A Gartshore-Funded Research Project September 1999 

J.W. Fisher
Kemptville College, University of Guelph
Kemptville, Ontario K0G 1J0

Abstract:

This study aimed to determine which production/marketing system would provide the most contribution margin given lamb size, price, and cost of production for a specified time period. Three production systems for lamb were modeled: spring lambing; winter lambing; and accelerated lambing. The study focused on a seven-year period (1992 - 1998 inclusive), of actual market price and lamb size . Consensus meetings were held to determine the cost-of-production for each system in 1998, and was then indexed back over the seven years. Three optimizing (contribution margin maximizing) computer models were designed. One ewe would have earned $357.20 in contribution margin over seven years in a spring lambing system. A winter lambing system would earn $560.93 per ewe over seven years, and an accelerated lambing system would have a contribution margin of $816.77 per ewe. In an accelerated Star lambing system, where ewes are bred every other month throughout the year, contribution margin falls to $634.51 per ewe over the seven years. The preferred market for spring born lambs was heavy lambs around the Christmas period, whereas the favored markets for winter lambs were new crop and light lambs for the Easter and early summer barbeque seasons. Lamb markets preferred with an accelerated lambing system, were both the Christmas and Easter markets. These two markets were targeted about 50% of the time over all marketings during the seven-year period with accelerated systems. In the past five years price preference has shifted from small lambs to heavier lambs, even at Christmas and Easter.

Introduction:

Various production systems for sheep are in use in Ontario. Producers can lamb once a year (in-season or out-of-season), or accelerate their breeding to more than once per year. Although many producers in the industry have ewes that will breed out-of-season, they breed only once a year, usually in-season. When asked why the opportunity for accelerated lambing is not used, the reply is that it is not economically worthwhile.

This is a surprising assessment of a technology that should make the industry more competitive and producers more profitable. Though it is generally accepted that out-of-season breeding costs more, it is not well known how much more costly it actually is. Accelerated lambing means breeding each ewe more than one time per year. Of course to do this, ewes must be able to breed in any season of the year.

The Ontario lamb market identifies lamb using six classes: lambs less than 50 pounds; "new crop" lambs (usually a 50-60 pound lamb of premium quality, no longer defined as a class as of July 1998); light lambs weighing 50 to 79 pounds; 80 to 94 pound light lambs; heavy lambs weighing 95 to 109 pounds; and 110 pounds or higher heavy lambs. Each of these classes have highs and lows in market price, yet these fluctuations occur at different times of the year. To confuse the issue further, sheep are typically seasonal breeders - they prefer to breed as days get shorter, from September through January. However, sheep breeds have been developed that will breed in all seasons (Dorset and Arcotts). Being able to produce lamb in all seasons enables farmers to provide the market with lamb at any time of the year.

A spring lambing system operates when ewes are bred in November, December, and January (in-season breeding) and lambs are born in April, May, and June - usually on pasture. The management style is very hands-off, and the ewes are left to fend for themselves on pasture with relatively little input and cost. The potential markets for spring born lambs are light lambs in June through to heavy lambs in December. For various reasons fecundity is typically quite low in a spring lambing operation. See Table 1A and 1B for production/marketing summaries for the three production systems.

A winter lambing system has ewes bred in August, September, and October (in-season breeding) and lambs born in January, February, and March. The management style requires distinct organization and time input, particularly at lambing time. The potential markets for these lambs are new crop or light lambs in March, to heavy lambs in September (Table 1A). Fecundity is typically better than with spring lambing systems.

An accelerated lambing system operates when ewes can breed at anytime during the year. Any target market is available with this system. However the requirement for management and labour is very high. Ewes have a production cycle of no more than eight months (approximately 35 weeks) with three lambings in two years, or perhaps 7.2 months (approximately 32 weeks) with five lambings in three years ("Star" system). A Star system has ewes organized in 4 or 5 groups and one group is lambing while another group is breeding every 73 days.

Literature Review:

In 1990, S.H. Umberger compared three production systems at Virginia State University, where two out-of-season lambing systems and one in-season lambing system were assessed⁽¹⁾. This study showed that the in-season lambing system was the most profitable. This result was due to: sheep being more prolific during in-season heats; in-season breeding allowed the use of cheap pasture; and marketing occurred at peak price seasons of the year. What is not included is a comparison between spring lambing, winter lambing and accelerated lambing production systems.

B. McCutcheon spoke on costs for out-of-season lambing at Ridgetown College's Farmer's Week in 1990⁽²⁾. Some guidelines were provided detailing added costs of accelerated breeding programs. Data is not available on a comparison of profit between production systems.

Cost of production studies have been published in Ontario for 1987⁽³⁾ and 1989⁽⁴⁾ by J.W. Fisher. The Ontario Ministry of Agriculture Food and Rural Affairs (OMAFRA) has also published sheep cost-of-production data on an annual basis up until 1997 in the Ontario Farm Management Analysis Project (OFMAP)⁽⁵⁾. Fisher's data, and that of OMAFRA, are average industry data and reflect a mixture of farm sizes and production systems. The average size of flock in Fisher's data (1989) was 274 ewes. Breeding occurred 1.0 times per year and yielded 1.43 marketed lambs per ewe, per year. The average flock size in the OFMAP (1997) data is 164.1 ewes. Again, breeding occurred 1.0 times per year and, in this study, yielded 1.74 marketed lambs per ewe, per year.

Neither Fisher (1989) nor OMAFRA (1997) made any attempt to identify cost-of-production budgets for producing lamb under various production systems. These published reports represent an average of all production systems found in the industry, and therefore no comparison between the various systems can be made.

The Ontario Sheep Marketing Agency (OSMA) commissioned a study in the late 1980's that identified input/output production parameters for sheep in Ontario. In this study, representative farms were surveyed, one for each region of Ontario. The Central and Southern Ontario farms operated under a semi-accelerated lambing system, having 1.3 lambings per year. The Eastern Ontario farm was using a spring lambing system, and the Northern Ontario farm was functioning under a winter lambing system. Because the report based its results on only one sample per area, it is difficult to draw conclusions about cost-of-production and profitability that are representative of the entire industry. The study did provide some information on physical inputs needed to produce sheep.

Alberta Agriculture (1983) published a cost-of-production report that, although it is out of date at this point, includes production input/output parameters for sheep⁽⁶⁾. As was the case in the OMAFRA study, this report is an average of all production systems in Alberta and comparisons of the different systems are not easy to make.

Thus, all in all, little is known about the economic merit of producing lamb in an accelerated system in Ontario versus a typical spring lambing season on pasture, or a typical winter lambing system.

The primary objective of this study is to assess 'which system would produce the most contribution margin given lamb size, price, and cost of production.'

Cost data for the three production systems is not available in the literature, and so an objective of this study is to determine budgets for each of these three systems. This project will use the actual market price and lamb size data from 1992 through 1998, which is available from the Ontario Stockyards at Cookstown, as published in the 'Ontario Sheep News'. This revenue data can be used in conjunction with cost data to create a computer model that will optimize contribution margin over time, given the limitations of the different production systems.

More specifically, the objectives of this project are:

• To summarize actual price and lamb size data by month from January 1992 through December 1998.
• To identify the quantities and associated costs of technical inputs needed to produce lamb in spring, winter and accelerated lambing production systems.
• To design a computer model for spring, winter and accelerated lambing production systems and determine the most profitable system.
• To identify the most profitable marketing strategy for each system.
• To convey the results obtained by this study to Ontario sheep producers.
  

Physical quantities of technical inputs used to produce lamb and their associated costs were collected by consensus group meetings. Two consensus meetings were held, one in Napanee, Ontario and the other in Orangeville, Ontario.

A consensus research meeting consists of a group of experts, pooling their knowledge and experience to 'negotiate' an average or reasonable set of data. In this case, the groups of farming experts negotiated budgets for producing lamb in the three production systems for 1998 (Tables 3A & 3B).

The participants, twelve in all, were producers and extension specialists. The groups identified production inputs needed to produce lamb successfully at different times of the year under the various production systems. Data was negotiated for the 1998 fiscal year (Table 2C).

The challenge for the groups was to identify input/output parameters for a sheep operation that a capable manager could reasonably expect to achieve. The budgets were to reflect competent management with an entrepreneurial attitude, where at least a portion of family living allowance is expected to come from the sheep operation. What was not wanted, were budgets for smaller operations that had no expectation of true profit.

Consensus meetings work well when information is unavailable or difficult to collect. Sheep production in Ontario is such a case. Too few farmers produce sheep in large enough quantities for each of the three systems to be easily surveyed. Sheep production is often a part-time endeavor (the Ontario average is 36.1 ewes⁽⁷⁾) making it difficult to find enough large farms from which to collect data.

Price and size of market lamb data from the Ontario Stock Yards were summarized from 1992 to 1998. The Farm Input Price Index⁽⁸⁾ was used to adjust production costs for inflation for both ewes and lambs from 1998 back through 1992. Given the actual market revenue information and the indexed costs, monthly budgets were detailed for each of the three systems from January 1992 through to December 1998.

Fixed (or overhead) costs were not included in this project. The resource base on sheep farms across Ontario are so varied, that an average of these fixed costs would be meaningless within the budgets. It should therefore be noted that budgets in this project use contribution margin as the residual. This contribution margin is the return to fixed costs, operator labour and management.

Also, it should be generally accepted that accelerated lambing systems need better fixed resources than winter lambing and spring lambing. What the dollar values are for each system on average will depend very heavily on what is available on farms.

An optimizing computer model was developed using a spread sheet program (Lotus 1-2-3⁽⁹⁾). The program will identify the optimum month and size of lamb to produce for each production cycle during the 7 years. The program optimizes contribution margin before fixed costs, over time.

What is the most profitable system to use? What set of target markets should each production system be aiming for? What prevents producers from targeting other markets? Is accelerating ewes economically worthwhile? The analysis of the data will provide answers to these questions.

Results and Discussion:

Actual price, volume, and size data from1992 through 1998 were used ⁽¹⁰⁾. This data is actual data throughout the time period, and need not be adjusted for inflation. Revenue per lamb was calculated monthly as a weighted average lamb value. This revenue was determined for each of the six size categories from January 1992 through December 1998.

Data from the two consensus meetings were averaged. The data was very close between meetings and did not reflect major variations in management. Input/output parameters for each production system are summarized in Table 2C.

Revenue data was collected during the consensus meetings as well. Productivity was recorded at 1.4 lambs weaned per ewe, per year for spring lambing, 1.75 for winter lambing and 2.55 for accelerated lambing.

Wool yield was 6.0 pounds per ewe for spring and winter lambing. Wool yields for the accelerated lambing system was 5.4 pounds per ewe. Average wool prices from 1992 to 1998 are shown in Table 6⁽¹¹⁾. Wool has not been included in the computer models due to the complexity to include it. Wool would add $2.28 to the spring and winter lambing budgets per ewe, and $2.05 to the accelerated lambing budget.

Other revenue items not included in the computer models are value added: due to freezer trade; for breeding stock; and forward contracts. It is recognized that each of these can add revenue and contribution margin to a business. The choice to leave them out was because some producers might participate in these and others may not. Participation in any of these value added activities should be individually assessed.

Physical inputs for spring lambing ewes are, for the most part, kept to a minimum compared to winter lambing ewes. On the other hand, winter lambing ewes have distinctly higher physical requirements, such as the following: they must be fed better; lambs must be creep fed; labour requirements are higher; bedding is required; building maintenance is higher; and predator control is less. For accelerated ewes, feed requirements are again significantly higher than winter lambing ewes. Other inputs greater than both winter and spring lambing systems include: higher labour requirements; increased supplies and medicines; higher bedding costs; and building maintenance. Accelerated lambing requires good facilities, use of hormone technology and a close consultative relation with the veterinarian. Unquestionably, overall inputs are greatly increased.

Feed costs represent about 50% of variable costs of producing sheep. Singularly the most expensive cost item, it is important to verify the accuracy of feed requirements. Feed requirements were re-calculated using the OMAFRA Sheep Ration Formulation program for ewes⁽¹²⁾. The calculation is based on a 176 pound ewe with a body condition score of three, lambing 180 - 225%, and suckling twins. Total yearly intake of dry matter is projected to be 1,437 pounds for spring and winter lambing ewes, and 1,621 pounds for accelerated ewes.

This level of dry matter intake represents 2.23% of body weight (on a dry matter basis) for annual lambing, and 2.52% for accelerated lambing. Feed intake at these levels confirms the data collected during the consensus meetings.

Annual budgets for sheep are shown in Table 3. These are on a per lamb basis (Table 3A) and on a per ewe basis (Table 3B) for the 1998 fiscal year. On a per lamb basis, contribution margins deviate by only $13 across the three systems. However on a per ewe basis, contribution margins are very different. Accelerated systems make 2.27 times more than spring lambing, and 1.57 times more than winter lambing.

Lambs can be sold at any time after weaning, yet as they are kept to heavier weights they incur costs, and so separate budgets were detailed for growing lambs. The input/output parameters are detailed in Table 2. The parameters are separated for feedlot (Table 2A) and pasture (Table 2B) lambs, and for lambs under 94 pounds and those 95 pounds and over. Many lamb costs are included in the ewe budgets and this is indicated by the abbreviation 'inc.' within the tables.

Average daily gain was reported by Umberger to be 0.82 pounds/day for feedlot lambs under 94 pounds, and 0.72 pounds/day for feedlot lambs over 94 pounds (Tables 1B, 2A and 2B). Average daily gains on pasture were 0.48 pounds/day for lambs under 94 pounds, and 0.20 pounds/day for lambs over 94 days. Feed efficiency was reported by Sharpe et. al.⁽¹³⁾ and Aziz et. al.⁽¹⁴⁾ to be 4.3 for lambs under 94 pounds and 4.9 for lambs over 94 pounds.

Cost data was developed for each month in the same time period. The cost data from Table 3A plus lamb growing costs were indexed back through to 1992 using the Farm Input Price Index (1995, 1997).

With all the cost-of-production, marketing, and physical data collected, the computer models were detailed. Again, three models were used - one for each production system. The spring and winter lambing models were fairly straight-forward. Ewes lamb once a year, and lambing is restricted to certain months (as outlined in Table 1A). The model allowed the spring lambing system to produce 1.4 lambs per ewe per year, bringing total number of lambs produced over seven years to 9.8 (in 7 lambings). The winter lambing model produced 1.75 lambs per ewe per year, for a total of 12.25 (in 7 lambings) lambs over seven years.

The accelerated lambing model was much more complex. 1.7 lambs are produced every 8 months (2.55 lambs per year), so the maximum number of lambs produced over seven years was 17.85 (in 10.5 lambings). The challenge of modeling this was allowing it to choose markets according to many various constraints. The model was allowed the freedom to choose any set of 8 month periods during the seven years. The cycling can start anywhere, and depends on the relative contribution margin between 8 month sets. The model then chooses the set with the maximum contribution margin over time.

The three models were 'balanced' by allowing total productivity as described above, to equal 9.80 spring lambs, 12.25 winter lambs, and 17.85 accelerated lambs over seven years. In this way, each system is competing in a fair manner. However, 'jamming' may occur in the accelerated model. Unlike the spring and winter models, which start and stop on the calender year, the accelerated model can start at any month. Therefore, to get 10.5 lambings in seven years, it must choose to start the cycling in the first month of the model. This may not be the most profitable month to start the process. If there is not enough freedom in the model to choose any month in the first year to start cycling, the model will jam the first lambing into January 1992. This will give a non-optimal solution if a more profitable starting point is found later in the year.

To avoid jamming the model, the accelerated model was run for seven years, and asked to choose 9.5 lambings (16.15 lambs in total). The model chose to start the cycling by selling a New Crop lamb in February 1992. Another effort used to prevent jamming was to allow the model to have the number of lambings less than or equal to 10.5 lambings. The optimal solution actually chose 10.375 lambings and 17.6375 lambs over the seven years.

The optimum solution for spring lambing (Table 4A) showed an overall contribution margin of $357.20 per ewe over 7 years with 9.8 lambs sold. The model consistently favored heavier lambs in late fall. These lambs are primarily destined for the Christmas market. It should be remembered that this is the top of the market. This is the best a producer could expect to do in each period.

The best contribution margin for winter lambing (Table 4B) over 7 years with 12.25 lambs sold was $560.93 per ewe. The model favored New Crop and light lambs in April and May. These lambs are mostly destined for the Easter and early summer barbecue markets.

The optimum contribution margin for the accelerated lambing system (Table 4C) was $816.77 per ewe over the seven years. The model chose the December (Christmas) market or the March/April (Easter) market six times out of the 10.375 cycles. The 8 month cycle forces marketing in other seasons if overall contribution margin can be enhanced. The model chose markets in February, September (twice), and October. The model did choose to lamb only once per year in 1992 and 1993. Both these years had poor market prices for lamb.

Some producers use the Star accelerated lambing system. The model was used to optimize this production pattern by lambing 0.25 times every 2 months. The optimal solution is seen in Table 4D. Overall contribution margin is $634.51 per ewe over seven years. Therefore, spreading production over the year in a Star accelerated system helps maintain a consistent cash flow but decreases contribution margin - in this case by $182.26 (22.3%).

Market trends have shifted since 1992, where a price preference is now seen for larger lambs instead of New Crop lambs, regardless of the system of production. This shift has been accompanied by a slight spreading out of the price preference to each size category. These trends show an increasing potential for accelerated lambing as more markets are becoming increasingly profitable to target. Table 5 summarizes the contribution margin per lamb, by month, from 1992 to 1998 for an accelerated lambing system.

Conclusions:

Accelerated lambing systems most certainly pay a return to the higher levels of management required. In this analysis, accelerated lambing systems returned 2.29 times more contribution margin than spring lambing and 1.46 times more contribution margin than winter lambing systems. Winter lambing proved more contribution margin than spring lambing by 1.46 times. The Star system remained competitive with winter and spring lambing, but contribution margins were reduced by over twenty percent when compared to the optimal accelerated lambing system.

Technical budgets have been prepared for each system of producing lamb, and it appears sheep production is profitable, given good management.

Without doubt, key markets at Christmas and Easter are favored above all other markets. Price preference has shifted to larger lambs in the past five years, although Christmas and Easter remain the markets of choice for any size lamb.

Acknowledgments:

I would like to thank the Gartshore family for their generous financial support. I thank the participants of the consensus meetings for their contributions, without which this research would not have been possible. Thanks to my summer student Jordan Jarjour for assistance with this project.

* All values are on a per lamb, per year basis.

*All values are on a per ewe, per year basis.
 
 

* Maximum contribution margin is defined for one ewe over the seven year period, and is the sum of the individual contribution margins multiplied by the average lambs weaned per ewe for the given lambing system.