Drought decisions require economic analysis

Powell – As producers continue to battle drought and the consequences of an unusually hot and dry year across the country, Professor Emeritus of North Dakota State University Harlan Hughes said, “In the summer of 2002, when the drought hit quite a bit of Wyoming, there was little or no discussion on the economics of it, and that concerns me.”
    Hughes was among a list of speakers who presented at the “Managing Drought Risk on the Ranch” workshop hosted by Northwest College and presented by the National Drought Mitigation Center, with sponsorship from USDA’s Risk Management Agency.
    “Is it possible that a rancher going through the drought might make it worse with the decisions they make?” asked Hughes.
Destock versus depopulate
    “Destocking is removing the animals from the grass,” Hughes explained. “Depopulating is removing the animals from the ranch. In other words, selling.”
    Hughes noted that the decision to destock or depopulate can have severe economic impacts, depending on where in that cattle cycle we currently are.
    “When I moved to North Dakota, the ranchers started telling me about the 1980 drought there, and the ones that moved their cattle 400 to 500 miles to grass said it was a complete financial disaster,” he said. “In 1988, they had anther drought, and as I went through the calculations, the numbers said they should move to grass.”
    While drought remained the same, Hughes said that the cattle cycle made the difference.
    “What was the difference in those years?” he asked. “It took me a long time to reach this conclusion, but my conclusion was, the optimum drought strategy depends on where we are in the cattle cycle.”
    To survive drought, Hughes said it is important to break drought strategies into destocking and depopulating.
    “Destocking is a production decision that has its own set of parameters,” he noted. “Depopulating is an economic decision based on economic parameters.”
Economic perspective
    In looking at the decision to depopulate or to destock, Hughes said that producers must look at both the visible and the invisible costs.
    Hughes defined visible costs as those that result from selling good cows at low prices and the high prices producers pay to purchase replacements when they decide to repopulate the herd.
    “I hear a lot about the visible costs,” he said. “There are also invisible costs, and quite often, they are greater than the visible costs. Yet, we focus on the visible cost.”
    The invisible costs are the calves that you don’t have to sell in future years, after prices are restored.
    “We are at a place in the price cycle where it makes a difference in which drought management strategy you use,” he added, noting that the difference is seen in invisible costs.
Strong predictions
    Using a simulated cowherd scenario, in combination with his predictions for the future of cattle prices, Hughes was able to analyze the potential implications of decisions to depopulate herds.
    First, Hughes predicts strong calf prices in 2012 through 2014, dropping only slightly in 2015 before prices will decrease again.
    “In 2012, 2013, 2014 and even 2015 is where I will make my money,” he said of the simulated herd. “Cull cow prices are harder to project. They are quite strong, and we will probably see them get just a hair weaker, but not bad, compared to historical numbers.”
    Hughes also projected bred heifer prices as being high through 2015, especially with the likely rebuilding of the cowherd, but he also noted that it is tough to predict.    
Strategies
    Hughes detailed three strategies for dealing with drought and demonstrated the implications using his simulated herd over a ten year period.
    The first strategy involved depopulating and allowing the herd to grow back slowly. By selling 60 bred cows and holding back no replacement heifers, Hughes noted the option would allow producers to not have to worry about grazing during the winter of 2012. Then, in 2013, this strategy provided for holding back a normal 46 replacement heifers.    
    The second strategy looked at buying back the 60 bred females in 2013 after depopulation, while the third strategy was to cull by 60 animals in 2012 and restock as quickly as possible, buying 85 replacements in 2013 and another 85 in 2014.
    “Under normal conditions, my cash flow for the herd averaged $38,000 per year over the 10 year period,” Hughes explained. “However, in the first strategy, I see an average of only $27,000 per year over that time period.”
    Because there are no calves to sell in 2013 or 2014, Hughes said there are some challenges, and invisible costs for the first strategy amount to over $346,000.
    “Those are the calves I don’t have to sell, and I’m selling fewer calves during the high priced times,” he said.
    In the second strategy, the average again was $27,000 per year, but invisible costs were lowered to only $105,706, because the herd was rebuilt.
    The third strategy saw an average of $30,000 over the ten-year period, with invisible costs at $146,346.
    “It can be a challenge,” commented Hughes, adding that after depopulating the herd, there is going to be a large amount of cash in the bank. “We have large profit in 2012, but I have some holes later. It is critical to figure out how to transfer 2012 profits into 2013.”
    “There are two categories of drought costs,” he emphasized. “Look at the visible costs – the fire sale prices for culls and high priced replacements – and the invisible costs – the costs of not having as many calves to sell in future years. That tends to be the bigger cost.”
    Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.

Current situations
    North Dakota State University Professor Emeritus Harlan Hughes said the current situation for the cattle herd shows promise.
    “We know that as harvest numbers go down, we rebuild the herd,” he said. “When we build cattle numbers up, we start selling. We are in the phase now that harvest numbers are going down, and cattle numbers are going down, so the price should start back up.”
    Hughes continued that, prior to the drought, many producers planned to start rebuilding their herds again, but drought caused reconsideration.
    “If we can hang on, we should have some good prices for calves,” Hughes said.

Drylot options
    With depopulating an option during drought times, Professor Emeritus of North Dakota State University Harlan Hughes shared drylotting options as a potential solution, as well.
    “We have been running a drylot beef herd for years,” commented Hughes of the NDSU program. “The cows are in the drylot year around.”
    However, he commented that the economics of drylot ranching is not competitive with traditional grazing during normal years.
    “My point is, drylotting is an option in a drought, so we don’t have to depopulate necessarily,” Hughes explained. “It allows you to destock, but you don’t have to depopulate.”