The sheep industry will/must change. It will either be a cottage industry serving niche markets only, or it will be a mainstream competitive industry with a healthy infrastructure. Policy debates aside, the loss of the wool incentive program takes net revenue out of producers’ pockets, thus raising their per head break-even points. Historically, when profits fall, the industry contracts. If this continues to happen, our infrastructure will be lost and major investments will have to occur to replace it.

I will try to describe a broad picture of our industry’s past and present economic environment and conclude by focusing on some opportunities which must be addressed in order for economic health to return to the sheep industry.

This industry has been contracting at the rate of about 10 million head per year since the late 1940s. The 1994 inventory is the lowest on record at roughly nine million head. The sheep industry has been experiencing forced disinvestment for over 40 years! One author recently wrote, "Either the prices the consumer has been willing to pay are not sufficiently high to keep resources in production or the costs of producing have not been kept under control via production technology and other means of decreasing the per-unit cost of lamb." Actually, both and more have occurred.

During the past 10 to 15 years, the pounds of lamb marketed have not changed much. We are selling about the same amount of lamb this month as we did during the same month in 1980, while our annual inventory has declined 25 to 30 percent. The average lamb crop percent has not changed significantly in over 40 years, while lamb production per ewe grew from about 36 pounds in 1980 to 51 pounds in 1993. The explanation is that we’re selling heavier, fatter lamb carcasses. In terms of inflation-adjusted prices, lambs are worth half of what they were in 1980. When supply and price are looked at together, it shows that the demand for lamb has fallen by 50 percent.

Why have producers shifted away from sheep and why are consumers paying less for less product? The answers are simple but the solutions are complex. The answers are: A) Given choices, consumers are not willing to pay much for lamb products in their present form. B) Given other choices, producers are not going to lose money for long, just because they know how to raise sheep or like them. Producer groups have long debated the predator problems, grazing fees, labor problems, weather patterns and the unique biology of sheep. They are all essential issues surrounding producer profitability. Lower cost and higher output of higher value product at the producer level is certainly part of the solution. However, there must be a profit incentive for producers to stay in business. Certainly with the 50 percent drop in lamb prices (real dollars) there has been no incentive.

To say that the sheep industry is very traditional is an understatement. We raise them the way we used to, market them the way we used to and we sell chops and legs the way we used to. The nostalgic essence of our industry has attracted many of us to it and kept us here. However, the "modernization" of the other meat sectors has kept them profitable and us unprofitable. Pork production, processing and marketing is moving toward vertical coordination and integration, as poultry and dairy have long since done. We still sell our lambs live to feeder/packer buyers who feed all but 8 percent of them whether they need to be fed or not for supply management purposes. They are schedule-killed in modern, high capacity packing plants, then sold either as whole carcasses or boxed wholesale cuts to fabricators who then resell to other distributors or to retailers after changing the product form slightly (mostly trimming). Retailers then offer the product generally in the same form as it arrives to them. This traditional marketing pattern is very costly. The farm retail price spreads for beef, pork and lamb were 3.3, 4.1 and 5.5 respectively in 1979. In 1991, they were 3.9, 4.3 and 10.5. These figures show that the "middleman" level of the marketing channel has doubled its margin and operated at a lower efficiency level over recent years compared to the other meats. In view of our current marketing structure, the "middleman" is providing an essential service. Considerable trimming is necessary to make products from Yield Grade 3 and 4 lambs acceptable to even traditional consumers. Starting with the seedstock producer, through the commercial ewe flock, to the feeder, to the packing plant, through the fabrication plant and any of the other wholesale activities, and finally to the retailer, every transaction has to be financed by what the consumer pays for the final product offering.

If the industry is to be revitalized, it will require a coordinated approach, "a plan," in which each segment will need to participate. It is the nature of business that at the individual firm level, resources will be put to their most efficient use to produce the most profitable product. If, through a revitalization plan, the industry is able to identify sheep products which consumers desire and are willing to pay for, how will our production machinery respond? Following are some initiatives we should focus on now, which will add value to our sheep and their products and thus economic health to our industry.

Each entity involved with growing, feeding, transporting, processing, packaging and marketing lamb must keep its future products in mind. Quality defects occur when something in the continuum goes wrong, i.e., bruises, poor sanitation, improperly given or untimely injections, parasites, disease, etc. "O" tolerance is a reality. Our customers are not interested in paying more for it, but rather they just expect it. Some areas of quality assurance will be regulated; however, regulation is not the whole answer. We know through our quality audit that defects are currently costing this industry over $20 million annually. We can only speculate as to what the lost opportunity value is when quality defects slip past inspection and consumers buy sheep products that do not meet their expectations. Sheep meat has the shortest average shelf life of the red meats. This can be corrected by good quality assurance practices, and it must start with the ewe flock. Taste, consistency, pelt and wool quality can all be improved by practicing quality assurance. The industry must start with education at each level and then self-regulate by putting Hazard Analysis Critical Control Point (HACCP) procedures in place. The objective must be to prevent quality defects.

Value is a measurement of relative worth. Flock health and performance improvement are means of obtaining end product integrity and quality assurance. They are also the management schemes that producers use to obtain value for their sheep. Within the context of a ewe flock (seedstock or commercial) or a feeder lamb operation, producers need to pay more attention to measuring value. In the past, potential buyers (domestic or international) could not buy an individual sheep or a flock with any reliable data to assure or predict their health or performance. Today, we have the tools to do this and we should start using them to measure value. Ewe flock owners and feeders can self regulate and measure flock health through the use of the standardized guidelines we are developing. This will provide prospective buyers at any level with the means of objectively assigning value to an animals or flocks health status, rather than operating on the basis of "buyer beware--what you see is what you get."

In addition to health, the overall performance of a flock can be measured. While the phenotypic component is useful as an overall indicator of a management system, only the genetic performance can be objectively measured in a standardized way and used to accurately quantify an animals or flocks value to a potential buyer. The sheep industry has such a system, the National Sheep Improvement Program (NSIP). Seedstock producers especially need to use this system. Producers will pay for the data. The value attached to the NSIP data is driven by the quality and performance characteristics customers want. Like measuring a flock’s health status, genetic performance information takes the guess work out of buying and gives producers a way to add value.

In summary, until the consumer-demand picture is changed, realistically we will continue to see the same lamb price patterns that we are now experiencing. In this scenario we can only hope to improve producer profitability by incorporating lower cost/higher output technologies. The use of new technologies at the processing level should also return something to producers. Many believe, however, that both producers and processors are operating close to their most profitable efficiency levels now. If economic health is to return to the U.S. Sheep industry, consumers of lamb will ultimately make it so. At the same time, each essential segment in the market continuum will have to be profitable enough not only to stay in business, but make investments and add value. Adding value by improving the quality of our products and providing data on flock health and genetic performance is a built-in profit center that will yield returns at any point in the market system where they are measured.