H-2A Labor Rate Impacts on Range Sheep Operations
Published on Feb. 29, 2020
By Bridger Feuz, University of Wyoming Extension
A few years ago, just before wage increases were implemented, a team from University of Wyoming including Tex Taylor, Roger Coupal, John Ritten and myself analyzed the potential impacts to Wyoming sheep producers as a result of proposed H-2A wage increases.
Our results showed it would be very difficult for Wyoming producers to remain profitable, and therefore, remain viable businesses. At the same time, I was working on a western region cost of production model, which would suggest western range sheep producers would see very similar results to Wyoming sheep producers.
John Ritten summarized our findings in an article titled, What Proposed H-2A Changes Might Look Like for Wyoming. The following are some highlights from the article.
“We compared returns under the current regulation where foreign herders receive $750 per month plus room and board against the proposed wages of $2,400 per month plus room and board,” the article reads. “While the wage increase would be phased in over a five-year period, we simply looked at before and after the wage increase to see the impacts on range flock operators.”
The article continues, “Under the current regulations, prior to wage rate increases, per-ewe revenues must be at least $97.85 to cover operating costs, while under the proposed wages per-ewe revenues would have to be $125.40 to cover operating costs.”
“Using price data from the last 20 years, adjusted for inflation, for animals and wool, our ‘typical’ producer goes from being able to cover operating costs 85 percent of the time under the current regulations to only 30 percent of the time under the proposed changes,” says Ritten. “Further, when analyzing the ability for the ranch to produce a profit, returns above both operating and ownership costs, the proposed wage increase will potentially have a very large impact.”
He continues, “Before any rule changes, we expect the ‘typical’ ranch to be profitable roughly 40 percent of the time. However, under the proposed changes, our typical ranch would cover all costs only eight percent of the time.”
According to the latest Census of Agriculture, almost 355,000 sheep in our state and 84 percent of sheep operations had at least 1,000 head. These are the operations most likely to rely on foreign herders, and therefore, be impacted by the proposed wage increases.
“In 2013, the economic value of production for the sheep industry for Wyoming was estimated at $33.5 million,” according to the article. “When accounting for the secondary impact of the industry, economic value of businesses that provide goods and services to the sheep industry, for example, the total economic impact of the sheep industry is estimated at more than $66 million per year, as of 2013.”
Final wage rate
This original analysis was done prior to a finalized wage rate for H-2A workers. This analysis examined a potential wage increase to $2,400, while currently the 2020 wage rate is at $1,682. Additionally, our initial assumptions in conducting this analysis were that producers would maintain the same level of H-2A staffing and firms would have no impact on market prices.
So how have producers adjusted as a result of the wage increases? Have they reduced staffing? Have they been able to influence market price, passing on increased labor costs to consumers?
In interviews with producers, I have asked about staffing since the H-2A wage increase. Firms have been able to make only marginal changes to staffing. Optimal band size has been developed over years of experience to maximize production per herder per band.
Ranches that tried to significantly increase band size to become more labor efficient saw significant negative production impacts and were forced to reduce band size back to traditional levels.
What operations are finding is that they were already operating at a highly efficient level and there was very little room to make labor adjustments.
Table 1. Changes in H-2A labor rates as compared to feeder lamb values
So, producers have had limited success adjusting staffing levels. What has the impact been on market price? Livestock agriculture, including sheep production, is a highly commoditized industry. Because of this commoditization, it is nearly impossible for any single producer to influence market price.
Even relatively large groups of producers acting as one have difficulties influencing market price. This differs from other more integrated agricultural industries using H-2A labor that are better able to pass on increasing costs to the final consumer.
This reality is born out of looking at H-2A labor rates as compared to market prices for lamb. For the period of 2010 to 2015 lamb prices averaged $139.16 per hundredweight for 60 to90-pound lambs as reported in the 3mkt average.
The 3mkt average is made up of the three key regionally distributed feeder lamb auctions in the western U.S. H-2A labor rates were $750 per month per employee. For the period of 2016-2019 lamb prices averaged $147.38 per hundredweight. The H-2A labor rate for 2019 is $1,633 per month.
Lamb prices increased a modest six percent over this time frame, while labor rates increased by 118 percent in the same time frame.
While some industries are able to pass on increased labor rates to their customers through price increases, it is clear the sheep industry is not able to pass on those added costs, and therefore, is forced to absorb most of those costs at the peril of their business viability.
Table 2. Number of lambs sold per H-2A annual salary
In 2010, a producer needed to sell 78 lambs to account for one H-2A salary. In 2019, a producer needs to sell 135 lambs to account for one H-2A salary. That represents a 73 percent increase in the number of lambs required to offset an H-2A salary. The impacts of labor rate changes are significant to range sheep producers.
To further understand the impacts, we can look at the U.S. Baseline Lamb Cost of Production Analysis: 2018 Update. This analysis looks at cost of production on a regional basis to develop a national model. The Wyoming region represents western range flock type operations.
As a result of increasing costs of production including H-2A labor rate increases along with increasing costs for securing, housing and feeding H-2A employees, profit in this region for the model or average ranch is showing a negative return. For the six years prior to the implementation of the wage increase the average return over total costs on a per ewe basis was a modest $28.
As labor rates increased the average over the last three years, there was a loss of $4.87 per ewe. In 2018, with the labor rate being fully implemented, the loss was $15.67 per ewe. If these losses continue it will be extremely difficult for western range flocks to maintain viability.
When we as a group of Wyoming researchers looked at the potential impacts associated with losses to sheep producers, we used the number of ewes currently in Wyoming of 355,000 and arrived at a potential total impact to the Wyoming economy of $66 million dollars. However, these impacts are not unique to Wyoming. If we look just at the intermountain region comprised of the states of Montana, Idaho, Wyoming, Colorado, Utah and Nevada, there are 1,558,000 ewes. This total is nearly five times the size of our original analysis.
A new analysis would need to be conducted to understand the true total dollar value impact given a loss of sheep producers in the region, but it is reasonable to assume it would also be nearly five times the amount we found in the original analysis.
Ideally, in commoditized markets, labor rates are set in a competitive market driven process. It is not unusual for society to wish to protect workers through artificial wage standards.
However, whenever wages are set at an arbitrary minimum there will be ripple effects in the industry. This is especially evident when the minimum wage is set at a rate that creates a negative return for business owners.
It is still too early to assess the ultimate economic impact of the H-2A labor rate increases on the sheep industry and the region. The initial analysis conducted at Wyoming is valid and shows that profitability is a significant challenge as labor rates increase.
Additionally, we see that individual producers have no ability to pass increased cost of production on to consumers.
Since the labor rate increase, lamb prices have remained relatively stable and strong, allowing producers to remain just below the long-term profit breakeven. We know that the sheep market experience variability and significant down turns are not uncommon.
Will ranches be able to survive those inevitable down turns when ranch equity is stretched thin from increases in labor costs? Will the market be able to adjust as ranchers are forced out of business and supplies are significantly reduced?
Bridger Feuz is a University of Wyoming Extension livestock marketing specialist. He can be reached at BMFeuz@uwyo.edu.