First-Quarter 2015 Sheep Industry Review Prepared by the American Sheep Industry Association for the American Lamb Board April 2015.

First-Quarter 2015Sheep Industry Review

Prepared by the

American Sheep Industry Association

for the American Lamb Board

April 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 SummaryThe first quarter of 2015 was a set-back for many in the lamb industry with markets losing important gains achieved in 2014 of higher prices and excellent quality. In the first quarter of 2015, the combination of higher 2014 lamb imports and record-high freezer inventory helped put the brakes on prices.

The stronger U.S. dollar and late-2014 surge in lamb import supplies might have saturated demand at Easter which led to a depressed live domestic market. In the fourth quarter of 2014, lamb imports were up 13% quarterly and 19-percent higher year-on-year. Lamb and mutton in cold storage in March was double that in 2008.All meats have higher year-on-year freezer inventories. USDA reported total red meat supplies in freezers up 18 percent from last year and chicken stocks up 27 percent.

Typically feeder and slaughter lamb prices strengthen through the first quarter in anticipation of high-demand Easter sales, but this year slaughter lamb prices fell 4 to 13 percent quarterly. As harvest rates slowed relative to available market-ready lambs, prices weakened further and harvest weights climbed. By the end of March, slaughter lambs on formula were weighing over 160 lbs., compared to a 140-lb. average.

Executive Summary, page 2

With strong beef prices at retail and higher incomes, lamb demand will likely stay strong through the second quarter. Imports tend to slow after Easter which could help move cold storage stocks and get old crop lambs to market. In mid-April, the American Sheep Industry Association's (ASI) executive board voted to request that the U.S. Department of Agriculture (USDA) consider a section 32 lamb-meat purchase. If accepted, it could be instrumental in moving supplies through the system.

We might see higher feedstuff prices this summer and fall, squeezing producer and feeder margins. Lower corn harvest expectations could put upward pressure on prices. Furthermore, there are likely ample hay supplies for the next couple months, but drought in the western U.S. – particularly California – could put pressure on prices this summer.

In the Live MarketsThe 3-market feeder lamb auction price saw a 4-percent gain quarterly to $208.09/cwt., but was down 7% year-on-year. Feeder lambs in direct trade trickled to a standstill by March with zero lamb trades reported. In January and February feeders in direct trade averaged $161/cwt., 13-percent lower from the fourth quarter and 17-percent lower year-on-year.

Executive Summary, page 3

Live, slaughter lamb prices at auction averaged $141.85 per cwt. in the first quarter, 12% lower quarterly and 12% lower year-on-year. Slaughter lamb prices on a carcass-based formula averaged $307.90 per cwt. ($154.55 per cwt. live-converted), down 4% quarterly and 3-percent higher year-on-year. Slaughter lambs in live, negotiated sales averaged $142.50/cwt., down 13% quarterly and down 11% year-on-year.

In the Meat MarketsLamb carcass and cutout values weakened in the first quarter as retail demand softened. The weighted average carcass price averaged $331.53/cwt., 4-percent lower quarterly and 7-percent higher year-on-year. The net carcass value (wholesale composite less processing and packaging) averaged $337.40 per cwt. in the first quarter, down 2% quarterly and up 1% year-on-year.

The 55-lb. carcass and lighter class of lambs in formula trades saw prices jump 16% quarterly while all other weight classes weakened by an average 2%. The market was telling us there was a strong demand for the lighter weight lambs.

Slaughter weights in carcass-based formula trades averaged 81.18 lbs. (161.73 lbs. live-weight) in the first quarter, 8% heavier quarterly and 3-percent heavier year-on-year. The percent of yield grades 4s and 5s (indicating increased back fat) in total federally-inspected slaughter in January and February was 23% compared to 19% a year ago. The total lambs graded in the first quarter totaled 62%, down from 64% year-on-year and down from about 70% five years ago.

Executive Summary, page 4

It is estimated that auction purchases maintained as a share of total harvested lambs in the first quarter, but formula and packer-owned lambs both saw increased shares (26% and 21%, respectively) at the expense of live, negotiated trades.

The primals were relatively flat over the past 14 months and into the new year while ground lamb moved higher. In the first quarter, the rack, 8-rib medium, maintained at over $8 per lb. but weakened by 1% quarterly and was down 1% year-on-year. After gaining through most of 2014, the loins weakened in early 2015. In the first quarter, the loin, trimmed 4x4 was down 1% quarterly and up 8% year-on-year. The leg averaged $349.79/cwt., down 4% quarterly and down 7% year-on-year. After six months above $3 per lb., the shoulder fell to $2.95 per lb. in March. Ground lamb averaged $569.72/cwt., up 2% quarterly and up 6% year-on-year.

I. Feeder and Slaughter Lamb Market Trends

Auction Feeder Lamb Prices (60- to 90-lb.) Gained 4% Quarterly

• The 3-market feeder lamb auction price saw a 4-percent gain quarterly to $208.09/cwt., but down 7% year-on-year.

• Prices were volatile: $204.90/cwt. in Jan., $219.27/cwt. in Feb. and $200.09/cwt. in Mar.

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

Feeder Lamb Prices at Auction Volatile

Feeder Lambs in Direct Trade Lower

o Feeder lambs in direct trade trickled to a standstill by March with zero lambs reported.

o In Jan. and Feb. feeders averaged $161/cwt., 13-percent lower from Q4, 17-percent lower year-on-year and 1-percent higher from its 5-year average for Jan/Feb.

o Prices averaged $150/cwt. in Jan. and $172/cwt. in Feb.

Early 2015 Prices Slumped Since $198/cwt. last October

Where are all the feeders? At 2,300 head, Q1 volume down 79% quarterly and

down 94% year-on-year.

Feeder Lambs in Direct Trade Fell Below Feeder Auction Lambs in Q1

Corn Relatively Low, but with Some Strengthening in Recent MonthsAt $3.79/bu. corn up 7% in Dec.-Feb. compared to previous three months.

Alfalfa averaged $176.33 per ton in Dec.-Feb., down 8% compared to previous three months.

Auction Slaughter Lamb Prices Lower Quarterly and Year-on-Year

• Live, slaughter lamb prices at auction averaged $141.85/cwt. in Q1, 12% lower quarterly and 12% lower year-on-year.

•Prices averaged $145.51/cwt. in Jan., $142.72/cwt. in Feb. and $137.33/cwt. in Mar.

Early 2015 Eroded 2014 Gains

2014 Slaughter Lamb Prices Weakened in Q1

Carcass-Based Formula Slaughter Lamb Prices Weakened in Q1

• Slaughter lamb prices on a carcass-based formula averaged $307.90/cwt. ($154.55/cwt. live-converted), down 4% quarterly and 3-percent higher year-on-year.

• Prices averaged $316.86/cwt. in Jan., $309.07/cwt. in Feb. and $297.77/cwt. in Mar.

Slaughter lambs on formula weakened since Nov. 2014

Lightest carcasses in slaughter lamb formula trade gained sharply in Q1 relative to other weight classes.

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

Live, Negotiated Prices Lower Quarterly

•Slaughter lambs in live, negotiated sales averaged $142.50/cwt., down 13% quarterly and down 11% year-on-year.

•Fourth-quarter prices averaged $151.39/cwt. in Jan., $140.57/cwt. in Feb. and $135.55/cwt. in Mar.

Slaughter Weights Heavier

•Slaughter weights in carcass-based formula trades averaged 81.18 lbs. (161.73 lbs. live-weight) in Q1, 8% heavier quarterly and 3-percent heavier year-on-year.

•Weights in live, negotiated trades were 156.69 lbs. in Q1.

•By comparison, federally-inspected weights averaged 71 lbs. (142 lbs. live) in Q1.

Formula Trades Up; Packer-owned Up

• At 129,700 head, the first-quarter volume of lambs purchased on formula was up 32% quarterly and 6-percent higher year-on-year.

• In Q1, formula trades comprised were an estimated 26% of total, up from 24% year-on-year.

• In Q1 packer-owned trades estimated at 21%, up from 20% a year ago.

• In Q1 live, negotiated trades estimated at 12%, down from 16% a year ago.

• Auction trades were an estimated 40%, same as a year ago.

Live, Negotiated Trades Down at Expense of Formula and Packer-Owned in Q1

II. Carcass and Boxed Lamb Market Trends

Carcasses Lower Quarterly

• Weighted average carcass price averaged $331.53/cwt. in Q1, 4-percent lower quarterly and 7-percent higher year-on-year.

•Prices averaged $338.58 per cwt. in Jan., $331.10/cwt. in Feb. and $323.15/cwt. in Mar.

•The percent of carcasses in total FI harvest was down 10% year-on-year to 14%.

Carcass Prices Weakened Since December ‘14

2014 Quality Excellent, but More YG 4s and 5s in Q1 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-Feb 2015

4% 31% 42% 17% 6%

Percent Graded Trending LowerIn Jan.-Feb. 2015 62% of lambs graded compared to 64% a year ago.

• The net carcass value (wholesale composite less processing and packaging) averaged $337.40/cwt. in Q1, down 2% quarterly and up 1% year-on-year.

• The net carcass value averaged $343.42/cwt. in Jan., $333.18/cwt. in Feb. and $335.61/cwt. in Mar.

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

Net Carcass Value Weaker in Q1

Net Carcass Value Volatile over Past Year

Primals Relatively Flat over Past 14 Months; Ground Lamb Higher

Rack, 8-Rib Medium, Held at Over $8 per Lb.

• The rack averaged $808.69/cwt. in Q1, down 1% quarterly and down 1% year-on-year.

• The rack averaged $823.04/cwt. in Jan., $800.64/cwt. in Feb. and $802.39/cwt. in Mar.

After Gaining Through Most of 2014, Loins Weakened in Early 2015

• Loins, trimmed 4x4, averaged $521.16/cwt., down 1% quarterly and 8-percent higher from a year ago.

• Loins was $523.42/cwt. in Jan., $521.84/cwt. in Feb. and $518.23/cwt. in Mar.

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

• The leg averaged $349.79/cwt. in Q1, down 4% quarterly and down 7% year-on-year.

• The leg averaged $359.13/cwt. in Jan., $338.47/cwt. in Feb. and $351.77/cwt. in Mar.

After six months above $3 per lb., the shoulder fell to $2.95 per lb. in March.

• The shoulder averaged $300.16/cwt. in Q1, down 4% quarterly and up 1% year-on-year.

• The shoulder was $304.35/cwt. in Jan., $300.48/cwt. in Feb. and $295.65/cwt. in Mar.

Ground Lamb Up 6% Year-on-Year

• Ground lamb averaged $569.72/cwt., up 2% quarterly and up 6% year-on-year.

• Ground lamb was $568.63/cwt. in Jan., $571.11/cwt. in Feb. and $569.42/cwt. in Mar.

III. At Retail & Food Service

The most popular featured items (domestic and imported) in Q1 saw mixed trends at retail: Rib chop prices fell sharply.

Q1 2015% Change

Year-on-YearBoneless leg $7.17 -8%

Shoulder blade chop

$5.57 12%

Loin chop $9.10 -0.2%Rib chop $11.06 -25%

In the 2 weeks before Easter, leg featuring down 27% on select leg cuts; prices mostly higher compared to Easter 2014

Bone-in Leg Semi-Boneless Leg

Butterfly Boneless Leg Boneless

PriceNo. of

Ads PriceNo. of

Ads PriceNo. of

Ads PriceNo. of

AdsQ1 2015 $5.54 5,890 $5.47 6,690 $8.49 60 $6.62 1,720

% change 0.7% -17% 2% 4% 6% -25% -0.2% -72%

Source: USDA/AMS

IV. Price Spreads

Ralmonline, 2008

Loins Gained only Marginally over the Past Two Years, the Rack Gained Sharply and then Steadied

• The rack-loin price spread averaged $2.88 per lb. in Q1, over 5 times higher year-on-year and up 1% quarterly.

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: Cutout gains surpassed slaughter lamb price gains.

The live to carcass price spread averaged $42.25 per head in Q1, up 98% quarterly and up 670% year-on-year.

Live to cutout spread was $71.71 per head in Q1, up 58% quarterly and up 57% year-on-year.

Carcass to cutout spread was $28.49 per head in 2Q1, up 24% quarterly and down 28% year-on-year.

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 dropped from about 90 cents per lb. in the fourth quarter to around 75 cents in the first-quarter.

• The mid-April estimated break-even was $143 to $151 per cwt. compared to $144 per cwt., the live-converted formula carcass-based price.

Cost of Gain in CO Feedlots Continued to Fall

Sensitivity Break-Even Analysis A: April harvest of November-traded Colorado lambs with a 65-cent per lb. cost of gain.

Item Cost

1. Total cost of feeder (1,000 head from CO traded in late Nov. at 102.5 lbs. for $188 per cwt.)

$192.70/head

2. Average freight from Colorado $3.00/head

3. Cost of gain in Colorado feedlot 62.5 lbs. gained @ $0.65/lb. to 165 lbs.)

$40.63/head

4. Break-even price of slaughter lamb @ 165 lbs. $236.33/head

  Break-Even $143.23 per cwt.

Sensitivity Break-Even Analysis B: April harvest of November-traded Colorado lambs with a 85-cent per lb. cost of gain.

Item Cost

1. Total cost of feeder (1,000 head from CO traded in late Nov. at 102.5 lbs. for $188 per cwt.)

$192.70/head

2. Average freight from Colorado $3.00/head

3. Cost of gain in Colorado feedlot 62.5 lbs. gained @ $0.85/lb. to 165 lbs.)

$53.13/head

4. Break-even price of slaughter lamb @ 165 lbs. $248.83/head

  Break-Even $150.80 per cwt.

V. Pelts

International Pelt Market Still Depressed, but U.S. Pelts Gained Marginally in Q1

• Fall Clips (previously shorn) averaged $5.75 per piece in Q1, up 7% quarterly and down 45% year-on-year.

• No. 1 pelts (previously shorn) average $3.50 per piece in Q1, steady quarterly and 60-percent lower year-on-year.

• The never shorn pelts typically command a premium. Over the past 12 months, the unshorn pelts received an average $1.15 per piece more than comparable previously shorn Fall Clips.

• Never shorn springers averaged $6.21 per piece in Q1, up 7% quarterly and down 47% year-on-year.

International Pelt Market Depressed

VI. Replacement Sheep

Replacements 5+ years saw quarterly price gain; younger ewes saw prices weaken. Ram prices not established.

First-QuarterEwe Lambs Not established.Yearling Ewes, 12-24 mos. $241 per headRunning Age Ewes, 2-4 years $213 per headMiddle Age Ewes, 5-6 years $172 per headAged Ewes, over 6 years $148 per head

Are Producers Rebuilding, Albeit Cautiously?

VII. Domestic Production and Trade

Q1 Estimated Lamb Harvest down 2% Year-on-year to 468,452 Head; Lamb Production up 0.4% to 33.3 Mill. Lbs.

Q1 Federally-Inspected Harvest Weights Heavier than a Year Ago at 141 lbs., up 3% Year-on-Year

At 36.8 Mill. Lbs., Monthly Cold Storage in March, up 5% Quarterly and up 40% Year-on-Year

Lamb and Mutton Imports Up Year-on-Year -- At 28.6 million lbs., lamb and mutton imports in Jan. and Feb. 2015 were down 28% from Nov. and Dec. and 11-percent higher year-on-year.

Lamb imports totaled 22.5 million lbs. in Jan. and Feb. 2015, steady with a year ago and down 31% from Dec. and Nov. total.

• Australian lamb imports in Jan. and Feb. were 16 mill. lbs., down 3% year-on-year and down 38% from Nov. and Dec.

• NZ’s lamb imports were 6.3 mill. lbs., up 6% from a year ago and down 4% from Nov. and Dec.

Early 2015 Lamb Imports Down from Nov. & Dec.

In Jan. & Feb. 2015, lamb import value totaled $78 mill., down 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

Mutton Imports Trending Lower

Lamb & Mutton Exports were 745,000 Lbs. in Jan. and Feb., Down from 818,000 Lbs. a Year Ago and Down from 1.2 Mill. Lbs. in Nov. and Dec.

Total Live Sheep Exports to Mexico Down

• Total live sheep exports to Mexico in Q1 totaled 1,854 head, down from 4,476 head in Q4 and down from over 11,000 head a year ago.

• Lower sheep trades at Producers Livestock Auction in San Angelo due to poor weather possibly curbed exports.

Q1 Cull Ewe Prices Higher

--San Angelo ewe prices averaged $90.63/cwt. in Q1, 37-percent higher year-on-year and 46% higher year-on-year.

--Inclement weather in San Angelo limited cull ewe deliveries and helped to bid prices up.

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 into January 2015. --Nontraditional price over $200/cwt. in Jan. compared to $160/cwt. for comparable formula trades.

IX. Total Lamb and Mutton Availability

Total Lamb Supplies in 2014 Up for Third Consecutive Year at Over 300 Million Lbs.

LMIC Forecasted 2015 Industry Contraction: Lower Total Supply and Disappearance, yet Domestic Production Expected to Remain Steady

U.S. Share in Total Lamb Availability 47% in 2014 and 49% in Jan. and Feb. 2015

U.S. Lamb Market Share Maintains below 50%

• In January & February 2015:

Domestic lamb market share was 49%, down from 50% a year ago.

Domestic lamb & mutton market share was 45%, down from 48% a year ago.

Domestic mutton market share was 19%, down from 32% a year ago.

X. Imported Product Price Comparisons

U.S. Competitiveness Against the AUS Shortloin Waned as the AUS Shortloin Price Fell

U.S. Rack and AUS Rack Weakened into 2015

*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 $1,518/ cwt. in Q1, down 1% quarterly.

•U.S. rack, roast-ready, frenched, special (204D) averaged $1,931/cwt. in Q1, down 3% quarterly.

•The AUS rack cap-off, 28 oz. + was $1,015/cwt., down 8% quarterly.

In early 2015 U.S. and AUS shoulder weakened; U.S. less competitive and sharply less competitive by March.

XI. Exchange Rates

-- In Q1 the Australian/U.S. rate was 79 cents U.S. per AUS dollar, down from 86 cents last quarter and 90 cents a year ago.

-- In Q1 the NZ/U.S. rate was 75 cents U.S. per NZ dollar, down from 78 cents last quarter and 84 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 Stay High Year-on-Year

• In late April, LMIC forecasted that second-quarter slaughter lambs on a carcass-weight basis could range from $314-$320 per cwt., 12-percent higher year-on-year.

• LMIC forecasted 60-90 lb. feeder lambs to range from $209-$218 per cwt., 10% higher than a year ago.

• Lower domestic production, a slowdown in imports and possible USDA lamb-purchase program could help clear out some freezer inventory and support live lamb prices.

Lower Corn Harvest Expectations and Drought Could Put Upward Pressure on Corn and Hay Prices

• 2015 corn area planted expected to be 2% lower year-on-year at 89.2 million acres (LMIC, 4/13/15).

• The 2014/15 corn forecast price range was $3.70 per bu. in mid-April (USDA/ERS, 4/13/15). In mid-April corn futures was $3.90 per bu. (LMIC, 4/20/15).

• Producers reported intentions to harvest same hay acreage as 2014, except for in drought-stricken irrigated hay areas of California and Nevada (LMIC, 4/13/15).

• Alfalfa and other hay might be priced higher this year: Most of California is labeled the highest-ranking exceptional drought and much of the West from western Colorado is considered severe drought (U.S. Drought Monitor, 4/21/15).

Index Lends Predictive Insight

•Both feeder and slaughterer lamb prices typically strengthen through the spring before weakening in the summer.

•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 begin weakening in the spring and trend to an annual low in late summer.

Slaughter lamb prices at auction forecasted to rally through the spring before weakening in June.

Substitute Meat Prices Could Soften, Weakening Lamb Demand

• High pork and poultry stocks could put downward pressure on prices this year, and, to the extent that lamb is a substitute, weaken lamb demand.

• Beef prices could remain high, – which helps lamb demand – and could stay firm through 2015.

• The Daily Livestock Report analysts do not expect increased beef imports to burden the market; they could help alleviate shortages of grinding beef going into the grilling season (4/24/15).

Retail Beef Topped $6 per Pound:In Q1 all fresh retail beef averaged $602.72/cwt., up 1% quarterly and up 15% year-on-year.

Income Growth Supports Lamb Demand -- In Jan. and Feb. per capita disposable income averaged $38,260, up 1% quarterly and up 3% year-on-year.

“A clear bright spot for the U.S. economy and the meat/poultry sectors has been consumer

expenditures on food,” (LMIC, 4/13/2015).

• Aggregate food sector retail sales in February were up 5.3% compared to 2014’s (LMIC, 4/13/2015).

• For the first quarter of this year expect foodservice and restaurant sales to increase 7% year-on-year (LMIC, 4/13/2015).

• LMIC explained: Those gains have been driven by growth in disposable income which gained momentum in late 2014 and continued in the most recent reports. For the balance of 2015, year-over-year increases could moderate (4/13/15).