1. Fourth-Quarter 2013 Sheep Industry Review Prepared by the American Sheep Industry Association for the for the American Lamb Board January 2014

3. Executive Summary The first-quarter of 2014 holds much promise for the U.S. sheep industry given excellent quality of lamb, continued tight supplies, higher feeder and slaughter lamb prices, lower feed costs and return to profitability for many in the producer and feeder sectors. What is less certain is what will happen at retail and to packer margins. Lamb’s excellent quality in 2014, coupled with high-priced substitute proteins and slow income gains will hopefully lend some support to lamb demand and boost lagging wholesale and retail prices. In the Markets The 3-market feeder lamb auction price saw a 64-percent quarterly jump to $187.20/cwt., up 83% year-on-year. Feeder lambs in direct trade averaged $172.90 per cwt. in the fourth quarter, up 57% quarterly, and up 76% year-to- year. Live, slaughter lamb prices at auction gained 38% quarterly to $153.93/cwt., 64- percent higher year-on-year. Slaughter lamb prices on a carcass-based formula averaged $275.22/cwt. ($139/cwt. live-converted), up 19% quarterly and up 25% year-on-year. Slaughter lambs in live, negotiated sales averaged $149.72/cwt. in the fourth quarter, up 27% quarterly and up 46% year-on-year.

4. Executive Summary, page 2 Weighted average carcass prices averaged $292.13/cwt. in the fourth quarter, 13-percent higher quarterly and up 16% from a year ago. Yield Grade 4 & 5 in lbs. was 21% of total slaughter in the first eleven months of 2013 compared to 31% in the same period of 2012. The gross carcass value averaged $333.16/cwt. in the fourth quarter, up 19% quarterly and 10-percent higher year-on-year. Lamb primal prices were relatively steady in 2013, but with a sharp year-end gain. Production & Trade In the fourth quarter, estimated lamb slaughter fell 5% quarterly to 486,914 head, down 22 percent year-on-year. Lamb production was 31.7 mill. lbs. in the fourth quarter, down 8% quarterly and down 29% year-on-year. At 158.9 million lbs., lamb and mutton imports in January through November were 14% higher year-on-year. Lamb imports totaled 134.3 million lbs. in January through November, up 15% year-to-year.

5. Executive Summary, page 3 In January through November total lamb availability (imports plus domestic production, subtracting exported lamb) was 268.03 million lbs., up 8% year- on-year. In this period, U.S. domestic commercial lamb supply was down 1% to 133.7 million lbs. compared to a year ago and imports were up 15% year- to-year to 134.34 million lbs. In one nontraditional market, New Holland Sales Stable, lamb sales increased 8-percent annually in 2013. Price Projections and Outlook Tight supplies domestically and worldwide will likely support prices through 2014. After years of price volatility, lamb prices should stay steadier this year, and strong. In early-February, the Livestock Market Information Center (LMIC) expected slaughter lambs on a carcass-weight basis to range from $295 to $298 per cwt. in the first quarter (about $149 per cwt. live), 31-percent higher than a year ago. LMIC forecasted 60-90 lb. feeder lambs to range from $193 to $200 per cwt., up 32%. By the fourth quarter of 2013, many feeders were making money, after three years of losses for some.

6. I. Feeder and Slaughter Lamb Market Trends

7. Q4 Auction Feeder Lamb Prices (60- to 90- lb.) Nearly Doubled Year-to-Year The 3-market feeder lamb auction price saw a 64-percent quarterly jump to $187.20/cwt., up 83% year-on-year. Markets included San Angelo, Ft. Collins and Sioux Falls. Prices averaged $182/cwt. in Oct., $182/cwt. in Nov. and $198/cwt. in Dec.

8. Prices jumped $90/cwt. from the summer to year’s end

9. Feeder Lambs in Direct Trade Gained 76% Year-on-Year o Feeder lambs averaged $172.90/cwt. in Q4, up 57% quarterly, and up 76% year-to-year. o Feeders averaged $166/cwt. in Oct., $176/cwt. in Nov. and $177/cwt. in Dec.

10. December Feeders in Direct Trade up $80/cwt. from Year’s Low in June

11. Most feeders in direct trade already traded by Q4; Feeder trade spiked in September

12.  Corn averaged $4.31 per bu. in Q4, down 29% quarterly and down 41% year-on-year (USDA/AMS, 1/2014).  Corn averaged $4.34 per bu. in Oct., $4.23 per bu. in Nov. and $4.37 per bu. in Dec. Price of Corn Dropped Sharply in Late- 2013

13. Corn Began to Fall in June

14. Alfalfa averaged $190 per ton in Q4, down 6% quarterly and down 12% year- on-year

15. Q4 Auction Slaughter Lamb Prices 14-Percent Higher Year-on-Year Live, slaughter lamb prices at auction gained 38% quarterly to $153.93/cwt., 64-percent higher year-on-year. Prices averaged $151/cwt. in October, $152/cwt. in November and $159/cwt. in December.

16. Auction Slaughter Lamb Price Rebounded 37% Since its 7-Year Low in Aug. 2012

17. Late-2013 Auction Slaughter Lamb Prices Rebounded to December 2010/2011 Levels

18. Carcass-Based Formula Slaughter Lamb Prices Gained Steadily through 2013 At 103,300 head, formula trades were down 31% quarterly and down 34% year-on-year. Slaughter lamb prices on a carcass-based formula averaged $275.22/cwt. ($139/cwt. live-converted), up 19% quarterly and up 25% year-on-year. Weighted-average prices were $255/cwt. in Oct., $279/cwt. in Nov. and $292/cwt. in Dec. In Q4, average weight was 74.13 lbs., down 6% quarterly and down 10% year-on-year.

19. Prices Rebounded 33% Since October 2012’s Stabilization

20. Prices by Weight Trended Together; Heaviest Carcasses No Longer in the Mix

21. Live, Negotiated Prices Top Formula Prices Slaughter lambs in live, negotiated sales averaged $149.72/cwt. in Q4, up 27% quarterly and up 46% year-on-year. Lambs averaged $141/cwt. in Oct., $152/cwt. in Nov. and $156/cwt. in Dec. Q4 weights were 137 lbs., up 2% quarterly and down 2% year-on-year.

22. II. Carcass and Boxed Lamb Market Trends

23. Carcasses Gained Quarterly and Year-on-Year Weighted average carcass price averaged $292.13/cwt. in Q4, 13-percent higher quarterly and up 16% from a year ago. Carcass price was $273/cwt. in Oct., $288/cwt. in Nov. and $302/cwt. in Dec. Lightweight carcasses received a 40-percent premium to the heaviest at $388 to $277 per cwt. in Q4.

24. Carcass Rebounded 26% from its Late-2012 Low

25. 2013 Carcass Price Gains Accelerated in Q4

26. YG 1s (Minimal Back Fat) Up with Very Current Market

27. Carcasses Trimmer: YG 4s and 5s Coming Down Yield Grade determination is positively correlated with heavier slaughter lambs. Yield Grade 4 & 5 in lbs. was 21% of total slaughter in the first eleven months of 2013 compared to 31% in the same period of 2012.

28. YG1 YG2 YG3 YG4 YG5 20085%5%31%47%14%3% 20094%34%45%14%4% 2010 5%38%43%13%2% 2011 4%27%49%17%3% 2012 5%28%37%18%12% 1-11/2013 7%37%34%14%8% Yield Grades for Federally Inspected Lamb and Mutton Percentages, Fiscal Year Source: USDA, AMS, Livestock and Seed Division.

29. Live, Negotiated Sales Up in 2013; Formula Down

30. The gross carcass value averaged $333.16/cwt. in Q4, up 19% quarterly and 10-percent higher year-on-year. Gross carcass value was $306/cwt. in Oct., $333/cwt. in Nov. and $360/cwt. in Dec. Q4 Gross Carcass Value (Wholesale Average) Up Quarterly and Up Year-to-Year

31. December’s Wholesale Market Higher than a Year Ago

32. Gross Carcass Value 20-Percent Lower than Nov. 2011 Record High

33. Lamb Primals Relatively Steady Over Past Year, but with Year-end Gain

34. December Rack 10-Percent Lower than its Record High in 11/2011, but Sharply Higher than its Annual Average. The rack averaged $676.08/cwt. in Q4, up 33% quarterly and up 27% year-on-year. The rack was $552/cwt. in Oct., $686/cwt. in Nov. and $790/cwt. in Dec.

35. After Holding Virtually Flat for Most of 2013, Loins Gained Steadily Through Q4 Loins, trimmed 4x4, averaged $478.14/cwt., up 6% quarterly and down 4% year-to-year. L oins were $467/cwt. in Oct., $477/cwt. in Nov. and $490/cwt. in Dec.

36. Leg, Trotter-Off, Climbed Steadily Through Q3 and Q4 The leg averaged $354.31/cwt. in Q4, up 18% quarterly and up 6% year-to-year. The leg was $332/cwt. in Oct., $355/cwt. in Nov. and $377/cwt. in Dec.

37. Shoulder Shot Up 27% Since September The shoulder averaged $267.08/cwt. in Q4, up 18% quarterly and up 10% year-on-year. The shoulder was $246/cwt. in Oct., $266/cwt. in Nov. and $290/cwt. in Dec.

38. Ground Lamb Down Quarterly and Year-on-Year Ground lamb averaged $517.55/cwt. in Q4, down 1% quarterly and down 2% year- on-year. Ground lamb was $497/cwt. in Oct., $522/cwt. in Nov. and $533/cwt. in Dec.

39. III. At Retail & Food Service

40. Food Service Sector Growth Down in Late 2013 December saw a 0.2% drop in restaurant same-store sales and a 2.6% drop in customer traffic (Nation’s Restaurant News from NRN-MillerPulse survey, 1/15/2014). Lower sales likely due to the combination of bad winter weather, a late Thanksgiving and a shorter holiday shopping season. “With improving macroeconomic factors as a tailwind going into the new year, Larry Miller, founder and chief executive of the monthly MillerPulse report, projected a modest 2-percent increase in industry-wide same-store sales for 2014,” (Nation’s Restaurant News, 1/15/2014).

41. Breakdown of December Food Service Indices Casual - 2% same- store sales -4% traffic Fast Food +1% sales -2% traffic Fine Dining -1% sales -4% traffic Source: Nation’s Restaurant News, 1/2014

42. Retail Featured Lamb Leg Price Lower Year-on-Year and Featuring Down Dec. 2012Dec. 2013% Change Leg Bone-In$6.60$5.87-11% Leg, Boneless $6.92$6.46-7% Leg, Semi- boneless $5.76$5.41-6%

43. IV. Price Spreads Ralmonline, 2008

44. The Rack-Loin Price Spread Increased Sharply in Q4 The rack-loin price spread averaged $1.98 per cwt. in Q4, up 261% quarterly and up 522% year-to- year. In the last year, the rack price jumped 33% while the loins saw only a 6-percent gain.

45. 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.

46. Packer Spreads Gained in Q4

47. The live to carcass price spread averaged $4.60 per head in Q4, down 89% quarterly and down 7% year-to-year. -- In Q4, as slaughter lamb prices gained sharply, the meat market lagged, squeezing margins.

48. Live to cutout spread was $38.21 per head in Q4, down 30% quarterly and down 7% year-to-year. -- In Q4, the gain in slaughter lamb values outpaced the growth in the cutout, putting pressure on margins.

49. Carcass to cutout spread was $32.96 per head in Q4, up 134% and down 1% year-on- year. -- In Q4, the cutout gained faster than the carcass, raising the cutout- carcass price spread.

50. V. Pelts

51. Pelts Down Quarterly and Year-to-Year Due to Lower Seasonal Demand Fall Clips were $11.24 per piece in Q4, down 7% quarterly and down 5% year-to-year. No. 1 pelts were $9.10 per piece in Q4, down 2% quarterly and down 12% year-to-year. Recall pelt prices are prices received by packers for pelts from slaughter lambs processed.

52. Pelt Values Dropped Seasonally in Late-2013

53. VI. Replacement Sheep

54. Oct./Nov. Replacement Ewes Up 16% Year-to-Year Oct. & Nov. Ewes (per head): 2-4 years: $149, up 20% year-on-year. 5-6 years: $97, up 16% year-on-year. Over 6 years: $72, up 10% year-to-year. December prices not established.

55. VII. Domestic Production and Trade Donald Macleod, Stornoway, Scotland, 2010.

56. Lower slaughter and lower weights in Q4 translate to lower production. In Q4, estimated lamb slaughter fell 5% quarterly to 486,914 head, down 22% year-on-year. Lamb production was 31.7 mill. lbs. in Q4, down 8% quarterly and down 29% year-on-year. With Q4 very tight supplies and retail and foodservice demand higher seasonally and possibly annually, we might see cold storage stocks down in January.

57. Q4 Slaughter Down 22% Year-on-Year

58. Which Way is Lamb Production Trending?

59. Slaughter Weights in 2013 Averaged 137 lbs., Down 37% Year-on-Year -- Between Q3 and Q4, live weights dropped from 135 lbs. to 129 lbs. --Slaughter weights were 126 lbs. in Oct., 129 lbs. in Nov. and 132 lbs. in Dec.

60. Cold Storage Averaged 21.06 Mill. Lbs. per Month in 2013, down 1% from 2012’s Average - Recall that some portion of cold storage is imported product. Cold storage was 21.8 mill. lbs. at the beginning of December, down 9% monthly and up 15% year-on- year.

61. Lamb and Mutton Imports Higher At 158.9 million lbs., lamb and mutton imports in Jan.-Nov. were 14% higher year-on-year.

62. Lamb Imports Totaled 134.3 Mill. Lbs. in Jan. to Nov. – Up 15% Year-to-Year

63. Lamb Imports 34% Higher in November Year-on-Year

64. Australian lamb imports in Jan.- Nov. were 91.9 mill. lbs., up 11% year-to-year. NZ’s lamb imports were 41.4 mill. lbs., up 25% year-to- year. Both Australian and New Zealand Lamb Up Year-to-Year

65. At 24.6 million lbs., mutton imports were 6% higher in Jan.-Nov. compared to a year earlier, same period. Mutton imports from Australia were 18.3 million lbs. in Jan.-Nov., up 18% year-to-year. New Zealand mutton imports were down 26% to 5.6 million lbs. in this period. Mutton Imports Higher Year-on- Year

66. Mutton Imports Higher in 2013 Through November

67. Lamb & Mutton Exports Down 35% January to November Year-to-Year; Lamb Exports Up & Mutton Exports Down

68. 2013 Lamb Exports on Track to Double Annually

69. Total Live Sheep Exports Down 2% Year- to-Year through November to 49,411 Head U.S. live sheep exports to Mexico were 27,979 head in Jan.-Nov. compared to 0 head during the same period in 2012. At 21,348 head, live exports to Canada were down 55% year-to-year.

70. Q4 Cull Ewe Prices Saw Strong Gains after Third-Quarter Record-Low --San Angelo ewe prices averaged $48.37 per cwt. in Q4, up 44% quarterly and down 0.2% year-on-year. --Culls averaged $33/cwt. in Oct., $35/cwt. in Nov. and $33/cwt. in Dec.

71. XIII. Nontraditional Market Andrew, 2006.

72. 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.

73. December Highs Hit $160 per cwt. for 90-130 Lbs. at Nontraditional Market in PA Prices averaged $144.15/cwt. in Q4, 18-percent higher quarterly and up 36% from a year ago for 90- to 110-lb. slaughter lambs. For heavier lambs – 110-130 lbs. – prices averaged $144.51/cwt., up 25% quarterly and up 29% year-on-year. New Holland Sales Stable saw an 8-percent annual increase in lamb sales in 2013.

74. Nontraditional (New Holland) Lamb Market Prices Mirror Commercial Market

75. . Total Lamb and Mutton Availability IX. Total Lamb and Mutton Availability

76. In January through November, total lamb availability (imports plus domestic production, subtracting exported lamb) was 268.03 million lbs., up 8% year-on-year. In this period, U.S. domestic commercial lamb supply was down 1% to 133.7 million lbs. compared to a year ago. Imports were up 15% year-to-year to 134.34 million lbs. Note: These figures do not include the nontraditional market estimated volume. Boosted by Imports, Total Lamb Availability Up 8% Through November Year-on-Year

77. Total Lamb Availability Trending Up

78. Could we have three years of total lamb market expansion?

79. U.S. Lamb Market Share: 50% In January to November: Domestic lamb market share was 50%, down from 53% year-on-year. Domestic lamb & mutton market share was 46%, down from 51% year-to-year. Domestic mutton market share was 24%, down from 32% a year ago.

80. Domestic Share of Lamb Market Contracting, Challenging Growth

81. X. Imported Product Price Comparisons

82. 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.

83. Price Comparison with Imports is Tricky Caveats: 1.Imported product might be sitting in cold storage and not competing directly 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.

84. U.S. – AUS Rack Price Spread Widened in Q4 *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.

85. U.S. Rack Premium Jumped from to $160 in June to $670 per cwt. in December 2013

86. U.S. Shortloin Competitive against Imports

87. U.S. Loins Lost Competitiveness & then Gained in Q4

88. U.S. Shoulder Competitiveness Declined in Late 2013: Imported shoulder dropped while the domestic shoulder price increased.

89. Shoulder Premium Shot Up in Late 2013

90. XI. Exchange Rates

91. -- In Q4 the U.S./Australian dollar gained 1% quarterly to $0.93, down 11% year-on-year. -- In Q4, the U.S./New Zealand dollar hit $0.83, up 4% quarterly and up 0.5% year-to-year. In 2013 the US$ Gained 14% Against the A$; Imports More Competitive

92. Price of one AUD in USD dropped through 2013; Lower Australian lamb prices helped counteract the strong Australian dollar (Meat & Livestock Australia, 12/2013).

93. XII. Price Projections and Outlook

94. Tight Supplies Domestically and Worldwide will Likely Support Prices through 2014 After years of price volatility, lamb prices should stay steadier this year, and strong. In early-February, LMIC expected slaughter lambs on a carcass-weight basis to range from $295 to $298 per cwt. in the first quarter (about $149 per cwt. live), 31- percent higher than a year ago. LMIC forecasted 60-90 lb. feeder lambs to range from $193 to $200 per cwt., up 32%.

95. Seasonal Index Lends Predictive Insight Price trends--up or down--depend on which factor dominates, supply or demand. When feeders come to market in the fall and slaughter lamb supplies increase, prices tend to weaken, but can be pulled up by holiday demand needs. 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.

96. Feeder Lamb Prices Forecasted to Gain 8% Above Annual Average in Q1

97. Slaughter Lamb Prices at Auction Predicted to Gain 5% Above Annual Average in Q1

98. Break-Even Analysis Many feeders were in the red for the past three years; some just now making money. Recall the breakeven analysis is only one snapshot of feedlot marketing. Cost of gain fell an estimated 27% between quarters: from about $1.38 per lb. in Q3 to around $1.13 per lb. in Q4. Some feeders saw cost of gain fall below $1 in late Q4. December estimated break-even was $120 to $122 per cwt. compared to $148 per cwt., the live-converted formula carcass-based price.

99. Cost of Gain Fell Sharply in Q4

100. Sensitivity Break-Even Analysis A: December kill of September feeders with a $1.10 per lb. cost of gain. ItemCost 1. Total cost of feeder (98-lb. feeder @ $120 per cwt. in September 2013) $117.60/head 2. Average freight from NV, UT, CO, WY$4.00/head 3. Cost of gain in Colorado feedlot (34 lbs. gained @ $1.10/lb. to 132 lbs.) $37.40/head 4. Break-even price of slaughter lamb @ 132 lbs.$159/head Break-Even$120/cwt.

101. Sensitivity Break-Even Analysis B: December kill of September feeders with a $1.15 per lb. cost of gain. ItemCost 1. Total cost of feeder (98-lb. feeder @ $120 per cwt. in September 2013) $117.60/head 2. Average freight from NV, UT, CO, WY$4.00/head 3. Cost of gain in Colorado feedlot (34 lbs. gained @ $1.15/lb. to 132 lbs.) $39.10/head 4. Break-even price of slaughter lamb @ 132 lbs.$160.70head Break-Even$122/cwt.

102. LMIC Forecasted Total Supply Expansion in Q1 LMIC estimated in mid-February that with slaughter weights about even with a year ago, domestic production could be down 2% in Q1 year-on-year. LMIC forecasted that Q1 imports could be down 6% year-on-year. Given increases in beginning stocks and noncommercial production (farm), total supply could be up 3% in Q1 compared to a year ago.

103. Producer/Feeder Profitability up in 2014? Producer profitability could be up with lower feed costs. Feeder lamb prices higher, hay below $200 per ton and extreme drought areas shrinking nationally. However, a historic drought in California has eroded grazing pasture and threatened much-need water for raising sheep. Some producers selling off some ewes. USDA forecasted corn at the farm gate could range from $4.05 - $4.75 per bu. in its 2013/14 marketing year (12/2013). Many reports put corn around $4.40 per bu. in 2014.

104. While Producers/Feeders Profit, Returns Less Certain at Wholesale and Retail Global meat consumption growth is forecast at a modest +1.5% (International Meat Secretariat, 1/2014). In December, consumers reported that their primary challenge was finding affordable foods to fit within their budget, (Food Demand Survey (FooDS), Oklahoma State University. 12/2013). Tight budgets and slow income and job growth will restrict price increases at retail and challenge lamb demand. “There is a continued cautiousness of the meat sector: with serious consumer and retailer price resistance,” (The International Meat Secretariat, 1/2014)

105. Can excellent lamb quality trump other lamb demand factors in 2014? Lamb Demand Expansion? Lovers of Lamb Appreciate Excellent Lamb Quality Price of Substitute Proteins Still High Incomes Sluggish, but Gaining