As this is written, the U.S. Drought Monitor (droughtmonitor.unl.edu) indicates that the 2012 summer drought is expanding. Most of the Southwest is in a drought, as is Wyoming, Kansas, parts of Texas, New Mexico and Oklahoma. Parts of the eastern Corn Belt and Southeast are also in severe drought. This is developing into a very dry year for a lot of cow country.
My early July analysis of the drought map suggests Colorado is the worst state, followed by western Kansas and some parts of New Mexico. Some states in the Southeast are also being hit. This year's weather has to be particularly tough on Texas, Oklahoma and New Mexico, which went through a serious drought last year and continue to suffer some in 2012.
I attended a drought meeting in Wyoming in mid-June at which ranchers met with several University of Wyoming Extension specialists to discuss drought-coping strategies. Local ranchers commented that conditions are the driest they've even seen this early in the growing season. Compounding the problem is the lack of snowpack in the mountains last winter, which means irrigation water will be limited this summer. Just one year ago, there was record snowpack in the Wyoming mountains. Oh, how things can change in one year.
During the meeting, Wyoming Extension specialists pointed out that the primary grass-growing months in Wyoming’s high plains are in late spring and early summer. If the grass is short of water during these key growing months, the total annual forage production would likely be low, even if it began to rain in mid-summer. This puts some urgency into developing a drought-management plan immediately. The rest of the meeting discussion focused on alternative drought-management strategies.
As this article is being written (early July), sale barns are reporting increased selling activity as ranchers begin to adjust to the drought. Local cattle prices are starting to come under pressure from the increased sale barn volume.
Traditionally, ranchers have just sold cows to reduce stocking rates as the drought progresses, which means cash income goes up dramatically as the ranch is depopulated. Sometimes, this money is used to pay down debts, after which cash expenses typically rise again even more as the ranch restocks following the drought. Restocking prices are normally higher than the fire-sale prices.
As an economist, I became quite concerned with this fire-sale strategy in the 2002 and 2006 droughts in Wyoming. I argued that selling down the cowherd impacts the financial well-being of the ranch business for the next decade. Either the ranch suffers a substantial drop in gross income for the next several years, or the ranch has to repurchase breeding females, which are often expensive replacement females. In either case, the drought's financial impact lasts for at least one generation of females. The net result of a drought is higher costs of production for the lifetime of the next generation of females.
There are three added economic costs in a drought that can be broken down into visible and invisible costs, with the invisible costs exceeding the visible costs in many cases.
• First, selling the breeding females, generally at fire-sale prices, is a visible drought cost.
• Later on, buying back or raising added replacements after the drought is another visible cost.
• Having fewer calves to sell in the years following the depopulation is an invisible cost – sometimes a huge invisible cost spread out over multiple years.
As ranchers formulate drought-management strategies, it's important that they separate “destocking” decisions from “depopulating” decisions. Destocking involves removing cows from the grassland; depopulating removes cows from ranch ownership.
Thus, destocking is a production decision, while depopulating is an economic one. These are two distinct management decisions, each with its own management decision variables.
You can destock the herd by removing them from the grassland and feeding them in a drylot, or by moving them to grass in another region or state. In fact, a lot of cows were moved east from eastern Colorado in the 2002 drought. Some experiences with this were more successful than others. In my travels last September, I observed a tremendous number of loaded hay trucks heading into Texas and Oklahoma. Apparently, many producers decided not to depopulate.
A second economic point is that optimal drought strategies vary with the stage of the cattle cycle. When calf prices are high, such as this year, several alternative drought-management strategies may be feasible. When calf prices are low, about the only strategy feasible is to sell cows. In today’s economic climate, ranchers are encouraged to evaluate traditional and non-traditional drought strategies. Automatic destocking and depopulating at the same time may not be the best strategy in today’s economic climate.
The 2002 drought was characterized by low calf prices and lower fire-sale prices for bred cows, followed by high replacement prices. The 2006 drought was during a national herd expansion characterized by higher calf prices, higher fire-sale prices, and lower replacement prices after the drought. So far, the current drought has had reasonably high fire-sale prices, strong calf prices, with projected high replacement female costs down the road.
In the 2002 and 2006 droughts, I simulated the 10-year implications of:
• Holding back zero replacement heifers,
• Selling off 30% of the mature females to reduce grass demand,
• And buying back replacement females after the drought vs. buying feed and keeping the original cowherd in place.
My conclusion was that the combined 2002 and 2006 drought impacts had the potential of reducing the next 10-year net cash flow of the ranch by 43%.
I concluded from my studies of the 2002 and 2006 droughts that the optimal drought strategy for the 2006 drought wasn't the same as that for the 2002 drought. This suggests ranchers should be careful in using previously used drought strategies in managing the current drought. While production circumstances may be similar, the economic circumstances may be quite different.
I have one final thought on drought strategies. How your herd has been performing economically should play a critical role in your drought management plan. For example, in the Northern Plains during 2011, the average beef cowherd grossed $941/cow, and had $415 in direct costs and $84 in overhead costs per cow. Replacement females cost $270/cow for a total cost of $768/cow. The earned average net return was $175/cow. This kind of profit potential leaves some leeway for implementing drought strategies.
What's more, the high-profit 20% of the herds studied had an average net return of $356/cow, which offers these operators considerable leeway in responding to drought. Meanwhile, the low-profit 20% of the herds lost $51/cow in 2011, which essentially leaves selling the cowherd as their only feasible drought strategy.
My conclusion is that producers need to know the economic performance of their beef cowherd during its last normal year before they formulate their optimal drought strategy for this year.
Harlan Hughes, a North Dakota State University professor emeritus, can be reached at 701-238-96607 or firstname.lastname@example.org.