Second-Quarter 2013 Sheep Industry Review Prepared by American Sheep Industry Association for the American Lamb Board July 2013

Executive Summary The lamb industry is finding it footing after record-high prices in 2011 followed by a record collapse in In 2013, the carcass market was flat, the wholesale market continued to lose value—albeit at a slower pace—and the feeder and slaughter lamb markets were down 25% to 42% from a year ago. This year the industry is challenged to keep the slaughter chain moving and maintain quality, while facing a surge of imports at retail. Lamb imports totaled 63.5 million lbs. in January through May – up 17% year-to-year. A combination of forces prompted the influx of lamb imports. Meat and Livestock Australia reported that widespread dry conditions across most sheep growing regions and heavier weights over the past five years prompted high slaughter and production (7/5/13). Sheep and lamb slaughter from January to May was at a three-year high. Coupled with increased Australian production has been the recent strengthening of the U.S. dollar against the Australian dollar. Since January, the Australian dollar lost 12% against the US$ to land at 94 Australian cents per USD. It is anticipated that the Australian dollar will fall even further. In January through May, total lamb availability (imports plus domestic production, subtracting exported lamb) in the U.S. was million lbs., up 8% year-on-year. However, cold storage stocks were still high. When cold storage is subtracted from disappearance, a downward trend is 2013 availability is revealed. Uncertainty prevails in estimating volume marketed: We don’t know what percent of cold storage is imported product.

Executive Summary, page 2 In July a light supply of old and new crop lambs continued to move to market out of Colorado feedlots. Tight domestic supplies in the third quarter, coupled with a slowdown in imports will help support both feeder and slaughter lamb prices in coming months. In early July, LMIC forecasted that third-quarter national direct slaughter lambs on a carcass weight could range from $235 to $245 per cwt., up from an estimated $225 per cwt. in the second quarter, but down 5% year-on-year. Sixty- to 90-lb. 3-market feeder lamb prices at auction were forecasted to range between $125 and $135 per cwt., up 29 percent from a year ago and up from an estimated $114 per cwt. in the second quarter. Through July and into early August, the Muslim observance of Ramadan will likely encourage increased retail lamb featuring activity. In early July, the New Holland auction saw an uptick in slaughter lamb prices. Feeder & Slaughter Lamb Markets The 3-market feeder lamb auction price saw a 29-percent quarterly drop to $114.01/cwt., down 42% year-on-year. Markets included San Angelo, Ft. Collins and Sioux Falls.

Executive Summary, page 3 Feeder lambs in direct trade averaged $98.65 per cwt. in the second quarter, down 10% quarterly and down 32% year-to-year. Live, slaughter lamb prices at auction lost 6% quarterly to $109.20/cwt. and lost 27% from $141/cwt. a year ago. Slaughter lamb prices on a carcass-based formula averaged $224.87/cwt. ($112.21/cwt. live-converted) in the second quarter, down 0.5% quarterly and down 25% year-on-year. Feedstuffs remained high into the second quarter with minimal relief. Corn averaged $6.99 per bu., down 1% quarterly and up 10% year-on-year. High cost of gain meant weights going into feedlots were lower in 2013 over Weighted average carcass prices were $249.67/cwt. in the second quarter, 0.5% lower quarterly and down 24% from a year ago. The gross carcass value averaged $284.88/cwt. in the second quarter, down 2% quarterly and down 20% year-to-year. Federally-inspected slaughter lamb weights averaged 142 lbs. in the second quarter, down 7% year-on-year. Yield Grade 4 & 5 in lbs. was 24% of total slaughter in the first- half 2013 compared to 30% in 2012.

I. Feeder and Slaughter Lamb Market Trends

 The 3-market feeder lamb auction price saw a 29-percent quarterly drop to $114.01/cwt., down 42% year-on-year.  Markets included San Angelo, Ft. Collins and Sioux Falls.  Prices averaged $120.34/cwt. in April, $116/cwt. in May and $105.70/cwt. in June. Auction Feeder Lamb (60- to 90-lb.) Prices Down 42% in a Year

Three Markets Mostly Move Together

Feeder Lambs in Direct Trade Fell Quarterly o Feeder lambs averaged $98.65 per cwt. in Q2, down 10% quarterly, and down 32% year-to- year. o Feeders averaged $97.92/cwt. in April, $100.71/cwt. in May and $97.31/cwt. in June.

Feeders in Direct Trade Down 57% in Value from Record High

Q2 Volume of Direct Feeder Lambs Down 10% Quarterly to 55,350 Head; Down 32% Year-to- Year 45,10055, %-9.98%

Feed Costs Still High Historically  Corn averaged $6.99 per bu. in Q2, down 1% quarterly and up 10% year-on-year.  Corn averaged $6.97 per bu. in April, $6.97 per bu. in May and $7.02 per bu. in June.

Goodbye $2 Corn

 Alfalfa averaged $ per ton in the quarter ending April (season’s end), up 0.5% quarterly and 8% higher year-to-year.  Alfalfa was $218 per ton in April, $219 per ton in May and $215 per ton in June.

 Live, slaughter lamb prices at auction lost 6% quarterly to $102.53/cwt. and lost 27% from $141/cwt. a year ago.  Prices averaged $98.59/cwt. in April, $101.88/cwt. in May and $107.13/cwt. in June. Auction Slaughter Lamb Prices Weakened Quarterly

Auction Slaughter Lamb Prices Over Time

Q2 Auction Slaughter Lambs on Par with 2009 Q2 Auction Slaughter Lambs on Par with 2009

 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 $224.87/cwt. ($112.21/cwt. live-converted) in Q2, down 0.5% quarterly and down 25% year- on-year.  Weighted-average prices were $227/cwt. in April, $222.76/cwt. in May and $224.85/cwt. in June. Carcass-Based Formula Slaughter Lamb Prices Up Quarterly & Down Year-to-Year

Second-Quarter Slaughter Lamb Prices on Formula Hit a 4-Year Low

Auction Slaughter Lamb Still Lower than Slaughter Lamb Prices on Formula

Weight Helps Defines Value

The “market” is selecting for value and cost minimization: Reduced $ for heavies. -- Heavier lambs often have higher fabrication costs.

II. Feeder and Slaughter Lamb Price Projections

  LMIC early July forecast:   National direct slaughter lambs on a carcass weight: $235 to $245 per cwt., up from $225 per cwt. quarterly, but down 5% year-on-year.  (CO, SD, TX)  Sixty- to 90-lb. 3-market (CO, SD, TX) feeder lamb prices at auction: $125 and $135 per cwt., up 29% from a year ago and up from an estimated $114 per cwt. in Q2.  These volatile times means any price forecast should be used with caution. Feeder & Slaughter Lamb Q3 Forecasts

 Price trends--up or down--depend on which factor dominates, supply or demand.  During the summer, slaughter lamb supplies tighten, supporting prices. The third quarter is typically the highest- priced quarter.  When feeders come to market in the fall and supplies increase, prices tend to weaken.  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. Seasonal Index Lends Predictive Insight

Slaughter lambs on formula are expected to gain one- half percent in Q3 quarterly. LMIC forecasted tight supplies and lower imports could provide even stronger Q3 price support.

In Q3, feeder lambs at auction could weaken by 8% from the second quarter by historical trend. LMIC forecast differed: prices expected to gain in Q3

  Q3 commercial slaughter numbers could slow 6% quarterly, 3% below a year ago.   Estimated commercial lamb supplies on feed in Colorado were the lowest going into Q3 in 5 years.   This forecasted quarterly slaughter drop is the largest in over 5 years.   At the LMIC-forecasted Q3 dressed weight of 66 lbs., lower slaughter weights will translate into much lower production.   Production is estimated to fall 10% quarterly and 9% year-on- year. LMIC Forecasted Sharp Q3 Production Contraction

Lamb Demand Forecast? Tighter Q3 Supplies, Strong Beef Prices (Although a bit softer), Stronger Income Growth, and Quality Consistency ….Could Support Lamb Demand **Demand growth is key to stronger prices.

Source: U.S. Dept. of Commerce Slowly, but Surely Real Incomes Making a Sustained Come Back

Weaker Beef Prices Could Hurt Lamb Demand All fresh retail beef was $ per cwt. in Q2, down 1% quarterly, up 5% year-on-year % %

  Likely significant yield growth over last year and modest acreage expansion drive corn price forecasts lower.   The LMIC forecast is currently at $4.60 per bushel, down 33% from  The farm price for corn in 2012/13 is estimated at $6.75 to $7.15. The projected price range for 2013/14 is $4.40 to $5.20 per bushel (USDA, 7/15/13).   Improved pasture & range conditions and lower-priced competing feed could mean softer hay prices this year (LMIC, 6/2013). Relief in Sight for High Lamb Feed Costs

 Recall the breakeven analysis is only one snapshot of feedlot marketing.  In April/early May, over 22,000 head traded out of CA at $96.50/cwt. and 106 lbs.  July estimated break-even was $114 to $121 per cwt. compared to $114 per cwt., the live-converted formula carcass-based price. Lower Feeders, Stable Feed Helped Improve Margins

Cost of gain increased marginally in Q2.

Sensitivity Break-Even Analysis A: July kill of April/May California lambs with a $1.30 per lb. cost of gain. ItemCost 1. Total cost of feeder (106-lb. $96.50 per cwt. in April/May 2013) $102.30/head 2. Average Freight from California$9.00/head 3. Cost of Gain in Colorado feedlot (61 lbs. $1.30/lb. to 167 lbs.) $79.30/head 4. Break-even price of slaughter 167 lbs.$190.60/head Break-Even$114/cwt.

Sensitivity Break-Even Analysis B: Sensitivity Break-Even Analysis B: July kill of April/May California lambs with a $1.50 per lb. cost of gain. ItemCost 1. Total cost of feeder (106-lb. $96.50 per cwt. in April/May 2013) $102.30/head 2. Average Freight from California$9.00/head 3. Cost of Gain in Colorado feedlot (61 lbs. $1.50/lb. to 167 lbs.) $91.50/head 4. Break-even price of slaughter 167 lbs.$202.80/head Break-Even$121/cwt.

III. Carcass and Boxed Lamb Market Trends

 Weighted average carcass price averaged $249.67/cwt. in Q2, 0.5% lower quarterly and down 24% from a year ago. Carcass Prices Down 35% from Record High Carcass price was $247.99/cwt. in April, $249.73/cwt. in May and $251.29/cwt. in June.

2013 Carcass Market Flat

 Yield Grade determination is positively correlated with heavier slaughter lambs and increased deposits of back fat.  Yield Grade 4 & 5 in lbs. was 24% of total slaughter in the first-half 2013 compared to 30% in Carcasses Trimmer: YG 4s and 5s Coming Down

YG 4s and 5s Coming Down

YG1 YG2 YG3 YG4 YG %5%31%47%14%3% 20094%34%45%14%4% %38%43%13%2% %27%49%17%3% %28%37%18%12% 1 st Half %36%33%15%8% Yield Grades for Federally Inspected Lamb and Mutton Percentages, Fiscal Year Source: USDA, AMS, Livestock and Seed Division.

 The gross carcass value averaged $284.88/cwt. in Q2, down 2% quarterly and down 20% year-to- year.  Gross carcass value was $288.76/cwt. in April, $283.13/cwt. in May and $282.76/cwt. in June. Q1 Gross Carcass Value (Wholesale Average) Weakened Quarterly and Year-to-Year

 The rack averaged $509.30/cwt. in Q2, down 0.25% quarterly and down 25% year-on-year.  The rack was $510.25/cwt. in April, $501.97/cwt. in May and $515.68/cwt. in June. Wholesale Rack Gained in Late Q2

 Loins, trimmed 4x4, averaged $452.11/cwt., down 1% quarterly and down 13% year-to-year.  L oins were $450.22/cwt. in April, $450.50/cwt. in May and $455.60/cwt. in June. Q2 Loins Down Quarterly

 The leg averaged $314.89/cwt. in Q2, down 2% quarterly and down 24% year- to-year.  The leg was $322.38/cwt. in April, $312.48/cwt. in May and $309.81/cwt. in June. Leg, Trotter-Off, Down Quarterly & Down Year-to-Year

 The shoulder averaged $231.05/cwt. in Q2, down 4% quarterly and down 8% year-on-year.  The shoulder was $236.44/cwt. in April, $232.01/cwt. in May and $224.71/cwt. in June. Shoulder Lost Greatest % Among Primals in Q2

 Ground lamb averaged $531.81/cwt. in Q2, down 2% quarterly and down 10% year- on-year.  Ground lamb was $528.17/cwt. in April, $531.89/cwt. in May and $535.38/cwt. in June. Ground Lamb Gained in Q1, Lost in Q % %

IV. Retail Feature Activity

 Feature activity in Q2 was down 18% quarterly and up 9% year-to-year.  Prices listed in lamb features averaged $6.52 per lb. in Q2, down 6% quarterly and down 6% year-to-year (USDA/AMS, 7/13).  Product and quality wasn’t necessarily constant over this period.  Mix of products at retail could have changed over time. Retail Prices Lower in 2013 Year-on-Year

 Loin chops averaged $9.21 per lb. in June, down 9% year-on-year.  Shoulder blade chops were $4.90 per lb., down 44% year-on-year.  Shoulder round bone chops averaged $5.68 per lb., down 32% year-on-year. Summer Grilling More Competitive

Ramadan Takes Center Page ). --“Retailers focused on popular shoulder and loin chops,” ). -- In late July, the rack received a boost in featuring. Ramadan Takes Center Page --Feature ads increased generally through June & July. --“The religious holiday was noted in several ads throughout the northeast,” (USDA/AMS, 7/12/2013). --“Retailers focused on popular shoulder and loin chops,” (USDA/AMS, 7/12/2013). -- In late July, the rack received a boost in featuring.

V. Price Spreads

 The rack-loin price spread averaged $0.57 per cwt. in Q2, up 10% quarterly and down 64% year-to-year.  The loins fell sharper than the rack in Q2. The Rack-Loin Price Spread Gained 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.

The live to carcass price spread averaged $46.27 per head, up 21% quarterly and down 8% year- to-year. -- In Q2, slaughter lamb prices up, carcass down.

Live to cutout spread was $72 per head, up 6% quarterly and down 9% year-to-year. -- Live lambs were up while the cutout lost value in Q2.

Carcass to cutout spread was $25 per head in Q2, down 12% quarterly and down 9% year-on- year. --The cutout fell 2% while the carcass lost under 1%.

VI. Pelts

 Prices fell in June as light end-user demand caused build-up in supplies (USDA/AMS, 6/2013).  Fall Clips were $13.99 per piece in Q2, up 6% quarterly and down 8% year-to-year.  No. 1 pelts were $10.90 per piece in Q2, down 0.06% quarterly and down 21% year-to-year. Late-Quarter Lighter Demand Prompted Supply Increases

Recall pelt prices are prices received by packers for pelts from slaughter lambs processed.

VII. Replacement Sheep

 May and June prices not established.  In April: Ewes:  2-4 years: $125 per head,  5-6 years: $94 per head,  over 6 years: $70 per head. Rams:  black-faced rams at $523 per head,  $531 per head for white-faced,  $470 per head for crossed. April Replacement Ewes Down 49% Year-to-Year

VIII. Domestic Production and Trade

 In the first-half of the year, estimated lamb slaughter was up 6% year- on-year.  Production was 494,319 lbs. in Q2, up 0.3% quarterly and down 1% year-to-year. Steady with a Year Ago Estimated Lamb Production About Steady with a Year Ago

Slaughter weights in Q2 held at 142 lbs., down 7% from 153 lbs. a year ago. -- Weights on formula lambs averaged 167 lbs., up 4% quarterly & down 7% year-on-year.

Q2 Cold Storage Averaged 20 Mill. Lbs. Monthly, Up 0.3% Quarterly and Down 2% Year-on-Year -- Recall that some portion of cold storage is imported product.

At 78.5 million lbs., lamb and mutton imports in Jan.-May was 24% higher year- on-year. 65, %

Lamb Imports Totaled 63.5 Mill. Lbs. in Jan. to May – Up 17% Year-to-Year

Lamb Imports Higher Each 2013 Month Except May

 Australian lamb imports in Jan.-May were 42.9 mill. lbs., up 18% year-to-year.  NZ’s lamb imports were 20.5 mill. lbs., up 17% year- to-year.

 At 15 million lbs., mutton imports were 63% higher in Jan.-May compared to a year earlier.  Mutton imports from Australia were 10.2 million lbs. in Jan.-May, up 57% year-to-year.  New Zealand mutton imports were up 68% to 4.6 million lbs. in this period. Mutton Imports Sharply Higher Year-on-Year

, down 14% Year-on-Year Lamb Exports Shot Up in May --Lamb & Mutton Exports were 3.8 Million Lbs. in Jan.- May, down 14% Year-on-Year

 At 263,000 lbs., lamb exports were up 80% in Jan.- May year-to-year.  Mutton exports totaled 3.6 million lbs. in Jan.-May, down 17% year-on-year.

 U.S. live sheep exports to Mexico were 8,485 head in Jan.-May, 124% higher quarterly and compared to 0 head a year ago.  At 4,408 head, live exports to Canada were down 79% year-to-year. Total Live Sheep Exports Down 29% Year-to-Year thru May to 14,107 Head

Cull Ewe Prices Lowest Since 2009 Cull Ewe Prices Lowest Since 2009 San Angelo ewe prices averaged $32.93 per cwt. in Q2, down 37% quarterly and down 39% year-on-year.

IX. Nontraditional Market

 The nontraditional market is often characterized by a lighter-weight lamb, around 100 lbs., but very variable depending upon customer.  The nontraditional market is comprised of lambs sold direct to consumers.  The largest nontraditional markets are the livestock auctions at New Holland, PA and San Angelo, TX, but nontraditional markets exists across most auctions. Nontraditional Market Weakened in Q2

The New Holland, PA nontraditional auction market averaged $128.38/cwt. in Q2, down 6% quarterly and down 26% year-to-year.

X. Total Lamb and Mutton Availability

 In Jan.-May total lamb availability (imports plus domestic production, subtracting exported lamb) was million lbs., up 8% year-on-year.  In this time, U.S. domestic lamb supplies were up 1% to 61.1 million lbs. compared to a year ago.  Imports were up 17% year-to-year to 63.5 million lbs.  Note: These figures do not include the nontraditional market estimated volume. Total Lamb Availability Up Through May Year-on-Year

Lamb Availability Trending Up?

We Don’t Really Know How Much Product is on the Market --When cold storage is subtracted, availability trends down in 2013.

 In Jan.-May: Domestic lamb market share was 49%, down from 53% year-on-year. Domestic lamb & mutton market share was 43%, down from 51% year-to-year. Domestic mutton market share was 16%, down from 29% a year ago. U.S. Lamb Dipped Below 50%

XI. Imported Product Price Comparisons

Domestic & Imported Cuts not Identically Specified: Challenges an “Apples to Apples” Comparison U.S. Commerce data only offers broad cut categories. There are limitations to USDA/AMS/MRP import data: Confidentiality measures can sometimes prohibit price reporting. The volume threshold might not be met if smaller importers/reduced volumes are imported.

Imported Cuts Follow General Trend of U.S. Cuts -- Recall imported product is lighter weight.

Price Comparison with Imports is Tricky Caveats: 1.Imported product might be sitting in cold storage and not competing with domestic product at a specific time period. 2.Imported product is lighter weight. 3.Prices reported in Commerce data could have been established in forward pricing.

U.S. Leg Weakened through May; Imports Higher, Volatile

U.S. Leg More Competitive than Imports; Imported Price Premium Grew in 2013

U.S. Rack Still Higher-Priced but Gained Competitiveness in 2013 –Note weight differences: U.S. rack lbs. and imported rack 28 oz.+

U.S. Rack Gaining Competitiveness in 2013

U.S. Gained Competitiveness in the Loins in 2013 as its Price Continued to Weaken; Imports Higher

Apr/May U.S. Loins Still More Competitive, but Lost Some Edge

Imported Shortloins Comparison with U.S. Loins under MPR

Shoulder Competitiveness Improved: Imported Shoulder Gained & Domestic Shoulder Weakened in Q2

XII. Exchange Rates

Since Jan., the Australian dollar lost 12% against the US$. In Q2 the U.S./Australian dollar fell 5% quarterly to $0.99 and down 2% year- on-year. In Q2 the U.S./New Zealand dollar hit $0.82, down 2% quarterly and up 4% year-to-year. The US$ Strengthened Against the A$ in 2013: Making Imports Relatively More Competitive