The Commission instituted the subject investigation on November 1, 1994, following receipt of a request on October 12, 1994, from the United States Trade Representative. The investigation is being conducted under section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g)) and under the authority delegated by Executive Order 12661 for the purpose of investigating the competitive conditions affecting the U.S. lamb industry.[1]

[1]The information and analysis provided in this report are for the purpose of this report only. Nothing in this report should be construed to indicate how the Commission would find in an investigation concluded under statutory authority covering the same or similar subject matter.
Lamb meat is derived from young sheep, usually under one year in age. For purposes of this study, the U.S. sheep and lamb industry may be described as consisting of lamb growers and feeders, packers, and processors. U.S. sheep and lamb growers may be divided into categories including (1) purebred breeders (that is, those who keep purebred sheep and sell rams for breeding purposes), (2) commercial market lamb producers (those who maintain flocks of sheep for the production of lambs that are sent directly to slaughter or feedlots), and (3) commercial feedlot operators (those who maintain feedlots where lambs are fed concentrates until they reach slaughter weight). Lamb packers are companies that slaughter lambs, regardless of whether they process lamb meat. Lamb meat processors fabricate carcasses into primal, subprimal, or retail cuts. Lamb meat is distributed to the ultimate consumer through hotel, restaurant, and institutional (HRI) outlets and through retail grocery chains and butcher shops.

Some domestic interests have expressed concern about lamb meat imports that increased from 6.7 percent of domestic consumption in 1990, to 11.5 percent in 1994. Also, some domestic sheep and lamb growers contend that their sector has been adversely affected by recent U.S. government actions. For example, payments to growers under the National Wool Act of 1954 are estimated to have accounted for between 18 and 23 percent of annual gross returns to growers between 1990 and 1993; these payments are to end with the 1995 production season. Other U.S. Government actions have included restrictions on predator controls, including the termination of the U.S. Department of Agriculture (USDA), Animal Damage Control (ADC) program on lands administered by the U.S. Department of the Interior (USDI), Bureau of Land Management (BLM) effective on April 6, 1993. Growers have also noted other restrictions related to grazing on public lands administered by the BLM and the USDA Forest Service (FS). They further contend that regulations administered by the Immigration and Naturalization Service (INS) under authority of the Immigration Reform and Control Act of 1986 have made it difficult to employ shepherds from other countries.

Increasing concentration in the lamb slaughtering and processing sector, concomitant with a decline in the number of packing plants, has increased concerns on the part of growers. Indeed, growers have expressed a concern about a general decline in the infrastructure of the U.S. sheep sector, citing declining market outlets and shortages of specialized labor. They have also noted that the relatively small size of the U.S. lamb sector impedes investment and research by such supporting industries as the animal medicine industry.


United States
 In the United States, most sheep and lambs are meat-type animals kept mainly for the production of lambs for meat or dual purpose breeds kept both for the production of lambs for meat and wool. The U.S. sheep sector, located primarily in the Western States and in the Corn Belt, has been in a long-term decline as measured by the number of animals or growers and by lamb meat production. However, prices for lambs generally rose during 1990-94.

 The U.S. sheep and lamb population declined by 22 percent, from 11.4 million animals in January 1, 1990, to 8.9 million animals in January 1, 1995. The number of sheep-raising operations in the United States declined by 20 percent, from 108,940 in 1990 to 87,350 in 1994. The Western States accounted for 79 percent of the total U.S. sheep and lamb population as of January 1, 1995; the Corn Belt accounted for 15 percent.

 During 1990-94 the annual average price for live lambs rose irregularly from $55.42 per 100 pounds (cwt) to $66.77, or by 20 percent. The rise in price corresponded with a general decline in lamb meat production, which fell by 13 percent, from 346 million pounds in 1990 and 1991 to 300 million pounds in 1994. The price pattern for lamb carcasses was similar to that for live lambs. During 1990-94, the annual average price for lamb carcasses rose by 22 percent, from $121.47 per cwt to $147.62. Some domestic sheep and lamb growers have expressed concern about the farm-retail price spread between live lamb and lamb meat. This spread may reflect to some extent a less efficient U.S. lamb meat processing and distribution sector in comparison with other meat sectors, such as beef and poultry.

 U.S. imports of fresh, chilled, or frozen lamb meat are subject to several health and sanitary measures. Virtually all U.S. imports of lamb meat are from Australia and New Zealand. Frozen bone-in cuts of lamb meat represent the bulk of lamb meat imports and reflect transportation cost considerations. The share of imports accounted for by frozen products rose from 69 percent in 1990 to 80 percent in 1994; fresh or chilled lamb meat made up the remaining 20 percent. During 1990-94, annual U.S. imports of fresh, chilled, or frozen lamb meat increased irregularly from 24.9 million pounds, valued at $31.3 million, to 38.7 million pounds, valued at $48.7 million.

 Imports from Australia rose 70 percent in terms of volume during this period. U.S. imports of Australian lamb amounted to 13.4 million pounds, valued at nearly US$14 million, in 1990, compared with 22.8 million pounds, valued at US$26.5 million, in 1994. Imports from New Zealand rose 38 percent in terms of volume from 1990 to 1994. More than 11.5 million pounds, valued at US$17.3 million, were imported in 1990, compared with the more than 15.9 million pounds, valued at US$22.2 million, imported in 1994.

 During the 1980s, the domestic lamb sector filed three petitions with the United States International Trade Commission (USITC) alleging that imports of lamb meat from New Zealand were being subsidized and/or were being sold in the United States at less than fair value (LTFV). One petition was withdrawn and the investigations associated with the other petitions resulted in USITC determinations of no injury or threat of injury to a domestic industry. A fourth petition alleging that imports of lamb meat were being subsidized by the Government of New Zealand was filed with the U.S. Department of Commerce (DOC) in 1985. This petition resulted in a countervailing duty order (CVD) on imports of lamb meat from New Zealand entering on and after June 25, 1985.

 Eight final administrative reviews of the CVD order on lamb meat from New Zealand have been completed by the DOC. The CVD (subsidy) amounts decreased for each annual review, and the total bounty or grant was found to be de minimis for all firms for the review period April 1, 1990, through March 31, 1991. A subsequent final review for the period April 1, 1991, through March 31, 1992, also determined de minimis CVD amounts for all firms.

 On May 22, 1995, the DOC published a notice of its final determination that the subsidy for the period April 1, 1992, through March 31, 1993, was de minimis for all firms. In the same notice, the DOC reported its final determination that the Government of New Zealand had met the requirements for revocation of the CVD order. Accordingly, on May 22, 1995 (60 F.R. 27082), the DOC announced a revocation of the CVD order.

 In Australia, about 75 percent of the sheep are wool-type (animals kept mainly for the production of wool), unsuited to produce lambs for meat. During 1990-94 (as of March 31), the number of sheep and lambs in Australia fell from 170 million animals to 134 million. The decline in Australian sheep numbers reflects declining profitability of wool production in Australia during the early 1990s and adverse production conditions resulting from drought.

 Exports of lamb meat have become increasingly important to the Australian sheep sector in recent years, and the United States is an important market. During FY 1990-94 (year ended June 30), Australian exports of lamb meat rose irregularly from 87.6 million pounds (shipped weight), valued at US$84 million, in 1990, to 127.4 million pounds, valued at US$134 million, in 1994. Exports also rose irregularly as a share of Australian lamb meat production from 14 percent in 1990 to 23 percent in 1994, reflecting decreased production as well as irregularly rising exports.

 The United States was the largest single market for Australian exports of lamb meat in terms of quantity during 1990-94. In terms of value the United States was the largest single market for Australian lamb meat exports in all years except 1991 and 1992, when the value of exports to the European Union and Japan both exceeded those of the United States. The United States accounted for 19 percent of the quantity and value of Australia's exports of lamb meat in 1994.

 Australian Federal Government involvement in the sheep sector appears to be largely through wool-related programs or general agriculture programs rather than through programs that are specifically limited to live lambs or lamb meat. Most Australian Federal Government programs related to sheep production are administered by the Department of Primary Industries and Energy by subdivisions, or "Sub-programs," which appear to be similar to agencies of the USDA. The Wool Industry Supplementary Payment Scheme was established by the Australian Federal Government in March 1991 after the abolition of the Reserve Price Scheme, a program to provide price stability for Australian wool. The announced purpose of this program was to compensate wool growers for the difference between the market price for wool and the Reserve Price for wool sold between February and June 1991. The total payment to sheep growers from the Wool Industry Supplementary Payment Scheme was AUS$311 million, including AUS$300 million of Australian Federal Government funds. This program was terminated in 1992.

New Zealand
 In New Zealand, most sheep are dual-purpose animals. Although New Zealand sheep growers benefit from nearly ideal climatic and grazing conditions, the sheep inventory declined from 57.9 million animals in 1990 to 50.1 million animals in 1994, continuing a long-term decline from 70.3 million in 1982. The decline in sheep numbers reflects in part lower wool prices and the continued movement, especially in northern regions from sheep to dairy cattle, beef cattle, and forestry.

 Meat processing is handled mainly by a number of private-sector companies, some of which are owned by producer cooperatives. Reportedly, inefficient plants have been closed in recent years; others have been modernized, and new efficient plants have opened. Significant gains reportedly have been made in productivity in recent years, and per head processing costs have been declining. During 1994, two large meat-processing companies went into receivership.

 Between 95 and 97 percent of New Zealand's annual lamb meat production during 1990-94 was exported. New Zealand lamb meat exports increased from 732 million pounds in 1990 (year ending September 30) to 838 million pounds in 1992, then dropped to 747 million pounds in 1993, and rose to 827 million pounds in 1994. The largest market for New Zealand lamb meat exports is the European Union (EU), which accounted for 52 percent (by quantity) of New Zealand's exports in 1994. New Zealand sheepmeat (mutton and lamb) exports into the EU are subject to import quotas under various voluntary restraint agreements. Other major markets include the Middle East, Papua New Guinea, Fiji, North America, and Asia. U.S. imports of New Zealand lamb meat were equivalent to 2.5 percent of total New Zealand lamb meat exports and to about 5 percent of U.S. consumption in 1994.

 Government assistance to New Zealand agriculture has fallen significantly since the 1980s. Government funded research, primarily related to animal and plant health concerns, and disaster relief are the major areas in which the Government provides assistance. The New Zealand Government made a commitment in 1991 to maintain a minimum level of funding (NZ$255 million per year) for its investment in research through the Public Good Science Fund. Approximately NZ$13 million of this funding is allocated to sheep production.

Comparative Analysis
 Available data suggest that live lamb raising, and thus, lamb meat production are generally lower in cost in New Zealand and Australia than in the United States, and likely reflect, at least in part, different management practices of live lamb growers.

 Mature sheep typically are fed on pasture in the United States, but, in addition, they receive some concentrates (usually grains) and protein supplements. In New Zealand and Australia sheep and lambs are fed almost exclusively on pasture and limited amounts of hay. In the United States, grains and protein concentrates accounted for about 20 percent of estimated total variable cash expenses annually during 1989-94. Hay accounted for an additional 10 percent of estimated total variable cash expenses. Total hay costs are believed to be lower in New Zealand and Australia, reflecting the longer pasture seasons in those countries.

 U.S. lamb packers also pay a higher price for lambs than do their counterparts in New Zealand and Australia. Lower prices for live animals in Australia and New Zealand provide a cost advantage to packers in those countries relative to their counterparts in the United States.

 The U.S. sheep and lamb packing sector is rather concentrated and has become increasingly profitable in recent years. The Australian meatpacking sector is relatively inefficient. The competitive position of New Zealand's meatpacking sector, especially lamb, has suffered from overcapacity and high debt levels, and, in recent years some plants have closed.

 The number of large U.S. lamb packing plants has declined from 11 in 1991 to 7 in 1995. Eight large plants accounted for 83 percent of U.S. lamb slaughter in 1994. Packers responding to the Commission's questionnaire (accounting for over 86 percent of domestic production) reported their operating income as a share of net sales ranged from 1.4 percent in 1993 to 3.5 percent in 1994. Operating income was 2 cents per-pound in 1992 and 1993 and 6 cents in 1994.

 In a private study commissioned by the Australian Meat and Live-stock Corporation, the Australian meat packing sector, while marginally profitable, was found to be less efficient than counterparts in a number of other countries, including New Zealand and the United States. Although, Australian packers obtain low-cost animals, they have relatively high wage rates, restrictive labor practices, and strikes.

 The New Zealand lamb packing sector benefits from relatively low-cost animals for packing, economies of scale, and a relatively concentrated geographic area which limits transportation costs. In August 1994, several lamb packing plants, representing about 30 percent of the capacity of the North Island of New Zealand, closed, sharply reducing an overcapacity problem. In the South Island one plant was closed because of a bankruptcy.

 Domestic lamb carcasses and the cuts derived from them are typically larger than imported carcasses and cuts. The average U.S. carcass weighed 63 pounds; New Zealand carcasses averaged 33 pounds; and Australian averaged 40 pounds in 1994. Commission questionnaires sent to lamb meat purchasers requested comparisons between imported and domestic lamb meat relating to such factors as product quality, palatability, fat content, consistency of product specifications, shelf life, availability, packaging, and servicing. The most common response to the aforementioned factors was that the imported and domestic products are comparable.

 Domestic lamb meat, especially at retail outlets is typically sold fresh or chilled, whereas imported meat is often sold frozen. Some consumers prefer fresh meat because it is perceived to be higher in quality. The shelf life of frozen lamb meat is obviously an important consideration for Australian and New Zealand lamb meat in the U.S. market since three weeks transit time must be allowed for surface transportation.

 In the United States lambs are typically fed concentrates in addition to pasture and milk from their mothers. Such lambs are referred to as "fed lambs." In New Zealand, lambs are fed only on pasture and milk from their mothers, and in Australia concentrate feeding is minimal. Some consumers contend that meat derived from grass-fed lamb is "gamier" and has a stronger flavor and aroma than meat derived from grain-fed lambs. According to hearing testimony, responses to the Commission's questionnaires, and fieldwork, the preference of individual consumers in the U.S. market between large or small-sized cuts, fresh or frozen form, and grain-fed or grass-fed lamb appears to vary considerably.

 Price appears to be an important factor influencing purchase decisions for U.S., Australian, and New Zealand lamb. The Commission's questionnaire asked purchasers to rank the importance of various factors in their decision to purchase U.S., Australian, and New Zealand lamb meat. Quality was reported to be very important in 16 of 18 responses, availability was ranked as very important in 15 responses, and price and price consistency each were ranked as very important in 10 responses. No respondent purchasers of U.S., Australian, or New Zealand lamb meat ranked quality, availability, price, and price consistency as somewhat important or unimportant.

 The relative prices of domestic and imported lamb meat fluctuated significantly during 1990-94 according to information obtained from the Commission's questionnaires to purchasers and importers. The relative prices of domestic and imported lamb meat vary depending on the cut and form (fresh or frozen) under consideration. Also, the price of imported lamb meat is influenced by transportation cost. The fresh or chilled imported meat is flown to the United States at a cost of US$0.85 per pound. Frozen lamb is typically sent to the United States by ship at a cost of US$0.17 per pound.

 During 1994 Australian and New Zealand fresh racks and fresh legs, and New Zealand fresh carcasses were higher priced per pound than their domestic counterparts according to information obtained from the Commission's questionnaires to purchasers and importers. During May-December, fresh Australian and New Zealand shoulders were reported to be lower priced per pound than domestic fresh shoulders were reported to be lower priced per pound than domestic fresh shoulders.

 During 1994 New Zealand frozen racks were reported to be higher priced than domestic fresh or frozen racks. However, for all other frozen imported lamb meat (where price comparisons were available) both Australian and New Zealand were reported to be lower priced than their domestic fresh or frozen counterparts.

 An econometric model was developed to illustrate the competitive conditions affecting the U.S. sheep-related markets. Model results suggest that increased imports displaced U.S.-produced lamb quantities to an extent that apparently falls between the range of opinions expressed by U.S. and foreign producer representatives. Results suggest that imports displaced some U.S.-produced lamb quantities, but such displacement typically has not significantly influenced price.

 Simulation results from the econometric model suggest that increasing U.S.-produced quantities displace imports to a greater extent than increasing imports displace U.S.-produced lamb. According to model results, expanding U.S. quantities of lamb produced and consumed appear to displace lamb meat imports; historically, increases in U.S. quantity result on average, in a fall in U.S. lamb price, a rise in U.S. wool production, a decrease in the price of U.S.-produced wool, and a large drop in lamb meat imports. Model results also suggest that elimination of Wool Act benefits will likely result in some contraction of the U.S. industry.