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Making The Tough Decisions Regarding Drought

Ranchers in the dry regions of the West are starting to ask questions about the economics of drought strategies. After conducting considerable simulation work on the economic impact of alternative drought management strategies for the potential 2006 drought, coupled with the past 2002 drought, economist Harlan Hughes' conclusions may surprise ranchers.

Having developed the tools to look at the economics of alternative drought management strategies applied to specific individual ranches, the North Dakota State University professor emeritus and author of <i>BEEF</i> magazine's monthly column, "The Market Advisor," says his simulation work suggests the drought-management strategy a rancher selects is all-critical.

He recommends ranchers separate "de-stocking" decisions from "depopulating" decisions. The first concerns removing cows from the grasslands; the other concerns removing cows from ranch ownership. De-stocking is a production decision, while depopulating is an economic decision. These are two distinct and different management decisions, each with its own and distinct management decision variables.

Associated with a drought are three added economic costs that can be broken down into visible and invisible drought costs, Hughes says. First is the selling of breeding females at fire-sale prices. This is the visible drought cost. Meanwhile, buying back or raising added replacements after the drought is a second visible drought cost.

Having fewer calves to sell in the years following depopulation is an invisible (hidden) cost -- sometimes a huge hidden cost. In many cases, the invisible costs exceed the visible costs.

Second, Hughes suggests that optimal drought strategies vary with stage of the cattle cycle. When calf prices are high, several drought strategies are possible. When calf prices are low, about the only strategy available is to sell cows.

The 2002 drought was characterized by low calf prices and low fire-sale prices for bred cows, followed by high replacement prices after the drought. Meanwhile, in the current drought, we have high calf prices, projected higher fire-sale prices for bred cows, and projected lower replacement prices after the drought.

Thus, the optimal drought strategy for 2006 probably isn't the same as the optimal drought strategy for 2002. Be careful using your 2002 experience in formulating your 2006 drought strategy, Hughes says.

"I'm simulating two different drought strategies -- selling off 30% of the females to reduce grass demand, and buying feed and keeping the original cow herd in place. I'm currently looking at the compounding economic impact of the 2002 drought, and now a 2006 drought, projected over the total decade for the years 2000-2009," Hughes says. "As a general comment, the droughts of 2002 and 2006 are projected to reduce the 10-year total net-cash flow on my case ranch by 43%!"

Hughes says his simulations suggest buying feed and keeping the cow herd in place in droughts during the high-price phase of the cattle cycle reduces the impact of the drought substantially over the more traditional drought strategy of selling off females (de-populating some of the ranch herd). It's the current high-price phase of the cattle cycle that makes this possible.

TAGS: Disaster