ECONOMIC ANALYSIS OF SHEEP PRODUCTION IN TENNESSEE

Sheep production constitutes a small, but significant source of income to Tennessee farmers. In 1994, 650 farms marketed about 4,000 lambs, generating about $360,000 in gross income. Most lambs are produced from small farm flocks of less than 50 ewes. Continued reductions in total United States (U.S.) sheep supplies have led to modest lamb price increases recently, which in turn have led to a need for updated economic analyses of sheep production in Tennessee. The purpose of this study is to estimate current costs and returns for lamb producers in Tennessee, and to explore the sensitivity of net returns to important economic and production variables.

The economic costs and returns associated with a flock of 30 crossbred ewes and one black-face ram are estimated in the enterprise budget shown in Table 1. Ewes are bred in August and September, and lamb in January and February. Tall fescue and clover pasture provide the majority of the feed needed, except during the winter months. Each year, 20% of the ewes are culled and replaced with purchased crossbred yearling ewes.

Revenue

With a good genetic base in the breeding stock and above-average management, a 150% lamb crop is budgeted, resulting in 45 lambs born alive. Lamb death loss is assumed to be 10%, or about five lambs, leaving a weaned lamb crop of 40 lambs. Lambs are creep fed to achieve average sale weight of 110 pounds per head by June, when they are sold for $0.85 per pound. This price is much higher than most producers have received, on average, over the last five years, but is considered to be a reasonable price to budget for 1996 given the current tight lamb supplies.

Other sources of revenue include cull ewes and wool from 30 ewes and the ram. Six ewes are culled annually because of health problems or poor performance. They are sold for $0.20 per pound at an average weight of 125 pounds per head. An average of seven pounds of wool is shorn from 30 ewes and one ram each year, and sold for $0.85 per pound. Total revenue from the sheep enterprise is estimated to be about $4,074, or $136 per ewe.

Variable Expenses

Replacement crossbred ewes are purchased prior to the breeding season for $100 each. Replacements are assumed to be of breeding age and weight, and in good health.

From April 1 to November 30, tall fescue and clover pasture is used for feed. A total of 10 acres is rotational grazed at an estimated cost of $45.00 per acre. Pasture costs are estimated in the budget shown in the Appendix. In addition to pasture, the ewes are fed 0.5 pound of whole shelled corn per head per day for 30 days beginning August 1. This flushes the ewes prior to breeding, and requires 450 pounds of grain.

Beginning December 1, the ewes are fed with good quality mixed grass and clover hay for 60 days at the rate of five pounds per head per day. This hay is estimated to cost $60 per ton, and 4.5 tons will be fed. To supplement the hay prior to lambind, whole shelled corn is fed during this same period at the rate of one pound per head per day. About 1,800 pounds of grain are fed during this 60 day period.

After ewes lamb, they are fed a mixed grass and alfalfa hay at the rate of four pounds per head per day. Alfalfa hay costs $100 per ton, and is assumed to be fed from February 1 until March 31. A total of 3.6 tons of alfalfa is fed. The ewes also receive two pounds of whole shelled corn per head per day, requiring 3,600 pounds of grain. Total annual corn requirement is 5,850 pounds of grain, or about 105 bushels of grain. Corn is valued at $3.50 per bushel.

Lambs are creep fed as early as possible. The budget assumes each lamb consumes 1.5 pounds per day of a mixed feed containing 16% crude protein from April 1 to June 1, consuming a total of 1.8 tons of creep feed. The creep feed is priced at $234 per ton. Throughout the year, loose salt and minerals are made available. Ewes are assumed to consume 15 pounds per head annually, and minerals cost $15 per 50 pounds, or about $0.30 per pound.

A complete health program for ewes and lambs is estimated to cost $10 per ewe per year, or $300 in veterinary and medicine costs annually. Health care includes deworming, vaccinations, and veterinary services. The ewes and the ram are shorn in the spring, at a cost of $2.80 per head. The cost of bagging the wool is included in the shearing cost.

A trucking charge is included to account for the cost of hauling lambs to market, based on a charge of $0.30 per mile for the cost of driving a truck and trailer. The market was assumed to be 50 miles from the farm. The final variable expense included is interest on operating capital. During the year, $3,021 is spent on all other variable costs. If this amount is borrowed for an average of six months at an interest rate of 10%, then interest on the operating (variable) expenses will be about $151 per year.

Variable expenses total $3,172 per year, or about $106 per ewe. Subtracting variable expenses from total revenue leaves a net return of $903, or $30 per ewe. This net return above variable expenses is available to pay the fixed factors of production, including land, labor, management, and long-term capital.

Fixed Expenses

Fixed expenses shown in Table 2 include depreciation, interest, and repairs on buildings and equipment, plus depreciation and interest on livestock. A pole barn is used for lambing, feeding, and working sheep. The barn is used primarily in the winter, and is assumed to be available for use by other enterprises for at least six months a year. Thus, only half of the depreciation, interest, and repair expenses on the pole barn is charged to the sheep enterprise. The price of the pole barn is based on $5.50 per square foot construction costs, including labor and materials.

Depreciation on buildings and equipment is calculated using the straight-line method, assuming $0 salvage value. Interest costs are based on the average values of buildings and equipment (original cost plus salvage value, divided by two) multiplied by a 10% interest rate. Repairs are estimated at 3% of original cost, annually. High-tensile electric fence is assumed to be used around the perimeter of a 10-acre field, at a cost of $0.29 per foot. Fixed expenses for buildings and equipment total $408 annually.

A new ram is purchased every four years at a cost of $250. This cost is spread over the ram's four year life using straight line depreciation and no salvage value. No depreciation cost is incurred for ewes, because their purchase price was included as a variable expense for replacements. Interest expense on livestock is based on average values of $125 for the ram and $62.50 for the ewes. A 10% interest rate is assumed. Fixed expenses for livestock total about $263 annually. Total fixed expense for the sheep enterprise is approximately $670 per year.

Total variable and fixed expense is estimated to be $3,842, or $128 per ewe. This leaves a net return to land, labor, and management of $233 per year, or about $8 per ewe.

Labor

An estimated 1.5 hours of labor is needed for each ewe to account for time spent feeding, lambing, and managing the flock. Assuming labor costs $5.50 per hour, plus $0.50 per hour for social security taxes and payroll overhead expense, labor expense in the sheep budget totals $270 per year. Adding this amount to the total variable and fixed expense results in a total budgeted expense of $4,112 per year, or about $137 per ewe. The net return to land and management is -$37 per year.

Results and Sensitivity Analysis

Under the assumed production levels, prices, and levels of input use, the sheep enterprise is at about break-even. Net return varies, given changes in two key variables: lamb market price and lamb crop, as shown in Tables 3 and 4. Each table shows the effects of lamb price ranging from $0.65 per pound to $0.95 per pound, as well as lamb crop varying from 130% to 190%. The cost of creep feed is adjusted based on the size of the lamb crop shown in the tables. All other costs are held constant regardless of lamb crop size, although changes in other feed costs and labor requirements may occur for lamb crops larger or smaller than 150%.

Lamb production is economically justified for producers who achieve 130% lamb crops when lamb prices exceed $0.70 per pound, as shown in Table 3. Positive returns above variable costs occur for all lamb crop sizes examined in this table, suggesting that most producers are more than covering their short-run cash costs of production. Significant positive returns are estimated for flocks that achieve 170% to 190% lamb crops, on average.

Long-run viability of sheep production is addressed in Table 4, which shows returns over total costs of production. Lamb crops of 150% or less generally result in small to moderate losses at all the lamb prices shown. Producers who manage to produce 170% to 190% lamb crops show losses or modest gains at prices less than $0.80 per pound, but can enjoy significant positive returns at higher market prices.

The challenges faced by Tennessee sheep producers are highlighted in Table 3 and 4. Larger lamb crops are needed to cover total production costs over time, so managers must strive to eliminate open ewes and ewes that don't produce twins. Also, effective marketing skills are needed to achieve prices at or above average market levels. Producers who sell large lamb crops for premium prices will generate returns large enough to replace equipment, improve facilities, and pay for labor, enabling them to continue producing lambs.

This means that, in addition to paying for variable costs of production, the sheep enterprise is also paying for the use of capital, buildings and equipment replacement, and labor used in production. However, a decline in revenue or increase in costs will result in economic losses. Sensitivity analysis can be used to examine the potential outcomes occurring due to changes in production levels or costs.

Footnotes

(1) Price includes custom application charge.
(2) To maintain clover in the mixture it should be overseeded every 4 years at the rate of 2 lbs. of white clover and 4 lbs. of red clover per acre.
(3) Weed spray is done every other year at a rate of 1.5 pt/acre to supplement clipping and control broadleaf weeds.
(4) Labor cost is based on a cash wage for hired labor of $5.50/hour, plus $0.50/hour for social security and medicaid taxes, and payroll administration.

December, 1995

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