Disease of sheep that is found by ditch (7)
I believe the answer is:
scrapie
'disease of sheep' is the definition.
(ovine disease)
'that is found by ditch' is the wordplay.
'that is' becomes 'ie' (abbreviation for id est, 'that is' in Latin).
'found by' means one lot of letters go next to another.
'ditch' becomes 'scrap' (I've seen this in another clue).
'ie' after 'scrap' is 'SCRAPIE'.
(Other definitions for scrapie that I've seen before include "Disease of sheep" , "beastly disease" , "It affects sheep" , "sheep killer" .)