6. I. Feeder and Slaughter Lamb Market Trends

7. Auction Feeder Lamb (60- to 90-lb.) Prices Weakened Sharply The 3-market feeder lamb auction price saw a 14- percent quarterly decline to $182.57/cwt., down 20% year-on-year. Markets included San Angelo, Ft. Collins and Sioux Falls. Prices averaged $213.97/cwt. in April, $180.98/cwt. in May and $152.75/cwt. in June.

9. Three Markets Converge in Q2

10. Feeder Lambs in Direct Trade Averaged $145.59/cwt., 19% Lower Quarterly, 20% Lower Year-on-Year Feeder & Slaughter Lamb Prices Converge

11. Volume of Direct Feeder Lambs More than Doubled Quarterly (up 120%) to 45,100 head, Up 111% Year-on-Year But in the first-half of the year, the volume was less than half of last year’s mid-year volume.

12. Second-Quarter Feed Costs Still High Corn averaged $6.31 per bu. in Q2, 1% higher quarterly and down 1% from a year ago. Corn averaged $6.34 per bu. in April, $6.33 per bu. in May and $6.25 per bu. in June. Alfalfa averaged $207.66 per ton in Q2, 5% higher quarterly, 30% higher year-on-year. Alfalfa averaged $207 per ton in April, $215 per ton in May and $201 per ton in June.

15. Auction Slaughter Lamb Prices Down Quarterly, but Up Historically Live, slaughter lamb prices at auction lost 7% to $140.79/cwt. between quarters and lost 22% year-to-year. Prices averaged $147.89/cwt. in April, $140.41/cwt. in May and $134.09/cwt. in June.

16. Q2 was Still 17-Percent Higher than its Second-Quarter 5-Year Average of $120.66/cwt.

17. Q2 Prices Fall Unseasonably Due Likely to Retail Slowdown

18. Carcass-Based Formula Slaughter Lamb Prices Lower Quarterly & Year-to-Year At 135,800 head, formula trades were down 10% quarterly and up 9% year-on-year. Slaughter lamb prices on a carcass-based formula averaged $301.26/cwt. ($151.63/cwt. live-converted) in Q2, down 9% quarterly, and down 17% year-on-year. Weighted-average prices were $315.38/cwt. in April, $297.46/cwt. in May and $290.95/cwt. in June.

20. Auction Prices Hold Below Formula Prices

21. Premium for Lightest-Weight Carcasses Narrowed by June

22. II. Feeder and Slaughter Lamb Price Projections

23. Lamb demand in the third quarter could get a boost from possible higher beef prices, but not necessarily from income gains. The ALB is challenged to boost consumer’s preference for lamb through continued taste samplings and promotions. Consumer Demand is Key to Stronger Feeder and Slaughter Lamb Prices… and Ultimately to Industry Growth

24. If Beef Prices Move Higher, It Could Support Lamb Demand Fresh retail beef averaged $4.65/lb. in Q2, up 0.02% quarterly and up 4.6% year-to-year.

25. Positive Income Growth Can Promote Lamb Demand, But Recent Growth Minimal Inflation-adjusted disposable income gained 0.2% monthly in May (Bureau of Economic Analysis, 7/2012). Per capita disposable income gained 0.15% between Q4 2011 and the first quarter.

26. Disposable (Take-Home) Personal Income Has Been Flat

27. Lamb Prices Forecasted to Gain Quarterly and Post Lower Year-to-Year Values in Q3 The Livestock Market Information Center (LMIC) estimated in late July that carcass-based formula slaughter lambs could strengthen quarterly by an estimated 11% in Q3 to $332/cwt. and average about 12% lower year-to-year. Forecasts based upon underlying tight supply situation. If all meat moves higher with higher corn prices then retail lamb might also gain, helping to support higher slaughter lamb prices.

28. Feeder Lamb Forecasts USDA Agricultural Marketing Service (AMS) reported in July: “Demand very light and trade activity slow. With the overstock of market ready lambs in the feedlot and a decreasing carcass market, lamb feeders are very reluctant to buy feeder lambs.” USDA/AMS continued: “Corn and hay prices are increasing rapidly pushing cost of gains to even higher levels. The combination of all these factors coupled with very light consumer demand is pushing bids for feed lambs lower.” However, (higher-valued) New Crop relative to Old Crop sales could continue to drive feeder market. LMIC estimated that 60-lb. to 90-lb. Texas feeders could average $190/cwt. in Q3, 5% higher quarterly and 8% lower year-to-year.

29. Seasonal Price Indices Contradict LMIC Forecasts In 2010 and 2011, increasingly tight supplies trumped other seasonal factors, overwhelming seasonal patterns. Current lower demand and short-term ample feedlot supplies can trump the fundamental of continued tight lamb supplies resulting in softer, not stronger, prices. 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.

30. The index for feeder lamb prices at auction estimated a 10% price weakening in Q3 from its annual average.

31. The index for converted formula carcass-based slaughter lamb prices estimated a 0.07% weakening in Q3.

32. The index for live, auction, slaughter lamb prices forecasted an 8-percent weakening—from its annual average--- in Q3.

33. Forecasts for Higher Lamb Feed Bill In the 18 primary corn-growing states, 30 percent of the crop is now in poor or very poor condition, up from 22 percent the previous week (U.S. Drought Monitor, 7/10/12). Half of the nation’s pastures and ranges were in poor or very poor condition as of July 10, up from 28% in mid-June (U.S. Drought Monitor, 7/10/12). The hot, dry conditions have also allowed for a dramatic increase in wildfire activity since mid-June. As of early July, the year-to-date acreage burned by wildfires increased from 1.1 million to 3.1 million (U.S. Drought Monitor, 7/10/12). 80% chance that December corn is forecasted to range between $5.90 and $10.10 per bu. (Hilker, J., MSU, 7/25/12).

34. Hay Forecasted to Stay High It is forecasted that hay acres could increase 3% this year (USDA, 4/30/12). LMIC reported, “Hay prices in most regions of the nation are still expected to be below a year ago, even in alfalfa, but this is largely expected because of the pull-back demand by the livestock industries, especially dairies. Dairies and cattle feeders alike struggled with high prices last year and have not recuperated from costs,” (7/9/12).

35. III. Carcass and Boxed Lamb Market Trends

36. Carcass Prices Lower, Yet 37% Higher than its 5-Year Q2 Average Carcass prices averaged $366.10/cwt. in Q2, 2-percent lower quarterly and a down 6% than a year ago. East Coast carcass price was $377.70/cwt. in April, $368.51/cwt. in May and $352.10/cwt. in June.

39. Carcass Trade 17% of Total Weekly Slaughter, Down from Average 22% in 2010 & 2011

40. YG 1 and 2 Down in 2012 Yield Grade determination is positively correlated with heavier slaughter lambs and increased deposits of back fat. Yield Grade 1 & 2 in lbs. was 32% in Jan.-May of total slaughter compared to 39% a year ago. Yield Grade 4 & 5 in lbs. was 28% in Jan.-May compared to 18% a year ago.

41. Affect of Heavier Carcasses Larger carcass will have a larger loin eye/rib eye area, which can make them more valuable. Plant throughput is inherently higher with larger carcasses. However, the shoulder is one item that is difficult to remove fat from when the carcasses are Yield Grade 4 or 5. Trimming it can be labor intensive and will squeeze packer margins. Legs and loins primarily carry fat on the outside of the cut.

42. YG1 YG2 YG3 YG4 YG5 20074%32%47%12%3% 20085%5%31%47%14%3% 20094%34%45%14%4% 2010 5%38%43%13%2% 2011 4%27%49%17%3% 1-5/2012 4%24%36%21%15% Yield Grades for Federally Inspected Lamb and Mutton Percentages, Fiscal Year Source: USDA, AMS, Livestock and Seed Division.

43. YG 1 & 2 Trended Down Since Mid-2011

44. The gross carcass value averaged $356.72/cwt. in Q2, down 7% quarterly and down 12% year-to-year. Gross carcass price was $367.25/cwt. in April, $359.03/cwt. in May and $343.89/cwt. in June. Q2 Gross Carcass Value (Wholesale Average) Softer Quarterly and Year-to-Year

45. Second-Quarter Gross Carcass Value was 22% Higher than its 5-Year Average

46. Gross Carcass Value Down $66/cwt. Since Record-High Last November

47. Wholesale Rack Dropped Below $7/lb. for First Time Since Mid-2010 The rack averaged $681.97/cwt. in Q2, down 12% quarterly and down 24% year-on-year. The rack was $715.18/cwt. in April, $685.62/cwt. in May and $645.11/cwt. in June.

48. June Rack Falls Back to 2010 Levels

49. Q2 Loins Gained Year-to-Year in June Loins, trimmed 4x4, averaged $522.49/cwt., down 1% quarterly and up 0.4% year-to-year. Loins were $513.34/cwt. in April, $515.73/cwt. in May and $538.40/cwt. in June.

50. Loins Holds Value Compared to Summer Values in the Past Two Years

51. Leg, Trotter-Off, Down Quarterly and Down Year-to-Year The leg averaged $415.26/cwt. in Q2, down 5% quarterly and down 7% year-to-year. The leg was $426.03/cwt. in April, $418.55/cwt. in May and $401.19/cwt. in June.

52. Leg Still High Historically

53. Shoulder Gained Sharply in 2011 The shoulder averaged $251.38/cwt. in Q2, down 11% quarterly and down 22% year-on-year. The shoulder was $265.03/cwt. in April, $256.50/cwt. in May and $232.61/cwt. in June.

54. Shoulder is an expensive cut to remove fat from when the carcasses are heavier, Yield Grade 4 or 5.

55. Ground Lamb is One Item That Gained Quarterly Ground lamb averaged $590.98/cwt. in Q2, up 0.4% quarterly and up 4% year-on-year. Ground lamb and loins only products to gain year-to- year.

56. IV. Retail Feature Activity

57. Retail Prices Move Up Quicker Than They Come Down When wholesale prices drop, retailers are reluctant to drop prices, but will increase featuring. USDA/AMS reported lower wholesale prices make it “more favorable” for retailers to feature lamb into June. In Q2 feature activity jumped 20% quarterly and was up 40% year-to-year. Feature-average prices in Q2 were $7.00/lb., up 6% from a year ago and up 3% quarterly. In Q2 some higher-valued items such as rack and rib chops were featured more, moving the average price higher.

58. Feature Activity Aimed to Move Product Feature activity of the shoulder blade chop—one of the more featured items-- was up 30% in Q2 year-to-year with prices down 3% to $5.12/lb. Offseason leg features unusual, yet…leg feature activity was up 61% in Q2 compared to a year ago with feature prices averaging $7.48/lb., down 1% year-to-year. Loins chops are often featured during the summer grilling season. This year, feature activity was up 34% in Q2 with prices 7% lower from a year ago at $9.32/lb.

59. Shoulder blade chop prices—one of the more featured products—dropped sharply into July.

60. V. Price Spreads

61. The Rack-Loin Price Spread very Volatile, Marginally Higher The rack-loin price spread fell 36% in Q2 to $1.59 per lb., down 57% year-on-year.

62. Feeders in the Red due to Heavy Lambs, Prolonged Days on Feed & Higher Feed Costs Industry still killing Old Crop (OC) lambs when OC lambs often finished slaughtering by May. Producers losing an estimated $38 per cwt. or $76 per head. June estimated break-even was $172 to $185 per cwt. compared to $134 to $147 per cwt. slaughter lambs (auction & live-converted formula slaughter lamb price). By comparison, LMIC reported that July steers sold on cash market lost more money than ever before, over $250 per head (7/9/12).

63. Cost of gain up sharply in Q2 to $1.30 to $1.50 per lb. – about 20% higher than a year ago and 128% higher than its 5- year low in Q1 2010.

64. Sensitivity Break-Even Analysis A : June kill of Old Crop California feeders that entered Colorado feedlots in January at $1.30 cost of gain. ItemCost 1. Total cost of feeder (75-lb. CA feeder @ $232 per cwt.) $174/head 2. Freight from California$8.00/head 3. Cost of Gain in Colorado feedlot (125 lbs. gained @ $1.30/lb. to 200 lbs.) $162.50/head 4. Break-even price of slaughter lamb @ 200 lbs.$344.50/head Break-Even$172.25/cwt.

65. Sensitivity Break-Even Analysis B: June kill of Old Crop California feeders that entered Colorado feedlots in January at $1.50 cost of gain. ItemCost 1. Total cost of feeder (75-lb. CA feeder @ $232 per cwt.) $174/head 2. Freight from California$8.00/head 3. Cost of Gain in Colorado feedlot (125 lbs. gained @ $1.50/lb. to 200 lbs.) $187.50/head 4. Break-even price of slaughter lamb @ 200 lbs.$369.50/head Break-Even$184.75/cwt.

66. Live to Carcass Price Spread Up The value of live slaughter lambs fell more sharply than carcass values. The live to carcass price spread averaged $82 per cwt., up 7% quarterly and up 118% year-to-year.

68. Carcass to Cutout (Ave. Wholesale Values) Price Spread Fell into Negative The carcass held its value relative to the weaker cutout value. The carcass was worth $7/cwt. more than the cutout in Q2. The carcass to cutout spread was -$7/cwt. in Q2, down 222% quarterly from $6/cwt. and down 173% year-on-year from $10/cwt.

70. Cutout to Live Spread was $59/cwt., down 8% in Q2 and up 78% Year-to-Year In Q2, the cutout weakened by more than the live lamb.

71. VI. Pelts

72. Late Q2 U.S. Pelt Prices Suspended Under Limited Trade and Weaker Demand Stronger U.S. dollar made U.S. pelts less competitive in international markets. Heavy offerings from Australia, Ireland and England flooded the market leading to lower prices (USDA/AMS, 6/2012). Early Q2 prices: Fall Clips were $15.50 per piece, down 13% quarterly and down 2% year-to-year. Early Q2 prices: No. 1 pelts were $14.06 per piece, down 6% quarterly and up 4% year-to-year. Recall pelt prices are prices received by packers.

73. Absence of Pelt Report Interrupted LRP-Lamb Several weeks of pelt prices were not reported in June and July due to the lack of pelt trades. Coverage price for LRP-Lamb not issued during this time. LRP-Lamb is based upon a slaughter lamb price prediction model in which pelt prices are an integral component because slaughter lamb offers can be partly a function of pelt prices.

75. VII. Replacement Sheep

76. Ewes Not Traded; Rams Weaker Only ram prices reported in the second quarter (only in April), ewe trades not established. In April, black-faced rams averaged $573.31 per head, white-faced rams were $597.28 per head and cross-bred rams were $549.19 per head. Prices about 27% lower than a year ago.

78. VIII. Domestic Production and Trade

79. Federally-Inspected (FI) Lamb & Mutton Production Up in Q2 At 687,437 head, FI slaughter was up 41% quarterly and up 32% year-on-year. FI lamb & mutton production was 52 million lbs. in Q2, up 39% quarterly and up 46% year-on-year. Heavier weights boosted production.

80. Estimated Slaughter Weights Climbed Through Q2, Boosting Production 153-lb. Average in Q2, up 2% Quarterly and Up 5% Year-to-Year.

81. Estimated Q2 Lamb Slaughter was Up 34% Year-on-Year and Production was Up 40%

82. Q2 Estimated Lamb Production a Higher Portion of Easter Production Than in Past Years

83. June Cold Storage was 19.7 Mill. Lbs., Down 0.13% Monthly and Up 31% Year-on-Year

84. Lamb Imports Through May Totaled 54 Mill. Lbs. -- Down for 3 rd Consecutive Year in this Period

85. Lamb Imports Through May Down 8% Year-to-Year

86. Australian lamb imports through May were 36.4 Mill. Lbs., down 6% Year-to-Year Through May, NZ’s lamb imports were 17.6 Mill. Lbs., Down 13% Year-to-Year

87. At 9.2 million lbs., mutton imports were 63% lower in the five months through May year-to-year. Mutton imports from Australia were 6.5 million lbs., down 45% in this period. New Zealand mutton imports were down 79% to 2.8 million lbs. Mutton Imports Sharply Lower Year-to-Year

89. Lamb & Mutton Exports were 4.4 Million Lbs. through May, down 46% Year-on-Year

90. At 146,000 lbs., lamb exports were down 72% through May year-to-year. Mutton exports totaled 4.3 million lbs. through May, down 44% year-on- year.

91. Live Sheep Exports Down 53% Through May U.S. live sheep exports to Mexico were zero through May. Last live exports to Mexico were in early November Live exports to Canada were down 34% through May to 19 million lbs.

92. Cull Ewe Prices Fall in Q2, but High Historically San Angelo ewe prices averaged $54/cwt. in Q2, down 28% quarterly and up 4% year-on-year and 29% higher than its 5-year Q2 average.

93. IV. Total Lamb and Mutton Supplies

94. Through May total lamb availability (imports plus domestic production, subtracting exported lamb volume) was 115.4 million lbs., down 2% year-on-year. Through May, U.S. domestic lamb production was up 3% year-to-year and lamb imports were down 8%. Total Lamb Availability Contracted in Five Months Through May Compared to a Year Ago

95. Total Lamb Availability Contracted an Annual Average of 3% from 2006 to 2011

96. U.S. Lamb Market Share Up In the five months through May, domestic lamb market share was 53%, up 4% year-to- year. Through May, domestic lamb & mutton market share was 51%, up 18% year-to- year. Through May, domestic mutton market share was 29%, up 60% year-on-year.

98. X. Imported Product Price Comparisons

99. U.S. Leg Loses Competitiveness Compared to 2011 In the first five months of 2012, the U.S. leg, trotter-off, was $4.31 per lb. and the imported leg was $4.11 per lb.

100. Through May, the U.S. Leg Had a $0.20 per lb. Premium, Compared to -$0.15 per lb. a Year Ago.

101. U.S. Loins Less Competitive In the first five months of the year, the U.S. loins, trimmed 4x4 was $5.23 per lb. and the imported loins was $5.19 per lb.

102. U.S. Loins Gained Competitiveness U.S. loins held a $1.21/lb. premium in Jan.-May 2011 and narrowed to $0.06/lb. this year.

103. U.S. Rack Less Competitive U.S. rack still less competitive in Q2, but both values down quarterly.

104.  The U.S. rack averaged $1,473/cwt. in Jan.-May and the imported equivalent was $1,104/cwt. U.S. Gained 15% in Price Competitiveness between Jan.-May 2011 and the same period 2012.

105. XI. Exchange Rates

106. Stronger U.S. Dollar in Q2 Rate change makes imports relatively more competitive and exports less competitive. In Q2 the U.S./Australian dollar was $1.01 down 4% quarterly and down 5% year-to-year. In Q2 the U.S./New Zealand dollar hit $0.79, down 3% quarterly and down 1% year-to-year.