1
Development and Structure of the U.S. Sheep Industry

The U.S. sheep and lamb industry is one of the most complex in animal agriculture. The industry provides lamb meat for U.S. domestic consumption (retail, and hotel, restaurant, and institutional trade) and some exports, mutton from older animals, exports of live mature animals, wool, pelts, and a variety of byproducts. A relatively new and growing industry built on milk from sheep is offering many sheep cheese varieties and yogurt, as well as some products blended with bovine milk. Hair sheep, which do not require annual shearing, have been introduced into the industry over the past few decades, thereby altering the fixed proportion of products common in the lamb-wool-pelt enterprise.

Another part of the U.S. sheep industry is made up of purebred flocks, producing high-quality breeding stock for other purebred breeders and the commercial flock. Considerable variation in breeds and breed characteristics is evident across the U.S. purebred sheep and lamb industry. Traditional European breeds have been the dominant bloodlines in North America since the introduction of sheep with the earliest settlers. In the last several decades, new and different breeds have been introduced, bringing greater variation in animal characteristics, as breeders and commercial sheep farmers have sought to adapt production methods, product characteristics, wool length and quality, milk efficiency, and the like to regional conditions. The purebred industry is a major source of high-quality breeding animals for the commercial flock, particularly rams, used for crossing with commercial ewes. In commercial operations, most producers maintain purebred lines in their ewe flock, relying on terminal sire breeds to achieve the characteristics desired in their market lambs.



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1 Development and Structure of the U.S. Sheep Industry T he U.S. sheep and lamb industry is one of the most complex in animal agriculture. The industry provides lamb meat for U.S. domestic con- sumption (retail, and hotel, restaurant, and institutional trade) and some exports, mutton from older animals, exports of live mature animals, wool, pelts, and a variety of byproducts. A relatively new and growing industry built on milk from sheep is offering many sheep cheese variet- ies and yogurt, as well as some products blended with bovine milk. Hair sheep, which do not require annual shearing, have been introduced into the industry over the past few decades, thereby altering the fixed proportion of products common in the lamb-wool-pelt enterprise. Another part of the U.S. sheep industry is made up of purebred flocks, producing high-quality breeding stock for other purebred breeders and the commercial flock. Considerable variation in breeds and breed characteristics is evident across the U.S. purebred sheep and lamb industry. Traditional European breeds have been the dominant bloodlines in North America since the introduction of sheep with the earliest settlers. In the last several decades, new and different breeds have been introduced, bringing greater variation in animal characteristics, as breeders and commercial sheep farm- ers have sought to adapt production methods, product characteristics, wool length and quality, milk efficiency, and the like to regional conditions. The purebred industry is a major source of high-quality breeding animals for the commercial flock, particularly rams, used for crossing with commercial ewes. In commercial operations, most producers maintain purebred lines in their ewe flock, relying on terminal sire breeds to achieve the characteristics desired in their market lambs. 

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES 60 50 40 Million Head 30 20 10 0 1867 1873 1879 1885 1891 1897 1903 1909 1915 1921 1927 1933 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 Years FIGURE 1-1 U.S. sheep and lamb inventories (January 1), 1867–2007. Fig 1-1.eps Source: USDA (2007b). The dominant feature of the sheep industry and the focus of much pro- ducer and policy concern over the years, however, has been the steady de- cline in sheep and lamb inventories since the mid-1940s (Figure 1-1). From a record high of 56 million head in 1942, inventories on January 1, 2007 reached 6.2 million, the lowest level in recorded history. In turn, the decline in sheep and lamb numbers has created difficulties in the flow of sheep and lamb products through a shrinking marketing system as producers have struggled to respond to market signals while maintaining profitability. This chapter provides some historical background to the discussion of the current status of the various segments of the U.S. sheep industry in sub- sequent chapters. As well, the chapter provides an overview of the linkages and interdependencies in the industry inherent in the marketing channels or value chain through which sheep and lamb products flow from producer to end user. HISTORICAL DEVELOPMENT OF THE U.S. SHEEP INDUSTRY The first domesticated sheep were brought to the United States in 1493 with the second voyage of Columbus. These were largely Spanish Churro sheep, which were also later introduced to the southwestern United States by the Spanish conquistadores. They were small, hardy sheep with a poor- quality fleece by today’s standards. English breeds were introduced by colonists to be used primarily for wool for home-produced textiles and, to

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY a lesser extent, meat. Some colonies passed laws requiring young people to learn how to spin and weave. Following the Revolutionary War, the United States began to develop a viable automated woolen manufacturing industry. With growing importa- tion of Spanish Merino sheep in the late 1700s and early 1800s, the U.S. wool clip began to grow substantially. Woolen cloth manufacturing experi- enced its greatest growth during the period from 1830 to 1870, particularly during the Civil War years of the early 1860s. Although many eastern states had large sheep populations in the 1800s, sheep production began shifting westward with improved rail transporta- tion, feed production, and lower production costs in the West. As the indus- try moved west, wool production from the French Rambouillet, originally developed from Spanish Merino genetics, expanded rapidly. By 1870, about 80 percent of all U.S. sheep were of Merino origin (ASI, 2002). The U.S. sheep and lamb inventories reached a high of 54 million head in 1884 and then declined slowly to a low of about 37 million head in 1923 (Figure 1-1). Inventories quickly turned around again in the 1920s, peaking at 54 million head in 1932 and then reaching an all-time high of 56 million head in 1942. That rapid growth spurred an equally rapid development of a marketing system (including feeding, slaughter, milling, and breaking facili- ties, and distribution and transport systems) to meet the rapidly growing demands for meat, wool, and other sheep and lamb products during that period. At the same time, the emphasis on sheep production began to shift toward meat rather than wool in response to the demand for protein to feed U.S. troops during World War II. As the war drew to a close, U.S. sheep industry fortunes changed drasti- cally as inventories plummeted over the next several years, bottoming out at 30 million head in 1950, a nearly 50 percent decline from the record high set in 1942. Wool production fell commensurate with the drop in overall sheep numbers (Figure 1-2). Following a little more than a decade of relative stability, inventories began to decline once again in the early 1960s, a trend from which the industry has yet to recover. Although specific benchmark events, such as World War II and loss of the National Wool Act, are often cited as the cause of the decline in the industry since the 1940s, in fact, many events and factors have combined to limit opportunities for growth in the industry. Some of the more often cited of these include the following: • Labor loss during World War II. World War II drew a great deal of labor out of American agriculture on a permanent basis. This shift affected all of agriculture, including the subsequent availability of labor for sheep and lamb production. • American GI experience with mutton during World War II. Lamb was relatively common on American dinner plates before World War II. The

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES 450 250 400 200 350 Thousands of Dollars Thousands of Pounds 300 150 250 200 100 150 100 50 50 0 0 1909 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 Volume Value Fig 1-2.eps FIGURE 1-2 Volume and value of wool production, 1909–2006. Note: 1 pound (lb) = 0.4536 kg. Source: USDA (2007b). experience of American GIs with poor-quality and poorly prepared mut- ton during the war, however, negatively affected lamb consumption in the households of returning military veterans. This trend is widely recognized anecdotally. For examples of the attitude toward mutton following the war, see Garcia (2004) and Apple (2006). • Grazing permits and restrictions. The regulations and permits for grazing on public lands have changed considerably over the last several decades, with impacts on the availability of land for sheep production. This challenge to the industry is discussed in more detail in Chapter 2. • Competition from other liestock and meats. The increased produc- tion of low-cost feed grains beginning in the 1950s resulted in a rapid ex- pansion in the production of low-cost and high-quality meat products from poultry and pork. Similarly, the development of the cattle feedlot industry increased both product quality and the profitability of beef production, pro- viding an incentive to shift from sheep to beef production in many areas. • Competition from other fibers. The advent of synthetic fibers (such as polyester, rayon, and acrylic) in the 1950s and 1960s resulted in a grow- ing substitution of the lower-cost synthetics for wool, and to a lesser extent cotton, in apparel, carpet, and industrial goods. Chapter 5 provides more discussion of this issue

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY • Predation losses. Predation losses have been a concern for many years in the sheep and lamb industry, both for range and farm flocks. Sheep, goats, lambs, and kids are particularly susceptible to predation, and the changing availability or restricted use of many methods used to control predators since the late 1970s has been cited as a cause for increased losses from predation (Hawthorne, 2004; Shelton, 2004). This issue is explored more fully in Chapter 2. • Loss of the National Wool Act and the Incentie Payment programs. The National Wool Act, in place since 1955, was repealed in 1993. The act provided direct payments and other support through government programs to wool producers. Wool sales plus support payments together represented 28.1 percent of total sheep, lamb, and wool industry revenues in 1990; by 1997, wool alone accounted for only 6.6 percent of industry revenue, com- pared to 11.2 percent in 1990. As discussed more fully in Chapter 5, the termination of direct payments was a significant loss to wool and mohair producers, resulting in a substantial increase in the rate of contraction of the sheep and lamb industry (USDA, 1999). • Foreign wool production subsidies. Support price schemes in Aus- tralia, New Zealand, and South Africa also contributed to sheep and wool market difficulties over the years. Because support prices in those countries were set well above market levels, stockpiles of wool occurred, particularly induced by the Australian Wool Council in the 1980s and early 1990s. The stockpiles of wool, however, gradually were placed on the world market over the next decade, which seriously weakened world wool prices through at least the year 2000. Prices began to rebound somewhat in 2001 when the stockpile liquidation was complete. • Competition from imports. Between 1990 and 2005, imports of lamb, primarily from Australia and New Zealand, grew from 18.60 million kilograms, about 10 percent of domestic lamb supply, to 81.65 million kilo- grams, nearly equal to U.S. domestic production and half the total domestic supply (USDA, 2007a). In response, the U.S. imposed a tariff rate quota (TRQ) on lamb imports from Australia and New Zealand in 1999, which was struck down by a World Trade Organization ruling just 2 years later. Nonetheless, imports maintained the availability of lamb for U.S. consumers at about 0.5 kg per person throughout this period. The role of lamb imports in the U.S. sheep industry is explored in more detail in Chapter 4. • Appreciation of the U.S. dollar against Australian and New Zealand currencies. Despite imposition of the TRQ in 1999, lamb imports from Australia and New Zealand did not slow down. A possible reason for this phenomenon was that the import-restricting effect of the TRQ was offset to a large extent by a growing appreciation of the U.S. dollar against Austra- lian and New Zealand currencies during that period. For example, between January 1989 and July 2001, the U.S. dollar increased in value from 1.12

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0 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES to 1.98 Australian dollars, resulting in a more than 50 percent increase in the purchasing power of the U.S. dollar in Australia (RBA, 2007). The con- sequence was a reduction in the cost of foreign lamb to U.S. buyers and a more profitable U.S. market for Australian and New Zealand lamb exports. See Chapter 4 for more detail. • Concentration in the U.S. packing and feeding industries. The per- centage of U.S. lamb slaughter accounted for by the largest four lamb packers (the four-firm concentration ratio) jumped from approximately 50 percent in the mid-1980s to 77 percent in 1988 as a result of various mergers and acquisitions in the industry (Williams et al., 1991). One consequence was growing concerns that concentration in lamb packing and feeding gave market power to packers to control lamb markets and prices. The four-firm concentration ratio in the lamb packing industry has since receded to 57 percent in 2005. Various studies (e.g., Williams et al., 1991; RTI, 2007) have failed to find overwhelming evidence of concentration as a primary driver in the U.S. sheep and lamb industry. See Chapter 4 for more detail. Recent Developments in the Industry Despite the continuing decline in the U.S. sheep industry, there are some reasons for optimism about the future. Developments have occurred that have made the sheep industry more profitable for those producers who have survived. Genetic improvements, breed resources, management changes, and production and technology efficiencies, along with improved postharvest marketing strategies, have improved profitability. These and other devel- opments currently working against decline in the U.S. sheep industry are discussed in more detail in later chapters. Some of the more salient of these developments include the following: • Improing production efficiency. The average number of lambs pro- duced per ewe per year has increased from 0.88 in 1940 to 1.12 in 2006 (USDA/NASS). During the same period, the average carcass weight of lambs increased from 18 to 32 kg. Consequently, on an annual basis, sheep produc- ers are now producing 124 percent more lamb by weight per ewe than in 1940. As noted in Chapter 2, the genetic potential exists to further increase productivity within the various production systems. • More stable leel of national sheep inentory. The decline in sheep numbers appears to have slowed significantly and even reversed in some regions of the country, as discussed in more detail in Chapter 2. While in- ventories in some states continue to erode, many states have now halted the long-term decline and show modest growth in aggregate terms. The last few years exhibit a transition period with growth in the states with farm flocks coupled with slower overall decline in the range sheep flocks, contributing

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY to a more stable level in the national flock than has occurred in the past 60 years. • New packaging technologies. New gas flush and vacuum packaging processes, such as SecureFreshTM, are extending the shelf life of fresh and chilled lamb by significantly delaying the growth of spoilage organisms. Such packaging systems reportedly can increase the storage life of case-ready meats by 12 weeks (Food and Pack, 2002). With most existing packaging, fresh chilled meat lasts only 4 to 5 days on the shelf. Most U.S. “supermar- kets have to dump 20 to 30 percent of their fresh meat” because of spoilage (Food and Drink, 2002). These new packaging systems have increased the versatility of lamb marketing options. Retail and food service markets with lower lamb volume now have improved opportunities to merchandise lamb. Chapters 2 and 4 discuss this and other new technologies affecting the sheep and lamb industry. • Growth of the cull ewe market. The development of the cull ewe market in Mexico over the last 20 years, and to a lesser extent the domestic market for cull ewe products, has increased the market value of cull ewes. As a result, ewe depreciation costs are lower, thus improving profitability for sheep producers. As detailed in Chapter 3, the announcements of positive tests for bovine spongiform encephalopathy (BSE or “mad cow disease”) in the United States in 2003 and again in 2005 led to some reduction in U.S. live sheep exports to Mexico. Many producers retained 5- to 6-year-old ewes for an additional breeding season during this expansion period. Those exports have recently shown signs of recovery with an increase in 2006, the first since 2002. • Recent depreciation of the U.S. dollar against Australian and New Zealand currencies. Following its rapid strengthening against the currencies of Australia and New Zealand in the late 1990s and early 2000s, the U.S. dollar has depreciated just as rapidly against those currencies over the last few years as discussed in Chapter 4. For example, from the high of 1.98 Australian dollars in July 2001, the value of the U.S. dollar dropped to only 1.13 Australian dollars by September 2007, a level not seen since May 1984 (RBA, 2007). When combined with increased transportation costs and increased lamb market prices in Australia, the declining purchasing power of the U.S. dollar in Australia is helping boost the competitiveness of U.S. lamb in U.S markets. • Decline in Australian and New Zealand sheep numbers. The decline in U.S. sheep inventories is not a unique phenomenon among leading sheep- producing countries, as pointed out in Chapter 2. Australian sheep inven- tories peaked at 173.8 million head in 1990 but declined to 86.8 million head in 2007 (Figure 1-3) (ABARE, 2007; ABS, 2007). At the same time, New Zealand sheep inventories peaked at 70 million head in 1982–1983 but declined to 46 million head in 2006 (Figure 1-4) (SNZ, 2006). While

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES 180 12 11 160 10 140 9 120 8 7 100 6 80 5 4 60 2000 2006 2004 2005 2003 2002 2007 2001 1990 1996 1986 1988 1998 1999 1989 1994 1995 1992 1993 1987 1997 1991 Australia USA FIGURE 1-3 Australian and USA total sheep numbers, 1986–2007 (million head) Fig 1-3.eps Note: Australia is left axis, United States is right axis. Sources: USDA (2006, 2007b); ABARE (2007); ABS (2007). Copyright 2007 by ABARE (Australian Bureau of Agricultural and Resource Economics). Used with permission. declining by 45.5 percent in an absolute sense between 1990 and 2007, U.S. sheep inventories have remained steady in relationship to those of Austra- lia and New Zealand over that period. In 2006, the U.S. sheep flock was 6.7 percent of the size of the Australian sheep flock, the same as in 1991 (ABARE, 2007; ABS, 2007; USDA, 2007b). • New and emerging markets. Perhaps the most optimistic aspect of the U.S. sheep and lamb industry is the emergence of new and niche markets for sheep and lamb products, as discussed in more detail in Chapters 5, 6, and 7. Among others, these markets include the following: 1. A dairy sheep industry in the early stages of becoming an economi- cally important agricultural industry. From virtually nothing in the early 1980s, the dairy sheep industry has developed into a small but growing industry, with an estimated 6,478 ewes producing an estimated 1.15 million kilograms of milk in 2003. 2. Purebred flocks used in show for club lambs and raised for specialty wools. The growth of these markets is supported through active producer organizations, local marketing systems, statewide fairs, and new technolo- gies, such as the Internet, that have reduced the costs of exchanging infor-

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY 75 14 13 70 12 65 11 60 10 55 9 50 8 45 7 40 6 35 5 2000 2006 2004 2005 2002 2003 2001 1990 1996 1984 1985 1986 1988 1998 1999 1983 1989 1994 1995 1982 1992 1993 1987 1997 1991 1981 New Zealand USA Fig 1-4.eps FIGURE 1-4 New Zealand and USA total sheep numbers, 1981–2006 (million head). Note: New Zealand is left axis, United States is right axis. Source: SNZ(2006). mation in the market and facilitated identification of buyers and sellers of the products. 3. Direct marketing by producers with access to inspected slaughter plants. This market is being pushed by an expanding ethnic demand for lightweight and younger lamb carcasses. However, direct marketing custom- ers may include local friends and neighbors or purchasers via the Internet or other direct mail-order approaches to a broader market. Individual producers have cultivated retail and restaurant outlets for their lamb, often exceeding their production capacity, and are purchasing lambs from other producers that meet their specifications. Although to a lesser extent than for lamb, ethnic markets for mutton are also increasing in the United States. 4. Organic and natural lamb and wool products featured by niche marketers at a substantial market premium. Although many western range lambs would likely meet the requirements for organic or natural products, no lamb slaughter plant of significant capacity currently qualifies for the production and processing of organic or natural products. 5. Small wool mills, often called mini-mills, that produce for specialty wool yarn, wool fabric, and finished wool product markets. Some produc- ers sell raw wool, often naturally colored, to hand spinners. The number

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES of small retail outlets and hand spinners that are listed on the Internet is rapidly increasing. THE U.S. SHEEP INDUSTRY VALUE CHAIN1 The marketing system or value chain through which sheep and lamb and their products flow from production to end use is complex and rooted in tradition and history. As depicted in Figures 1-5 and 1-6, the U.S. sheep in- dustry value chain consists of six primary components: (1) farm production, (2) feedlot finishing, (3) harvesting and further processing, (4) retailing and food service, (5) trade (exporting and importing), and (6) end use (consump- tion and industrial use). Figure 1-5 depicts the entire sheep industry value chain, including trade. Figure 1-6 provides details of the linkages between domestic lamb production and use. Farm Production Sheep production in the United States is characterized by some very large flocks and many very small flocks. In 2005, 0.1 percent of all opera- tions with sheep accounted for 14.2 percent of the national flock and 1.5 percent of operations accounted for nearly one-half (47.7 percent) of the national flock (USDA, 2007a). For the smaller operations, 92.1 percent of the operations accounted for only 31.7 percent of the total flock. There are two primary types of commercial sheep operations in the United States: (1) range sheep operations and (2) farm flocks (Boxes 1 and 2 in Figure 1-5). Purebred sheep operations are a third type of sheep operation located throughout the sheep-producing states. Some producers maintain small purebred flocks as well as large commercial herds for the production of purebred breeding rams for sale or replacement, purebred ewes for sale to other producers, and for showing. Others specialize in purebred sheep production. Range sheep operations (Box 2 in Figure 1-5) are found principally throughout the central and western states where flocks are maintained on native and improved pastureland. Sheep production in Texas, Wyoming, Colorado, Utah, Montana, Idaho, New Mexico, Arizona, and Nevada typify these extensive, large-scale range operations. Often the sheep enter- prise on these operations is the primary source of income. There are two general types of range operations. Range band opera- tions are typically located in the 11 western states and South Dakota where there are vast areas of unfenced public grazing lands. Since the majority of 1The live animal marketing channel of the sheep industry value chain is discussed in more detail in Chapter 2, and the lamb meat marketing channel is discussed in more detail in Chapter 4.

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY Farm Flock Sheep and Lambs 1 22 • Mostly smaller operations Sheep Milk Processing • About half of all sheep and lambs 5 • Lambs often forage or grain fed through to slaughter Direct Marketing of Lambs • Often ancillary operations of the farm 19 21 Wool and Wool Wool Products Products Range Sheep Operations 2 Exports Fabrication • Dominated by large operations • Concentrated in western USA • About half of all sheep and lambs Raw Wool 18 • Most move to feedlot operations • For processing into wool fabrics and other products Feedlot Finishing for Lambs 3 • Weaned lambs moved to feedlots near feed • Mostly separate from ranch operations Wool Imports 20 • Usually large scale • Sold to packers mostly by auction and contract prices Lambs and Yearlings for Harvest Pelts for Processing 10 Pelts 12 4 • Carcasses for Export, • Offals mostly • Pelts Offals for Rendering, 9 Asia and Other Products Europe Cull Ewes and Rams or Disposal for Harvest 14 Industrial Product Demands 11 Further Processors and 6 for Products from Sheep, Breakers Lambs, Pelts, Offals and Wool • Consumer ready meats • Prepared foods containing lamb Lamb and Lamb Products for 8 Consumers: Meat, Prepared Foods, Milk, Pelts, Wool Retailers and Food Service Exports of 15 Products 7 • Meat case products mutton • Lamb/mutton as a component and lamb of prepared foods • Restaurant and institutional trade Imports of Sheep and Lamb Meat 16 Imports of consumer-ready meat Farm Production • Mostly whole carcasses for and prepared food products further processing Feedlots containing lamb and mutton • Very few live animal imports Slaughter/Further Processing 17 Retailers and Food Service Cull Ewes and 13 Exports and Imports Rams for Live Export Consumer/Industrial Demands FIGURE 1-5 Sheep and lamb value chain diagram. Fig 1-5.eps

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES Commercial Breeding Flock Cull Animals 3 Ewes and Rams 1 2 Feeder Lambs Produced • From commercial farm flocks Feeder Lambs sold directly • From range sheep operations to consumer • From ancillary farm operations • From farm level live, or • Dressed on the farm, or • Custom harvested • From 23 to 50 kg Grass/Forage Fed Lambs 7 • To 64 kg live (ave.) 4 Feeder Lambs for immediate commercial harvest Feedlot Finish Lambs • From 23 to 36 kg live 8 • To 64 kg live (ave.) 5 6 Packers and Breakers • Sold as dressed carcasses, major Retailers 9 cuts and retail ready cuts and processed • Major chains meats and meat products • Specialty food stores Food Service Industry Home Consumption 10 11 • Food Away from Home Ready to cook portions • Prepared products • Hotels • Products containing some lamb • Restaurants • Whole carcasses purchased live, with some dressed at • Institutions point of purchase Major Movement Farm Production Feedlots and Pasture Finishing Moderate Movement Slaughter/Further Processing Minor/Unknown Movement Retailers and Food Service Exports and imports not shown Consumer/Industrial Demands FIGURE 1-6 Farm-to-market linkages for lamb. Fig 1-6.eps

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY the land utilized by range band operations is unfenced, unimproved, native high-mountain and desert pastures, range bands often must move long dis- tances from season to season and, thus, require on-site herders (Ensminger, 2002). The competitiveness of range band operations is affected by govern- ment controls over public grazing lands and changes in public grazing fees. Fenced range operations are located mainly in Texas, New Mexico, Kansas, North Dakota, Nebraska, and Oklahoma, where there is relatively less publicly owned land and the ranges are mostly fenced. Unlike range band sheep operations, fenced range producers do not normally utilize on-site herders (Ensminger, 2002). Farm flock operations (Box 1 in Figure 1-5) are found throughout the United States but predominate in the Midwest and in the East. Farm flocks are typically found on confined, higher-quality pastures, with considerably smaller flock sizes than found in range operations. No state east of the Mis- sissippi has more than 50 head in average flock size. In California, flock sizes are much larger than in the eastern states but are raised in both confined pasture conditions and extensive range conditions. The range flocks are generally much larger than the more confined pro- duction systems, with the exception of California. Average flock inventory per operation as of January 1, 2005, exceeded 200 head in only a few states: Wyoming (478), Arizona (438), California (262), Nevada (250), Colorado (225), Idaho (200), and New Mexico (200) (USDA, 2007a). Range opera- tions in the more arid rangeland states have little capacity to finish lambs for harvest on the ranches where the lambs are dropped. These lambs generally move to large-scale feedlot systems for finishing on high-quality rations or to high-quality pasture for finishing before harvest. About half of the U.S. lamb crop comes from range operations. Lambs are normally born in the spring months and remain on pasture throughout the summer and early fall with their dams in the majority of range production systems. Fall lambing is the norm in California, Arizona, parts of Texas, and the southeastern United States. Most of the lambs are born in the fall and pastured through the winter months before moving into the light lamb trade or as feeder lambs into feedlots or high-quality pasture for finishing. Most farm flock operations lamb in the late fall and winter months, when farming activities are minimal. While it is possible to use hormones and management to control the estrus cycle in ewes to have a crop of lambs more frequently than once per year, this practice is not common in the commercial U.S. lamb flock.

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES Lamb Marketing Channels There are three distinct marketing channels for the U.S. lamb crop: (1) the traditional lamb marketing channel, (2) the early harvest lamb channel, and (3) the direct marketing channel. The Traditional Lamb Marketing Channel In the traditional lamb marketing channel, lambs move from range and farm flock operations to higher-quality feeding systems (pasture and/or feedlot) at 23–32 kg, and are grown to about 64 kg at harvest (Box 3 of Figure 1-5 and Boxes 4 and 5 of Figure 1-6). From discussions with industry representatives during this study, about three-quarters of all lambs produced in the United States pass through this marketing channel. Range lambs weigh about 25–40 kg in the fall as they come off pasture, at which time they are weaned and conditioned for sale through auction markets or direct sales to feedlots throughout the western United States (Box 3 in Figure 1-5 and Box 5 in Figure 1-6). These lambs are fed to an average weight of 64 kg at harvest. In some cases, the feeding operations are owned by ranchers who feed out their own and/or additional lambs, either by custom feeding or purchase of feeder lambs from other ranchers. In other cases, the larger-scale packers own and operate their own feedlots to ensure continuity of supply and quality of finished lambs. Major auctions for feeder lambs take place throughout the central United States, with the largest markets serving all aspects of the sheep and lamb trade located in San Angelo, Texas. From the smaller confined systems, lambs may move by auction or direct sale to feedlots for finishing, although they are often finished on the same farm where they were born. Many of the smaller confined flocks rep- resent an ancillary operation on farms along with other large enterprises or off-farm employment, filling a niche either by using available pasture not needed for the other operations or as a sideline where the primary family income is generated from off-farm employment. In the smallest of these operations, lambs are often sold as live animals directly to customers at the farm and may be dressed by the customer before leaving the farm (Box 5 in Figure 1-5 and Box 7 in Figure 1-6). Not all lambs end up in feedlots. Many lambs are forage finished (Box 1 in Figure 1-5 and Box 4 in Figure 1-6) and sold directly off pasture for harvest (Box 4 in Figure 1-5 and Box 6 in Figure 1-6). Higher-quality feeder lambs, weighing 23–36 kg, are regularly direct marketed through brokers and buyers to the light lamb markets for commercial harvest, most often for consumers in the large urban areas of the East coast, and increasingly in the urban areas of Chicago, Detroit, Houston, Florida, and California (Box 5 in Figure 1-5 and Box 8 in Figure 1-6). Additionally, there is a market for

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY lambs and mature animals across a wide range of weights sold directly to consumers at the farm gate. Ewe lambs are retained as replacement ewes equivalent to 20 percent of the mature ewe flock each year, both in range and farm flock operations. Finally, 4-H Club members represent another source of demand for commercial lambs for meat, as well as purebred and crossbred replacement lambs. In the meat component of the traditional marketing channel, lambs move directly from farms and feedlots to harvesters principally through auction markets and contract arrangements with growers (Box 4 in Figure 1-5). Carcasses may be further broken and processed at the harvest facility or moved to breakers and further processors in other locations for further processing (Box 6 in Figure 1-5). The outputs from these facilities represent the meat-case ready consumer products (Box 7 in Figure 1-5), prepared food products containing lamb (Box 8 in Figure 1-5), offals (Box 9 in Figure 1- 5), and pelts (Box 10 in Figure 1-5). The meat-based food products from the processing industry move directly to retailers and the hotel, restaurant, and institutional food markets and for distribution to consumers (Boxes 10 and 11 of Figure 1-6). Offals generally move to renderers for disposal or additional processing, generating industrial and some consumer-level prod- ucts (Box 11 in Figure 1-5). Processed pelts are either sold domestically into several industries including auto and leather goods (Box 11 in Figure 1-5) or exported, mostly to Asia and Europe (Box 12 in Figure 1-5). Another product coming from farm flock and range operations is cull mature animals. These animals, after four to six breeding cycles, are sold for meat (mutton). A large portion of the cull animals historically has gone to Mexico as live animals, although this trade diminished substantially from 2003 to 2005 due to trade restrictions following the identification of BSE in cattle (Box 13 in Figure 1-5) and the increased retention of older ewes for breeding. The export of live animals began to recover in 2006. Cull animals are also harvested and processed in the United States, generating meats mostly for inclusion in prepared foods, as well as generating pelts and offal for further processing (Box 14 in Figure 1-5). A small share of lamb and mutton food products is exported (Box 15 in Figure 1-5). Breakers and further processors also rely on growing imports of lamb carcasses and cuts for their supply (Box 16 in Figure 1-5). The retail and foodservice sector also directly imports consumer-ready lamb and prepared food products containing lamb (Box 17 in Figure 1-5). About one-half of the 170.5 million kilograms (retail weight equivalent) U.S. lamb and mut- ton supply in 2006 came from imports, almost all from New Zealand and Australia (USDA, 2007c). While lamb imports have been growing, domestic production has been declining, leaving annual domestic per capita consump- tion stable at about 0.5 kg in recent years, considerably below the annual

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0 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES domestic per capita consumption levels of broilers (39.5 kg), beef (29.9 kg), pork (22.4 kg), and turkey meat (7.7 kg) in 2006 (USDA, 2007d). The Early Harvest Lamb Channel The second marketing channel for lambs involves the movement of better-quality lambs, mostly 23–36 kg in weight, coming from range and farm flock production systems and moving to commercial and noncommer- cial harvest for direct sale to consumers (Box 5 in Figure 1-5). These lambs represent meatier, more heavily fleshed animals, raised on higher-quality pasture and forage than their counterparts raised on lower-quality range forage. Few official data systems for lambs provide detailed information on this market. According to two active participants in this market, lambs are continuously sourced across all major markets in the United States for transport to small abattoirs near large urban centers, such as Newark and New York City (committee discussions on April 12, 2007 with Sam Ferarra, New York City, and Susie and Omar Mady, American Halal Fresh Meats, Newark, NJ). One of the participants reported handling up to 2,000 head per week throughout the year. Many early harvest lambs are sourced and harvested on behalf of consumers and, hence, fall outside official data col- lection requirements on lamb movements and harvest. Lamb from these operations is most often moved as whole carcass to small meat shops and farmers’ markets that cater to ethnic, religious, and high-end consumers. Rarely do the products from these operations enter the large grocery retail or restaurant chains. In many cases, the relationships between the broker, harvester, meat shop, and consumer are of long standing, based on a range of attributes including family, ethnic, religious, and local customs. Based on anecdotal evidence, which is the only information currently available on this growing marketing channel, the early harvest lamb market is quite active and growing, expanding beyond the traditional East and West Coast urban areas to other major U.S. urban centers. The Direct Lamb Marketing Channel The third lamb marketing channel is the direct sale of live lambs at the farm gate to individual consumers. In some cases, the lamb is dressed at the farm by the buyer. There are virtually no data on these operations because most fall below the minimum requirements in farm sales for reporting and most represent ancillary operations in rural areas in relation to other farm enterprises or off-farm wage employment. Again, anecdotal evidence sug- gests that the buyer-seller relationship is often one of long standing, with customers spreading the knowledge of the existence of sellers and the quality of the product primarily by word of mouth. With virtually no direct evi-

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY dence in official statistics on this lamb marketing channel, the importance, size, and growth of this market channel are difficult to determine. Although USDA provides estimates of on-farm harvest of lambs, the figures indicate a continuing decline in numbers while market participants report a growing market. These latter two lamb marketing channels are further explored in Chapter 7. The Effect of Lamb Pricing on Lamb Marketing The pricing of lambs of all weights reflects the pattern common in the cattle industry. Even with most calves born in the spring, a steady supply of beef is maintained throughout the year. By earlier entry to feedlots, or by delayed entry and feeding to heavier weights, the production industry can spread the resulting product across the entire year. However, this process is more difficult for the lamb industry. While cattle arrive at harvest from 18 to 24 months on average, lambs have only up to 5 to 14 months from birth to harvest. Fall- and winter-born lambs assist in smoothing out the supply of lambs throughout the year, providing feeder and finished lambs offset from the lamb production in the rest of the country. As with cattle, the prices of feeder and finished lambs throughout the year are closely linked. Consider the following simple example. Suppose a feeder lamb of 30 kg is purchased with the intent of feeding it to 60 kg as a finished lamb. If the expected price for the finished lamb is $2.00/kg and the total or “all-in” cost of each kilogram of gain is $1.60/kg, then the maximum price in the market for the feeder lamb must be less than $2.40/kg if the finisher expects to make money. The lower (higher) the cost of each kilogram of gain, the higher (lower) the price for the feeder lamb will tend to move. If the cost of a kilogram of gain on a light lamb of 20 kg is less than the cost of a kilogram of gain on a 40-kg lamb, then the lighter the feeder lamb, the higher its price will tend to be in the market relative to the price of the heavier feeder lamb. This relationship is demonstrated clearly by O’dell et al. (2003).2 The first two lamb marketing channels interact directly in the markets and pricing for feeder lambs. The traditional demand by lamb finishers dominates this market although the early harvest lamb marketing channel competes directly for the higher-quality feeder lambs ready for immediate harvest. Because of the demand by immediate harvesters for feeder lambs, this component seems to establish the top prices in the market with the poorer-quality lambs needing more time on high-quality feeds to make a quality product, establishing the average prices in the market. With these pricing arrangements, the recent increase in corn prices is of 2See Figure 17 in O’dell and related discussion in particular.

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES considerable interest. Corn is by far the most common feed grain for finish- ing lambs (as is the case for cattle and swine) in the United States. Based on the increased price of corn, the value of feeder lambs can be expected to weaken. Thus, an increasing share of feeder lambs is likely to move to high-quality pasture for finishing rather than to feedlots, so long as there is not a concomitant increase in pasture cost. Given the recent forecast for a long-term rise in grain prices in a study conducted by the Organisation for Economic Co-operation and Development and the Food and Agriculture Organization (OECD-FAO, 2007), considerable pressure for change in lamb marketing channels is likely. The demand for feeder lambs for immediate harvest can be expected to strengthen because of lower feeder lamb prices with fewer feeder lambs going to feedlots. The Wool and Pelts Marketing Channel For almost all breeds of sheep, wool is a product from farm and ranch sheep operations. Mature animals are sheared annually in the spring months with the wool moving into raw wool processing through auctions, coop- eratives, and private brokers (Box 18 in Figure 1-5). Little wool is graded, sorted, and baled at farm level, although the percentage is increasing in the larger western range flocks. A considerable proportion of the wool produced is exported, primarily to China, India, and Germany, where it is fabricated into textile products, either as pure wool or blended with other fibers (Box 19 in Figure 1-5). These products enter clothing, carpet, and industrial product markets. A large share of the wool products consumed in the United States is imported, both as raw and processed wool as well as finished clothing and other products containing wool (Box 20 in Figure 1-5). Over half the U.S. wool production is exported and U.S. imports of wool are roughly equal to domestic production (USDA, 2006). The proportion of U.S. wool produc- tion sold as exports is increasing, while wool imports are decreasing, indi- cating a declining level of wool textile and carpet production in the United States (Box 21 in Figure 1-5). For example, U.S. exports of wool in 2003 were double the export level in 2000, while imports of raw wool fell by 25 percent over the same period. Chapter 5 provides more information on the development and current status of the wool industry. A small market exists for cottage industry spinning and weaving for locally produced and specialty wools. While tiny in comparison to the traditional U.S. wool market, this market provides some evidence of an ongoing transition of the U.S. wool industry as a whole. See Chapter 7 for more detail. Sheep and lamb pelts are also produced from the harvest of sheep and lambs (Box 10 in Figure 1-5). Pelts are the hide with unshorn wool. These

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY pelts enter industrial markets and some are used in consumer products (Box 11 in Figure 1-5). Other pelts are exported, primarily to Asia and Europe (Box 12 in Figure 1-5). The Dairy Sheep Products Marketing Channel Finally, there is a small but growing dairy sheep industry in the United States, based mostly on breeds of sheep with good milk production efficiency (Box 22 in Figure 1-5). Farm flocks for milking sheep are located primarily in Wisconsin, Minnesota, New York, and Pennsylvania, although new flocks are being established in a number of areas. The ewes begin milking as early as 48–72 hours after lambing, and the lambs are fed milk replacements. In some cases, partial milking begins soon after lamb drop and may continue for a month before full milking begins. Sheep milk cheeses and yogurts are sold at the farm/cooperative level as well as at farm markets and small outlets in many cases. Some of the emerging cooperatives are now selling through the large retail chains. The United States is the largest importer of sheep milk cheeses in the world, largely from Europe, which are mostly sold through the large retail chains to consumers. The U.S. Department of Agriculture provides no data on this emerging industry. Chapter 6 provides a review of the dairy sheep industry in the United States. THE U.S. SHEEP AND LAMB INDUSTRY IN TRANSITION The long-term decline in sheep inventories is the dominant feature of the U.S. sheep industry to most observers. Although continuing declines can be expected in many areas of the industry, there are some reasons for optimism. The decline in animal numbers seems to have slowed substantially and even reversed in some regions for a number of reasons, as discussed in subsequent chapters. Furthermore, new and different products are emerging from this industry, such as dairy sheep products. Sheep and lamb marketing channels are changing as well. The traditional marketing channel may expect further declines in volume while new and different marketing channels are emerging and growing stronger. This transition in the industry is relatively new and will take several years to be fully realized. REFERENCES ABARE (Australian Bureau of Agriculture and Resource Economics). 2007. Australian Com- modities 07.3, Table 22, Crop areas and liestock numbers, www.abareconomics.com/ interactive/ac_sept07/excel/table _22.xls. Accessed November 12, 2007. ABS (Australian Bureau of Statistics). 2007. Selected agricultural commodities, catalogue nos. 7112.0, 7113.0, and 7121.0. Canberra, Australia.

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 CHANGES IN THE SHEEP INDUSTRY IN THE UNITED STATES Apple, R. W. 2006. Much ado about mutton: But not in these parts. New York Times, March 29, 2006. ASI (American Sheep Industry Association). 2002. Sheep Production Handbook. Englewood, CO: American Sheep Industry Association. Ensminger, M. E. 2002. Sheep and Goat Science, 6th edition. Danville, IL: Interstate Printers and Publishers. Food and Drink. 2002. Meat packing idea. Online at: http://www.foodanddrinkeurope.com/ news/ng.asp?id=15507-meat-packing-idea. Accessed November 12, 2007. Food and Pack. 2002. Shelf-stable meat. VATIS, Food processing: packaging. Online at: http:// www.techmonitor.net/techmon/03may_jun/fpr/fpr_package.htm. Accessed November 12, 2007. Garcia, K. L. 2004. World War II in microcosm: One soldier’s experience. MA Thesis, Angelo State University, p. 48. Hawthorne, D. W. 2004. The history of federal and cooperative animal damage control. Sheep Goat Res. J. 19:13–15. O’dell, D., D. J. Marshall, D. Singh, G. F. Plaugher, P. E. Lewis, E. K. Inskeep, and D. Smith. 2003. Final report: West Virginia lamb marketing information project. Prepared for the West Virginia Department of Agriculture, Marketing and Development Division, Charleston, WV. OECD-FAO (Organisation for Economic Co-operation and Development and the Food and Agriculture Organization of the United Nations). 2007. OECD-FAO agricultural outlook, 2007–2016. Online at: http://www.oecd.org/dataoecd/6/10/38893266.pdf. Accessed November 10, 2007. RBA (Reserve Bank of Australia). 2007. Exchange rates. Online at: http://www.rba.gov.au/ Statistics/Bulletin/F11hist.xls. Accessed November 10, 2007. RTI (Research Triangle Institute International). 2007. Livestock and Meat Marketing Study. Volume 5: Lamb and Lamb Meat Industries. RTI Project Number 0209230. Final report prepared for the U.S. Department of Agriculture Grain Inspection, Packers and Stockyards Administration, Washington, DC, February. Shelton, M. 2004. Predation and livestock production: Perspective and overview. Sheep Goat Res. J. 19:2–5. SNZ (Statistics New Zealand). 2006. Agricultural production statistics. Various Issues. Assembled from databases online at: http://www2.stats.govt.nz/domino/external/ pasfull/pasfull.nsf/0/4c2567ef00247c6acc256e83007303b5/$FILE/Part%202_01%20- %202_36.xls; http://www.stats.govt.nz/NR/rdonlyres/FD1CE3D6-10AB-44DD-9267- 6822AA3D787E/0/agriculturalproductionyejun06hotp.pdf; and http://www2.stats.govt. nz/domino/external/pasfull/pasfull.nsf/0/4c2567ef00247c6acc256fe2001333dd/$FILE/ alltabs.xls. Accessed November 12, 2007. USDA (U.S. Department of Agriculture). 1999. Economic Impact of the Elimination of the Wool Act. Economic Research Service. Report prepared for the House Committee on Appropriations, as requested in House Report Number 105–588, p. 16 (1998). Online at: http://www.ers.usda.gov/Briefing/Sheep/WoolActStudy.pdf. Accessed November 10, 2007. USDA. 2006. Cotton and Wool Yearbook 2006. Economic Research Service. Online at: http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1282. Accessed November 10, 2007. USDA. 2007a. Food availability spreadsheets: Beef, pork, lamb and mutton, and total red meats. Online at: http://www.ers.usda.gov/Data/FoodConsumption/spreadsheets/mtredsu. xls#lamb!a1. Accessed November 10, 2007. USDA. 2007b. Quick Stats. National Agricultural Statistics Service. Online at: http://www. nass.usda.gov/QuickStats/index2.jsp. Accessed November 10, 2007.

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 DEVELOPMENT AND STRUCTURE OF THE U.S. SHEEP INDUSTRY USDA. 2007c. FASonLine: U.S. trade, FATUS commodity aggregations. Online at: http://www. fas.usda.gov/ustrdscripts/USReport.exe. Accessed November 10, 2007. USDA. 2007d. Livestock, dairy and poultry outlook, October 22, 2007. Online at: http://usda. mannlib.cornell.edu/usda/ers/LDP-M//2000s/2007/LDP-M-10-22-2007.pdf. Accessed November 10, 2007. USDA/NASS. Several years. Chapter VII: Statistics of cattle, hogs, and sheep. National Agri- cultural Statistics Service. For 1998 as an example, see: http://www.usda.gov/nass/pubs/ agr98/acro98.htm. Accessed November 26, 2006. Williams, G. W., O. Capps, Jr., R. Dietrich, J. W. Edwards, R. A. Field, H. L. Goodwin, Jr., D. B. Griffin, K. Litzenberg, J. P. Nichols, J. W. Savell, G. Smith, D. Tatum, and J. B. Ward. 1991. Assessment of marketing strategies to enhance returns to lamb producers. Commodity Research Report No. CM-1–91. Texas Agribusiness Market Research Center. Texas A&M University, College Station, TX.

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