The derogatory term sheep-shagger wasn't originally a reference to beastiality but rather sheep rustling.

In the UK during feudalism, theft was punished more severely than other crimes so if a thief was caught running off with a sheep they might get off more lenient if they said they were fucking it.

During the 19th century, parliament ordered investigations into what crimes were going on in different parts of the British Isles. These reports were largely fraudulent in order to make Scotland, Wales and Ireland seem less "civilised" and thus excuse the crackdowns of dissent going on at the time.

Due to the amount of sheep farms in Wales at the time it was easy to fabricate lots of sheep rustling.

Hence, the Welsh being sheep-shaggers.

Edit: nowadays of course if someone calls you a sheep-shagger they are saying you fuck sheep.