LRP-Lamb program to receive updates
March 24, 2014
If you have a lamb crop for sale right now you should be in tall cotton, or tall wool as it were. If you will have a lamb crop for sale this fall, demand has never been higher and global supply is tight. It would be reasonable to be optimistic about fall prices for feeder lambs.
This is the same market outlook that sheep producers faced at the beginning 2010, but what followed over the next three years was a truly spectacular rise and subsequent crash of feeder and fed lamb prices. The effects of that wild ride in the sheep market lead to concern in a unique industry dealing with many challenges.
The United States sheep herd has been steadily declining from its peak in the 1940's, and today numbers roughly 5.5 million sheep and lambs. Altogether, annual sales of sheep, lambs and wool account for around 0.2 percent of total agricultural sales in the United States. The relatively low volume of sales make price discovery on the open market difficult even in a stable market period. U.S. sheep and lamb prices are dependent on the Australian auction market, and sometimes people in the American sheep industry essentially use the Australian auctions as an indicator. Australia supplies the vast majority of imported lamb to the U.S., with New Zealand next. Another factor to consider concerning the transparency of the sheep market is the large and growing "nontraditional" market, made up largely of ethnic people in places like southern California. These "nontraditional" buyers usually buy one or two lambs at a time, and do not have them processed at federally inspected meat plants, so they are not counted in market reports. By some estimates, this market consumes nearly 1 million lambs a year, or close to one third of production. It probably has a large and almost unquantifiable effect on the overall market.
Nearly everyone in the sheep industry calls what happened in 2010, 2011 and 2012 "the perfect storm." It started with a global shortage of product, spurred in part by a bad storm in New Zealand during that country's lambing season, which may have killed 1 million lambs. In November of 2010, Superior Farms purchased Iowa Lamb Corporation, a lamb packing plant in Hawarden, IA, on of four large scale plants in the U.S. Prices for domestic feeder lambs spiked around the last week in April of 2011, at almost $250/cwt. Shortly after that, Superior Farms closed the Iowa Lamb Plant for the stated reason that they couldn't afford to keep it running with the high cost of lamb. This left four major packers; JBS, Mountain States, and Superior Farms, all in Colorado, and Strauss Brands, Inc. of Chicago Ill. It also deprived producers in the Midwest of a traditional market.
Easter 2011 is a watermark in the chronology as well. The wholesale lamb market revolves around Easter and Christmas; although consumer demand for lamb had stagnated by Easter 2011, it wasn't until Christmas that the industry would see how much. Prices for imported lamb and prices for domestic dressed lamb both peaked in July 2011 at the same time that U.S. consumers became discouraged with the price and started consuming less lamb, reducing demand. A widespread drought in the southern and southwestern United States reduced grazing ground for sheep, particularly in California's Imperial Valley, where thousands of feeder lambs graze alfalfa over the winter, gaining weight more slowly than those in the feedlot.
The closing of the Iowa Lamb Plant and the drought in the Imperial Valley contributed to an overstock of lambs in feedlots, mostly in Colorado. Lambs in feedlots are an especially time sensitive product. Lambs that are fed too long receive steep discounts because much more fat has to be trimmed, and because the cuts of meat from the overfed lamb are larger than the consumer wants. In addition, generally after one year of age, lamb is sold as "mutton," with a completely different price structure.
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Christmas 2011 lamb orders were significantly less than projected. Prices for feeder lambs which had started to fall now began to plunge as the feeders and packers tried to reduce the glut of fed lambs. By mid-July, feeder lamb prices had fallen to $90/cwt, where they more or less remained until mid-October, when the last of the "old crop" lambs were slaughtered, and prices stopped falling.
These are all the factors of the crash that everyone in the industry agrees on. But many producers wondered if there had been market manipulation by the packers. At the request of nine agricultural organizations, eight U.S. Senators and one Representative, the USDA's Packers and Stockyards program conducted an investigation into the lamb market in 2010, 2011, and 2012. Released in December 2013, the report considered whether packers had slaughtered their own lambs before those of independent feeders, whether the packers manipulated prices, and whether the LRP- Lamb Program contributed to the crash.
The report found no evidence that packers had slaughtered their own lambs sooner or faster than those of others, and while finding that "the information available to them makes cooperation between packers more likely" it stated that they did not in fact manipulate prices.
While most producers are reluctant to "bite the hand that feeds them" in a close-knit industry, and while they all agree that there were many and varied factors to the crash, some are still not sure. "The USDA study turned out to be a fiasco," said Danny Lanning, a sheep producer and secretary of the Tri-State Wool Marketing Association. "In all honesty, it left a bad taste in my mouth," said Josh Kitzan, a sheep seedstock producer from Nisland. "I know there's two sides to every story, and I'm sure the people who wrote this report worked their butts off, but I wanted more figures. It was just a little incomplete."
With all the volatility in the market, lending institutions encounter difficulty determining the value of a lamb or bred ewe. "We don't do a lot of lending for the acquisition of new sheep," says Clay Birkeland, ag loan officer at Pioneer Bank and Trust in Belle Fourche. "Mostly if one of our producers wants more ewes, he keeps the ones he has." Birkeland starts running the numbers on a loan to purchase one hundred bred ewes. "Let's see, typically we'd want 20% down- if you had 120% lamb crop, you'd maybe sell 90, that's- honestly I get to the part of the projection of lamb prices this fall, and I don't know what to put down."
Further contraction in the sheep industry concerns Dave Ollila, SDSU Sheep Field Specialist. "Loss of numbers equals loss of infrastructure, and we need to grow that back" he says. "This is huge sheep country, and there is record demand for it. And on the wool side South Dakota and the surrounding states are known for quality."
The answer may lie in an insurance program. The pilot LRP-Lamb Program offered by the Risk Management Agency and the American Sheep Industry, currently suspended pending review, while open to all owners of lambs seemed to be used mostly by the feeders. Owners could purchase coverage up to 90 percent for a target weight for set week intervals, with an Expected Ending Value set for each week. At the end of that week, an Actual Ending Value would be compiled, and policyholders would be paid if the Actual Ending Value was lower than the Expected Ending Value. The program was never well funded, and with applications one day a week, most producers chose not to participate. While the LRP-Lamb program was scrutinized for it's effect on the crash, the USDA report suggested that it may have provided a price floor during 2012. "Here's my take-home message," says Josh Kitzan, a sheep seedstock producer near Nisland, "in order to find some lending confidence we need some stability within the American lamb market. An insurance product that protects the actual lamb producer could be a great start at establishing that. A working insurance program would offer some revenue stability for producers, thus giving a financial lending institution more lending confidence. Crop insurance programs are the shining star right now. We need an insurance program that reflects something like that. Let's put it this way, my financial lender wouldn't finance me if there wasn't crop insurance. So when they value a breeding age young ewe at 60 dollars per head, that tells me they lack confidence in the stability of the United States lamb market, not me."
"He kind of has a point," says Burdell Johnson, who sold the LRP-lamb policy from it's beginning through Food and Fiber Risk Managers and will sell it again as soon as it reopens. "This is the only program the sheep industry has as far as risk protection." Under the program, both before and after the new roll-out, sheep owners can purchase coverage on lambs they own. The actual value and weight of the insured lambs is irrelevant; they can be sold before or after for more or less than any value quoted by LRP-Lamb. The program essentially offers price protection, no death-loss protection and only incidental protection for loss of production.
"Speaking very generally," says Peter Orwick, Executive Director of the ASI, "producers tended to buy LRP coverage when the market was high, and much less when the market was low." As the price of lambs skyrocketed in 2010 and 2011, more and more producers purchased LRP-Lamb policies. When the market plunged, more and more indemnities were paid out and simultaneously producers saw no benefit in purchasing new coverage. This essential bankrupt the program.
"It was only ever a pilot program anyway" says Johnson. "Sometime it was going to be suspended for review." The lack of funds presented a good opportunity for that review. "It wasn't that bad of a program," says Johnson "it went through some circumstances that the industry had never seen."
Areas that the LRP-Lamb program needed improvement in were a more accurate forecasting model and an expansion of the daily limit of coverage purchases. The ASI will submit a proposal in mid-March to the review board, made up of the Federal Crop Insurance Corporation and the Risk Management Agency. Orwick and Johnson both hope the LRP-Lamb Program will be running again by August.
Orwick also points to a new program for producers looking to expand their flocks. The ASI teamed up with the National Livestock Producers Association Sheep and Goat Fund. Up to $2 million of Sheep and Goat Fund money is available to qualified applicants for purchasing sheep breeding stock, in the form of fixed-rate five year loans for five years, with a minimum of $35,000. "What they (the NLPA) have seen is producers come in, get an application, fill it out, and when they take that into their bank, the bank decides to loan the money and keep the loan under one roof. Asked if he believes the availability of another loan gives the banks more confidence to loan money for sheep, Orwick says "Yeah, I would say so."
Josh Kitzan graduated from SDSU in the spring of 2011 and moved back to the family ranch for good. In the fall of 2011, he signed papers on a small piece of ground near his parents place, and got married 2012, right during the dramatic drop in lamb prices. Now the Kitzan's are expanding into a commercial flock of sheep and sheep feeding. "I still have great faith in this industry because it still provides two of life's necessities, food, and clothing. Like everyone else in agriculture, we're eternal optimists," he says. "Maybe more than most."
Burdell Johnson encourages sheep producers to contact him regarding the re-introduction of LRP-Lamb. He can be reached at 701-867-2875. F