Santiago makes some critical observations about the condition of sheep.  One such observation is that the sheep follow the "herd."  They move as a group, rarely breaking off from the group to go on their own.  This bears connection to Santiago's own life as he is in the midst of a "dark wood" in which he must decide to follow the life of the "herd" (being a priest and making his father and his adherence to social conventions happy) or going out on his own and traveling.  Santiago also thinks about the loyalty of the sheep.  They blindly follow what Santiago says without much in way of regard for their own choices and sense of autonomy. It is here in which Santiago is disturbed at how easily he could kill one after another and they would not be disrupted.  

Such a thought process disturbs him and it is here in which Santiago ends up making his most critical observation.  He observes that the sheep are only concerned with their own subsistence.  They eat and drink and that is about it.  For Santiago, this becomes an elemental notion of human existence.  Santiago's thoughts begin to move into the realm of whether this is really all human beings are meant to do in terms of only being concerned with the present, that which is in front of them.  For Santiago, this construction of reality denies the ability to dream and to reconfigure what is into what can be.  These thoughts about the sheep end up coming back to Santiago's state of being in the world and what needs to be done about it.  Santiago comes back to this when he recognizes that his condition in the world is one in which he is poised "between my flock and my treasure."  His thoughts about the sheep help to develop this understanding.