Drake's Market News
Submitted December, 2014.
In agriculture there are winners and losers. Some people would say that the farmer was the loser this year, yet the first half of 2014 says the farmer is a winner. Yes, grain markets have dropped during the second half of the year, but the farmer will not really be the loser until 2015.
The lamb producers had a good year as Mother Nature for the most part was gentle and producers had good lamb crops and good conditions going into winter or into the breeding season. FIS slaughter has moved up each year since 2010 yet the government has recorded less ewes 1 yr. old and older for the same period. The ethnic market has increased its demand for lamb and goat meat during this period of time. Other proteins have declined in their supplies during 2014; therefore the consumer will continue to have difficulty in the selection of cheap protein. In 2015, what will the consumer have in the way of choices for protein?
The implementation of COOL was seen as a victory for those that think the primary focus of US government is to provide domestic producers with advantageous access to US consumers. The reality of trade flows is that the US is by far a net meat protein exporter. Current forecasts are for US beef, pork, chicken and poultry production to be a total of 91.017 billion pounds in 2014. The US has an 11.84 billion lb. trade surplus when it comes to meat protein trade. And then there is lamb. Our industry will not get much of a look in the larger scheme of things. Over the past five (5) years our industry has produced about 146 million lbs. of product. At the same time, importers have increased imports to about 198 million lbs. of product or 136% of the domestic industry. At present I see this as a situation that our industry has to live with.
Next year I see our industry having 3.7 million ewes 1 yr. old or older. With the help of Mother Nature, these ewes should produce about 4 million lambs. This year the FI slaughter was about 2.1 million sheep and lambs. Next year the FI slaughter should be about 2.16 million sheep and lambs. Pressure is
coming from importers to take our domestic market. Packer/Processors fight between themselves for market share by using price reductions, thus putting pressure on margins. To a point the domestic consumer is loyal, but when we ask our consumer to pay for a lamb chop the size of a pork chop at lamb chop prices, the domestic consumer becomes not as loyal. We need to remember the costs at the plate. Our industry has done a great job of processing the chuck and the leg, but there is not a lot we can do with the middle meat that carries a lot of value. In the number game, the processor wants to process heavy lambs to cut cost, but that is not the whole picture. The consumer does not want the “pork chop” lamb chop or rack, and cut ability should still rein king.
Consumers’ viewpoints on a number of current conditions and their prospects for the next six months all waned slightly in November. Slightly lower proportions thought business conditions were good and that jobs were plentiful, while slightly higher proportions thought the opposite of those points. The share
of consumers expecting business conditions to improve fell by nearly 2% while about the same percentage now expect them to worsen. Should the $0.87 per gallon price decline seen since June last an entire year, it would free up roughly $113 billion dollars for US consumers. It is noted by economists that the renewed confidence consumers have expressed must be nurtured, not again held hostage to partisan differences in government.
A commodity that is in short (?) supply can be influenced by many factors. Over the past few years, the market price for live lamb has been influenced by auction markets. This is historically true. Lamb value based pricing will show the industry the bad lamb the industry is producing. Many of these lambs come through the auctions and sell for more than they are worth. This really happened this year. Major Lamb feeder buyers were trying to purchase feeders lambs with margins. Lamb feeders, some for the first time in six (6) years, seeing cheap (?) corn pushed the market in the auction markets to unrealistic breakeven prices. The country markets followed. The item that buyers forgot about was that the producer had a lot of grass and would market lambs later than normal, not that there was a shortage of lambs. Many of these lambs fed in the Midwest will come back to market starting the first of the year. These lambs will not have a home, will have weight, and trade in the $140.00/$150.00/cwt. range.
Over the past five (5) years, lamb numbers have been fully steady to increasing 3% per year. Government statistics do not agree with that statement, but once you get into the country, you find lambs. Drought areas like California and Texas have had trouble holding their numbers, but only slightly. Market prices, range conditions, and producer optimism have increased the inventory in the intermountain areas. This year is no exception. Producers are increasing their inventory. Why shouldn’t they? The Lamb Feeder (the eternal optimist) can’t pay enough for bad lambs. The cattle industry has great standards for the most part. All proteins with the exception of lamb follow guidelines. The weights in a load of lambs can vary 40 pounds.
Despite the anticipation of record 2014 US corn and soybean harvests, physical inventory of both commodities has been very slow to accumulate. As the lethargic grain flow has continued into November, processors and animal feeders have paid premiums for immediate delivery and are faced with the strategic challenge of determining when sufficient supply will be available. The four key supply constraints: late harvest, farmer storage, market incentive for commercial storage, and delays in rail transportation are not likely to be completely resolved until the end of Q1 2015.
Easter comes on April 5, 2015. This should push more slaughter into the first quarter of 2015. However, demand of lamb for the Christmas season has been slow. I see the price to the consumer as a major retarder and strong competition from imports will continue thru 2015. Next year the industry will slaughter about 2.16 million lambs. Imports will be a very big competition. To hold market share, the Packer/processor may have to lower the market that I project by about $30/40/cwt. than the present market. I am always bearish because my market is one that allows for good movement of product to the consumer, not forced movement. I see processors having problems keeping market share and packers having more than enough lambs to harvest. This will lead to weight problems starting in late January. If exports slow for the beef and port complex, consumers for domestic product will back up. The consumers’ dollar could be helped this coming year if oil stays low. Governments worldwide continue to print “funny money” to keep countries from moving into recession. Yet at some point countries run out of “Funny Money”. I think our economy is shaky at best. Agriculture and oil are going to take a hit next year.
Oil will play in the sixty and seventy dollar range into the middle of next year. All commodities will be on a slippery slope as world supply will be good. The EU is still very sluggish with 2014 GDP growth expected to come in just below 1% and 2015 and 2016 growth to be 1.4% and 1.7%, respectively, according to Moody’s Analytics. China’s growth rate fell to its lowest rate since Q1-2009 in Q3 but was still 7.3%. Japan’s economy has now officially slipped back into recession after it shrank by 7.3% and 1.6% in the most recent two quarters.
Pork and Poultry will adjust rapidly in a slow economy. Beef and Lamb will adjust over a period of time. The consumer disposable income will be steady, but the consumer will be looking for the best buy.