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The Economics Of Various Drought Strategies

Article-The Economics Of Various Drought Strategies

The Economics Of Various Drought Strategies

The 2012 summer drought hit much of cow country. Derrell Peel, Oklahoma State University Extension economist, summed up the situation in late August this way:

“The percent of pastures and range rated as poor to very poor is 59% for the entire country, with higher percentages for the Great Plains (77%), Corn Belt (69%), and Southern Plains (66%), along with the Western region at 54%.”

Peel says that this summer’s poor grazing conditions are accompanied by severely reduced hay production. In fact, USDA’s August Crop Production report estimated 2012 alfalfa hay production down 21.5%, and total hay production is projected to decrease by 13.3%, compared to the 2006-2010 average. These two factors combine for a projected all-hay production figure for 2012 that is 17.3% smaller than the 2006-2010 average, and would be the smallest total U.S. hay production since 1976.

The bottom line is that we’re going into winter 2012/2013 with pastures short and hay supplies limited.

After moving to Wyoming in 2001 and experiencing the 2002 drought, I wrote in a “Market Advisor” column about my concern that little or no economics was employed in the drought recommendations I was reading at that time. I asked readers to consider whether it was possible that ranchers were making a serious crisis even more so by depopulation strategies tied into the recommended destocking strategies?

A Closer Look: Study Herd Performance In Developing A Drought Strategy

I didn’t know the answer and figured that by the time that I could research the question, the drought would be over. So I dropped the question and went on writing about other topics.

In 2006, however, another drought hit Wyoming. At this time, I was working on a multi-state educational project focused on drought strategies for ranchers. My challenge was to look at the economics of drought strategies.

Three definitions helped lay out this challenge.

  • Destocking, defined as “removing animals from the grassland,” is production-oriented with its own specific set of decision variables.
  • Depopulating, defined as “selling animals from ranch ownership,” is economics-oriented with a different set of specific decision variables.
  • Repopulation is defined as “adding animals back into the grazing herd.”

With these definitions clearly in mind, I turned to some of my rancher clients and asked them what drought strategies they used in the 2002 drought. Here are a few of the answers:

  • A Nebraska Sandhills rancher said he reduced his cowherd by 15% in 2002, and wintered his cows on cornstalks. He backed off on replacement heifers, but had a goal of selling a large number of cows at the next cattle cycle price peak targeted for some time around 2006.
  • A rancher in north-central Wyoming depopulated his herd by 30% in 2002. He artificially inseminated his total herd one time, aiming for a large group of uniform calves that would bring maximum calf price on the video auction. He shipped his remaining cowherd 135 miles to aftermath grazing, and invested in high-quality, non-ag property. He plowed the earnings back into the ranch operating expenses.
  • Another Wyoming client early-weaned in 2002 and sent the calves to a feedlot for growing and finishing. This worked well and became part of his marketing program even after the drought broke. A key advantage is that dry cows can be maintained easier. He depopulated 17% of his cows, wintering the rest on windrowed hay and supplement. He planned to repopulate by holding back ranch-raised heifers.

Let me share one more drought experience. In 1985, I moved to North Dakota, which had weathered a major drought in 1982. After the fact, I talked to several North Dakota ranchers about the management strategies they used in the 1982 drought. Several mentioned moving their cows south 400-500 miles to grass in southern South Dakota and suffering a financial disaster as a result.

In 1988, North Dakota experienced another drought. My economic analysis suggested that North Dakota ranchers “should” move the cows somewhere else to graze. North Dakota ranchers, however, assured me, in no uncertain terms, that they would not do that.

I asked myself where my analysis went wrong. Why had I concluded a recommendation so different from what ranchers were willing to consider?

I finally came up with an answer – the optimal drought strategy depends on where we are in the cattle cycle. In 1982, the cattle cycle was completely different than in 1988. What worked best in one drought may not work the best in the next drought.

Let’s look at the economics of depopulating. There are two costs associated with depopulating a beef cowherd:

  • The visible costs, which include selling bred cows at fire-sale prices and repopulating with expensive females.
  • The invisible costs, which come from having fewer calves to sell when it starts raining and fewer calves to sell in the early post-drought years.

Frequently, the invisible costs are greater than the visible costs.

Accepting that the optimal drought depopulation and repopulation strategy depends on where we are in the cattle cycle; let’s look at what point in the cycle the 2002, 2006 and 2012 droughts occurred.

The 2002 drought occurred at a time of low calf prices, low fire-sale prices of females, and high repopulation costs (green in Figure 1). Thus, the drought’s financial impact on depopulated herds was quite large.

Meanwhile, the 2006 drought occurred in a time of higher calf prices, higher fire-sale prices for females, and lower repopulation costs. The financial impact of depopulating was much less.

My economic analysis suggested quite different optimal drought strategies for these two droughts. The optimal strategy for the 2002 drought was to buy feed and not depopulate, while the optimal strategy for the 2006 drought was to sell females and buy back bred replacement females after the drought.

I project higher calf prices in 2014 and 2015. Most traditional depopulation strategies, however, will result in a dramatic drop in the number of calves sold in 2013 to 2015. That’s just when profits normally would be the highest in the cattle cycle.

The projected economic impact of having fewer calves to sell in 2013 to 2015 is huge. Ranchers should give serious consideration to drought strategies that maintain the beef cowherd’s calf production potential for 2013 through 2015.

Next month, I’ll detail my projected optimum drought strategies.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected]

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