter Lamb Prices 14-Percent Higher Year-on-Year • Live, slaughter lamb prices at auction gained 9% quarterly to $111.47/cwt., 14-percent higher year-on-year. • Prices averaged $109/cwt. in July, $108/cwt. in August and $117/cwt. in September.

16. Auction Slaughter Lamb Price Rebounded 37% Since its 7-Year Low in Aug. 2012

17. Q3 Auction Slaughter Lamb Prices Higher than Q1 Prices

18. Carcass-Based Formula Slaughter Lamb Prices Gained Steadily through 2013 • At 155,100 head, formula trades were down 3% quarterly and up 14% year-on-year. • Slaughter lamb prices on a carcass-based formula averaged $231.46/cwt. ($116/cwt. live-converted), up 3% quarterly and down 8% year-on-year. • Weighted-average prices were $227/cwt. in July, $229/cwt. in Aug. and $238/cwt. in Sept. • In Q3, average weight was 78.6 lbs., down 6% quarterly and down 12% year-on-year.

19. In Rebound Period Since last October, Slaughter Lamb Prices up 7%

20. Heaviest Carcasses Received Discount

21. Live, Negotiated Slaughter Lamb Sales up Quarterly • Slaughter lambs in live, negotiated sales averaged $118.34/cwt. in Q3, up 0.4% quarterly and up 3% year-on-year. • Lambs averaged $119/cwt. in July, $117/cwt. in Aug. and $120/cwt. in Sept. • Q3 weights were 134 lbs., down 6% quarterly and down 5% year-on-year.

22. II. Feeder and Slaughter Lamb Price Projections

23. LMIC Forecasted that Tight Supplies will Likely Support Prices • LMIC’s late September forecasts: • Q4 national slaughter lambs by carcass weight in direct trade could range from $245 to $250 per cwt. – 11 percent higher year-on-year. • Sixty- to 90-lb. 3-market feeder lambs could range from $130 to $140 per cwt. – 32 percent higher. • These volatile times means any price forecast should be used with caution.

24. Seasonal Index Lends Predictive Insight • Price trends--up or down--depend on which factor dominates, supply or demand. • When feeders come to market in the fall and slaughter lamb supplies increase, prices tend to weaken, but pulled up by holiday demand needs. • 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.

25. Feeder Lamb Prices Expected to Climb Through the Year’s End

26. Slaughter Lamb Prices at Auction Predicted to Gain through Q4

27. LMIC Forecasted Sharp Q4 Production Contraction • LMIC forecasted in late September that commercial production could be 5-percent lower in the fourth quarter year-on-year. • Imports could fall 2 percent year-to-year. • Total supply could be down 7 percent year-to-year. • Bottom line: Industry supplies expand and contract which helps fuel price volatility.

28. Extreme Price Volatility is a Cost to the Industry -- in Lower R&D, Loss of Infrastructure, and Most Important, Loss of Producers & Sheep

29. Lamb Demand Forecast?Tighter Q4 Supplies, Strong Beef Prices,Stronger Income Growth, andQuality Consistency (More YG 2s and 3s)….Could Support Lamb Demand

30. Inflation-Adjusted Income Making Slow Rebound

31. Retail Beef Charges Up 11% in 2 Years

32. Why is Retail Beef Higher? • Beef supplies down. (Contrary to increased domestic and imported lamb at retail.) • Incomes up. • “Last year’s record-high production costs and drought-reduced supplies continue to force retail meat prices higher with beef, pork and chicken prices setting new records again in August,” said Len Steiner and Steve Meyer (Daily Livestock Report, 9/18/13). • By the same reasoning, why haven’t these factors forced retail lamb higher (or have they?)?

33. Good News for the Lamb Industry • A recent Food Demand Survey (FooDS) conducted at Oklahoma State University found consumers’ willingness-to-pay for steak and hamburger increased by 8.30% and 4.21%, respectively, from August to September. • Willingness to pay is another way to think of lamb demand.

34. Lower Lamb Feed Costs • LMIC forecasted that the 2013/14 marketing year average corn price received by producers could average $4.50 per bushel (10/3/13), down from $6.88 per bu. in its 2012/13 year. • In mid-September, USDA reported that the corn basis is beginning to correct, slowly making corn delivered to the feedlot in the low to mid $6 range (USDA/AMS, 9/13/13). • The December corn future settled at $4.42 per bu. on October 15. • Corn supplies up: Corn stocks at the end of the marketing year in August were more abundant than analysts expected and a record crop is possible. • Improved pasture & range conditions mean softer hay prices this year (LMIC, 6/2013).

35. Feeders See Some Positive Profits • Recall the breakeven analysis is only one snapshot of feedlot marketing. • Many feeders have been in the red for the past three years; some just now making money. • Cost of gain fell from about $1.30 per lb. to $1.10 to $1.20 per lb. late in the third quarter. • Early October estimated break-even was $118 to $121 per cwt. compared to $119 per cwt., the live-converted formula carcass-based price.

36. Cost of Gain Falls into Q3

37. Sensitivity Break-Even Analysis A: October kill of late August California lambs with a $1.10 per lb. cost of gain.

38. Sensitivity Break-Even Analysis B: October kill of late August California lambs with a $1.20 per lb. cost of gain.

39. III. Carcass and Boxed Lamb Market Trends

40. Carcass Gained Quarterly, Yet Down Year-on-Year • Weighted average carcass price averaged $258.54/cwt. in Q3, 4-percent higher quarterly and down 11% from a year ago. • Carcass price was $256/cwt. in July, $259/cwt. in Aug. and $262/cwt. in Sept. • Lightweight carcasses received premium at $323 to $352 per cwt. in Q3.

41. Carcass Prices Down 32% from Record High

42. Carcass Made Slow, but Steady Gains in 2013

43. Carcasses Trimmer: YG 4s and 5s Coming Down • Yield Grade determination is positively correlated with heavier slaughter lambs. • Yield Grade 4 & 5 in lbs. was 23% of total slaughter in the first eight months of 2013 compared to 30% in 2012.

44. YG 1s (Minimal Back Fat) Up with Very Current Market

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

46. Why Have Yield Grade 5s Been Increasing in 2013?

47. Formula Purchases Up in 2013--Do purchases on a grid mean improvedquality consistency?

48. Q1 Gross Carcass Value (Wholesale Average) Weakened Quarterly and Down Year-to-Year • The gross carcass value averaged $279.28/cwt. in Q3, down 2% quarterly and down 13% year-to-year. • Gross carcass value was $280/cwt. in July, $278/cwt. in Aug. and $280/cwt. in Sept.

49. Sept. Wholesale Market Higher than 2008 & 2009 but 43% Lower than 2010-2012’s September

50. Gross Carcass Value 32-Percent Lower than Nov. 2011 High