Sheep expansion – safe bet or high risk?

As prime hogget prices hit an all-time high of 230p/kg and cull ewes head towards a jaw-dropping £150 a head, it’s no wonder UK sheep producers are gearing up for expansion. But as the only livestock sector that has enjoyed several years of steadily increasing returns, anyone expanding or making their first move into sheep should be doing their sums very carefully.

While market pundits and sheep consultants agree this spring’s prime sheep price bonanza has been a “tipping point” for many farmers considering increasing their ewe numbers, enthusiasm must be tempered with caution. Every aspect of sheep production costs must be meticulously scrutinised if expansion is on the cards, not least the anticipated hike in the price of breeding ewes this autumn.

Last season’s rise in breeding sheep prices pushed the best Mule gimmer lambs – North of England, Scotch and Welsh – towards £100 each, while Mule shearling averages nudging £140 hardly raised an eyebrow by the end of the autumn. As cull ewe prices have been exceeding the value of last year’s breeding sheep, is the £200 shearling soon to become the norm?

Breeding ewes set firm

With lambing-time still in full-swing on many farms – and amid a scorching seasonal demand for ewes with lambs at foot – trying to forecast this autumn’s trade for breeding sheep seems premature, albeit necessary, to say the least.

Based on the simple supply and demand scenario – the market driver of this spring’s record-breaking prime hogget and cull ewe trade – it’s inevitable that breeding ewe prices will increase if we continue to see a steady reduction in the numbers on offer across the UK set against a rising demand from buyers.

EBLEX admits there will be some expansion in sheep production over the next two years but stresses “it won’t be significant”. That could be the best piece of news established sheep producers want to hear considering there was a tiny 0.1% increase in the UK’s breeding ewe numbers last year. But is the EBLEX forecast going to attract newcomers into the sheep sector?

In 2010 there were 13.8m breeding ewes in the UK compared with 15.6m in 2005 and 20m in 1998. Although EBLEX’s senior red-meat analyst Mark Topliff says there are early signs of “rebuilding” the UK sheep flock, better returns from corn and the restrictions imposed by upland environmental schemes are regarded as major hurdles to large-scale expansion.

But established flocks with the opportunity, capital and management structure to increase prime lamb output can look forward to sustained higher prices reflecting the shortfall in supply, say sheep market analysts.

“There’s no indication that prime lamb prices will show any significant drop. Both the export and home markets are still strong and supplies from New Zealand remain very tight following a difficult lambing season,” says Mr Topliff.

Last year the UK imported 74,000t of New Zealand lamb – 15% less than the previous year – and in January/ February this year there were 412,000 hoggets slaughtered in the UK compared with 381,000 in 2010.

Stronger prices

So it appears the scene is set fair for a continuing strong demand for sheepmeat. The thorny question of how much it will cost to produce, particularly in terms of the breeding sheep needed to do the job, is certainly a vexing one.

This spring’s hogget trade has seen prices up to £110 a head but it is feared the “bird in the hand” attitude will encourage a surge of ewe hoggets, originally destined for the autumn sheep sales, to be cashed and killed as the prime market draws even more sheep on to the slaughter-line in the coming weeks.

The inevitable outcome will be even tighter supplies and even higher prices for breeding ewes come the autumn.

Although the long-awaited arrival of better prices for sheep producers is now stimulating a new phase of flock expansion, forecasts of sustained increased profitability will have widespread implications for those keen to supply the predicted shortfall – and there’s a raft of unanswered questions:

How much is it going to cost to expand? If a prime hogget is now worth almost as much as a Mule shearling, does the inevitable increase in breeding ewe prices make expansion too risky? Are current returns for prime lambs, hoggets and cull ewes sustainable? Will there continue to be a strong export demand for UK sheepmeat? Can UK sheep farmers exploit lower volumes of imported lamb? Is the unpredictability of store hogget finishing finally turning into a sure-fire money-maker?

As producers trawl through the issues trying to find the most profitable way to make money out of sheep, the business gurus are urging caution no matter what route may appear to be paved with gold.

Sheep consultant Lesley Stubbings doesn’t expect improved sheepmeat prices will encourage a significant number of new flocks to be set up but she is concerned about “flimsy” expansion plans undertaken by existing flocks.

“There may well be a few newcomers, but whether it’s a new flock starting from scratch or the expansion of an existing setup, every detail of the costs involved must be looked at very carefully.

“There’s still massive room for improvement in performance in many flocks. Making a determined effort to reduce losses, cut costs and improve output could turn out to be as profitable as expanding.

“The top-end sheep farmers are doing well out of the higher market prices but in a lot of flocks the drive to make real business improvements is being hampered by an assumption that more money is being made just because lambs are worth more. That’s not good business logic,” she says.

Upland opportunity

While considered expansion in the lowlands has to overcome the land’s potential income from growing corn – as well as the set-up costs based on the higher price of breeding ewes – the hills and uplands look like having the greatest opportunity to make the most significant contribution to an expanding UK sheep sector.

The main problem hill farmers face is their involvement in the swathe of environmental schemes that has put a lid on ewe numbers and has already wiped out vast numbers of breeding sheep.

The removal of Swaledale ewes from fells in the north of England, coupled with disenchantment with the effort involved in producing Mule breeding sheep compared with prime lambs, has historically hit the output of North of England Mules. But the anticipated long-term upswing in demand for breeding sheep is already firing talk of resurgence in Mule production where Swaledale numbers and moor grazings will allow.

“Sheep production has been stifled in the hills and uplands as environmental schemes have taken precedence over food production. But wherever possible I think we’ll see expansion in the uplands – either returning to producing Mule breeding sheep or prime lambs,” says auctioneer Stuart Bell of auctioneers Harrison and Hetherington at Kirkby Stephen, Cumbria.

National Sheep Association boss Peter Morris acknowledges there’s a “world-wide shortage of sheep” but newcomers courting plans to capitalise on a red-meat sector that appears to have low overheads were failing to recognise the true overhead costs of modern sheep production.

“Higher prices for sheepmeat have been long overdue but costs of production are still very high. No one is brave enough yet to start talking about the price of breeding ewes this autumn but the fear that some ewe hoggets that would have been sold for breeding have now been slaughtered isn’t going to help,” he says.

Higher prices for the producer inevitably mean higher prices to the consumer, but if that results in a reduction in retail sales, shelf-space allocation in supermarkets could be jeopardised – a situation that must not be underestimated in planning sheepmeat expansion, according to Glyn Jones of Dunbia which buys 1.3m UK-bred prime lambs annually.

“In this sort of sheep market, and where we’ve seen prices reach record levels in recent weeks, these are the retail reactions that can quickly erode sheep producers’ margins. They make it all the more important to carefully study costs of production before embarking upon expansion.

“High prices aren’t a safety-net for all market fluctuations,” he adds. “”Looking ahead to the main lamb selling season and I think we’ll see prices slightly up on last year and that’s likely to further bolster confidence in breeding ewe values in the autumn – but by how much no one dare guess.”