Impacts of H-2A Changes in Wyoming

Members of the Ag Economics Department at the University of Wyoming (UW), including Tex Taylor, Roger Coupal, Bridger Feuz and myself, were recently asked to analyze what the new H-2A visa rules would look like for Wyoming sheep producers.

While the impacts of the proposed rule will vary by operation, we took the approach of determining what impact the proposed wage increase would have on a “typical” range flock operation consisting of 1,000 breeding ewes. 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.

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.

If an operation hired two foreign herders, the proposed wage increase would cause total operating costs to increase by almost 30 percent. Under the current regulations, 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.

Further, the increase in wages would decrease returns over operating costs by 78 percent.

What is more telling, however, is how these impacts look over a range of economic conditions. When using historic prices to calculate profits, the impact of the wage increase is even less favorable, as current high price levels are able to somewhat mask the impact of increased costs.

Using price data from the last 20 years, as 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.

Further, when analyzing the ability for the ranch to produce a profit, defined as returns above both operating and ownership costs, the proposed wage increase will potentially have a very large impact. Before any rules 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. This drastic reduction in profitability will likely have some major long-term impacts on the industry.

Granted, sheep might not be as impactful on Wyoming’s overall economy as some other industries in the state, energy extraction for example, but the state does see quite a bit of economic activity from the sheep sector.

The latest Census of Agriculture, performed in 2012, showed 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. When accounting for the secondary impact of the industry, including the 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 over $66 million dollars per year as of 2013. The sheep industry provides roughly 835 jobs statewide, with total wages paid around $27 million.

Any negative consequences felt directly by the sheep industry will therefore be felt across our state.

There will also be impacts felt in surrounding areas, especially if sheep numbers are reduced in response to an increase in operating costs. I am not sure how many fewer sheep we can see without seeing feedlots and packing plants be either closed or mothballed in response to a decreased supply of inputs. Any further shrinking of the facilities in the downstream supply chain could potentially be a drastic blow to the already staggering sheep industry – especially as producers are already facing a dwindling market for U.S. lamb.

The average American consumes less than a pound of lamb per year, and much of what we eat already comes from overseas. The strong U.S. dollar currently makes these imports seem relatively cheap, especially if domestic production costs are going to rise. The new H-2A wages seem like just another blow to the industry at a time when it really could use a break.

So, the question I’ve been asked a lot lately is, “Is this the end of the sheep industry?” I don’t think so. I do think it may be the end for a few operations, but our “typical” ranch does not adequately portray all operations in the state. There are likely quite a few operations that are either more efficient producers who are able to produce lamb cheaper than our model suggests or either currently are – or will find – a way to be less reliant on foreign herders.

Agricultural producers tend to be both resilient and innovative, so I am confident some producers will find their way through the coming storm. I am confident there will be some producers who are able to survive with the new wages. However, the sheep industry may very well look quite a bit different in a few years if the proposed wage increases take effect.