There's a saying in the West that the next drought is only a day away. Thus, successful producers operate with the philosophy that drought is not an anomaly but a way of life in a semi-arid climate.
That's the philosophy of the Cornwell family of Glasgow, MT, for whom drought isn't even a part of their vocabulary.
Their philosophy is that “normal” years are the aberration. Given the uncertain nature of forage supplies from year to year, the ranch utilizes two basic deferred-rotation grazing systems and two rest-rotation systems.
And, while they have no formal monitoring system on either their private land or public land leases, they keep a close eye on what's out there on the range.
“We always look at our resources late in the winter and determine what the moisture situation looks like,” says Lynn Cornwell. “Then we determine where we have old grass left and manage numbers accordingly.”
Average river basin stream flows across Montana are forecast to be 65-75% of normal this summer. Late-winter soil moisture levels around the state were critically shallow, if there's any at all.
West of the Continental Divide, throughout most of the West, average stream flows are forecast to be about 67-78%. East of the Continental Divide, it's forecast at 50-62%.
As he copes with a three-year drought, Rob Hendry, Lysite, WY, has made pastures and supplemental feed his first priorities. But if cattle prices should fall, he'll quickly turn his attention to the financial side of drought management to ensure the future of his central Wyoming ranch.
With drought hanging over much of the U.S., thousands of producers are crafting survival strategies. Survival will depend in part on how well they handle the operations side of their ranch. But experts say it also depends on how ranchers handle the financial side of their operations.
This facet includes taxes, equipment purchases, loan rates, financial analysis and relationships with lenders. Mess up the financial side, and an operation can be lost to drought just as surely as if day-to-day ranch management is botched.
The key, Hendry says, is to remain extremely flexible.
Uncovering Potential Problems
Start with an in-depth financial analysis. If your operation is in trouble or faces potential problems, the sooner you find out the better. You may find that drought-related problems have been masked by recent high calf prices.
“When trouble is on the horizon, it's a good time to see how profitable you really are and where you would be if calf prices drop and the drought continues,” says Damona Doye, Oklahoma State University Extension economist. That task is easier today, thanks to computer financial software.
A financial analysis will help in making better day-to-day operating decisions. In addition, banks consider clients who understand finance a better credit risk and may offer interest rate breaks on loans.
The analysis also may uncover a problem that requires an immediate conference with the bank. For instance, if drought is cutting revenues and you can't cover your operating loan, you may need to roll over the loan. The earlier you know, the better you can respond and seek the bank's help.
“Like it or not, the bank is a kind of partner in your outfit if you borrow money,” says Hendry. “You've got to keep the bank informed. Bankers don't like surprises.”
Advising the bank of impending trouble may be particularly important if you're dealing with a big regional or national bank.
“There are a lot of corporate banks now,” adds Hendry. “They're not run by people in down-home Wyoming, so your loan officer has to be on your side. He has to sell your story to his boss in the big city.”
Even if you bank with a smaller institution, it makes sense to keep your lender informed.
“Make sure the banker knows as soon as possible how severe the situation is,” explains Butch Bratsky, Billings, MT. He's president of Stockman Bank, a community-oriented lender with branches in 18 Montana cities and towns.
“If the banker knows there's going to be a problem with drought, they can liquidate some cattle, help you look for outside pasture or take other measures,” he says.
Sometimes, ranchers with the biggest problems dodge their lenders, Bratsky says. “They don't talk to the banker. They stay in the background and hope things work out.”
If things don't work out, they may face partial liquidation or a foreclosure in which they could lose everything.
The financial analysis also will help you decide whether to de-stock or buy supplemental feed to keep the herd intact. De-stocking is often one of the first moves ranches make in a drought.
The De-stocking Dilemma
For Linda Davis, Cimarron, NM, de-stocking is about the only answer to a depressing and debilitating four-year drought.
“There just aren't any quick fixes to what is happening here,” says Davis, who ranches with her six children and their families. “It's really the only thing we can do — I wish there were other options.”
The Davises have cut their herd size by a third already. They've culled deep into their older cows and cut back sharply on replacement heifers.
With virtually no winter snowpack in the Sangre de Cristo Mountains to the west, the outlook for adequate summer irrigation water is bleak. It leaves Davis with the prospect of a hay crop 50% of average.
Last fall, Davis was able to winter some bred cows in the Texas Panhandle on corn stalks and milo residue. She also farmed some cows out to the University of New Mexico's nearby Clayton agricultural research facility where they were used in drought research.
Like most ranchers, Davis doesn't like to even think about getting drought relief from the government. She'd rather depend on Mother Nature and hope spring rain will spare them further sell-off of their herd.
“Our philosophy is that for every day this drought goes on, we're one day closer to a good rain,” she says.
De-stocking can be damaging if it's done at the wrong point in the cattle cycle, warns ranch consultant Harlan Hughes. He expects the price of replacement cows to increase as much as $250/head over the next two years.
Hughes says ranchers must buy new cows within two years of a drought-related sell-off or face taxes on the sale proceeds. (See sidebar below.)
“If you liquidate, you're going to be buying back higher-priced cows. That really puts stress on an operation,” Hughes says. He adds that the ranch also loses one or two high-priced calves for each mother cow sold.
“You want to do everything in your power to keep your herd together,” he adds. “Either bring feed to the cows or move the cows to feed.”
But before you can do that, Hughes says, do an analysis to see where you stand. Your books will help determine if you can afford to buy feed to keep the herd intact.
The key to drought management, says Cornwell, lies in running yearlings in combination with mother cows.
“Every ranch should have the flexibility to run yearlings,” he says. “That's the best drought management formula.”
With yearlings a rancher has the ability to get in and out quickly depending on the grazing conditions.
“If you have yearlings in a backgrounding lot, you can figure them into your carrying capacity,” he explains. “If you don't have the grass for all your animal units, you can cull deeper into your cows, you can rent grass somewhere else for the yearlings or market them, depending of course on the economics of all those options.”
In any case, the Cornwells try to stay away from selling very deep into their base cowherd, even if grass is short.
“We've never sold any of the base cowherd,” he says. We've always looked for grass somewhere else and hauled them to grass.”
If you have to move cows, though, move the young cows, Cornwell says. “Move your breeding heifers first and feed the heck out of them — make sure they are in good shape when you turn out the bulls,” he says. Then, they don't cheat them when it comes to breeding — using plenty of bull power at around 10 heifers/yearling bull.
“Everyone tends to move their old cows to grass and think they'll sell them and not bring them back home,” he explains. “If you're spending money for grass, spend it on something with more value.”
Drought or no, the Cornwells believe in keeping the average age of their cowherd to a minimum — less than about six years.
“We breed over half our heifers each year for replacements,” he explains. “That way, you can be flexible depending on grazing conditions, and it increases reproductive efficiency at the same time.”
The basic philosophy is to keep the value in the young end of the cowherd, he says.
“The important thing is to always have young cows, lots of bred heifers and more yearlings,” he emphasizes. “It opens up your marketing, makes grazing decisions easier — especially with regard to weather fluctuations.”
Managing For Tough Times
Doug Hixon has seen his share of droughts since he came west from Illinois to work for the University of Wyoming. As a beef production specialist and researcher, he's worked with producers of all sizes on their drought management strategies.
April is the key month for cattle ranchers in Wyoming — as well as in many areas of the Great Plains and Intermountain region.
“If we have moisture in April, we usually have a decent year in Wyoming,” he says.
But, before drought ever sets in, Hixon believes a rancher can do things to manage for tough times.
“A lot depends on the genetics of the cattle and how they can tolerate varying conditions,” he says. “Find cattle that have the genetics to rebreed, stay healthy and produce.”
Hixon agrees that having the flexibility to run yearlings makes good sense in drought country. Yearlings allow the grass manager some positive options.
“If we do have a dry year, you're not tied to having to turn out a set number of cattle,” he says, “or have to run around looking for grass at the same time everyone else is looking for grass.”
Hixon says a good grass manager also will reserve opportunities for growing annual forages like triticale and other annuals that can augment perennial grasses and help in recovery after a drought.
But, beyond growing more forage, Hixon says early weaning calves from young cows makes a lot of sense for ranchers facing a drought situation.
“When resources are short or grass is expensive, early-weaning offers some opportunities to keep cattle at home, save money on winter feed and maintain acceptable weaning weights,” he says. “I don't know of a management decision a person can make, especially during drought, that can make more money and save costs.”
In research with Wyoming cattle, Hixon found that cows weaning calves in November lost about 40 lbs., and cows weaning calves in August gained 80 lbs. over the same period. The early weaning practice, though, is best for young cows, he emphasizes.
“With older cows it really doesn't matter, but on the two- and three-year olds it makes a heck of a difference,” he explains. “Those young cows will enter into the winter feeding period in better condition, and you won't lose anything in terms calf weights.”
He recommends turning the early-weaned calves out on meadow regrowth immediately after weaning. If there is ample meadow regrowth, those calves will gain just as if they were still on their mothers.
“The fear is that the calves will come in lighter. We saw that they gained right with the calves that were with their mothers grazing native range grass,” he adds. “I think it's a management tool anytime — not just during a drought.”
The Last Resort
If other moves fail, land or other assets can be sold. In the West, where scenic vistas command huge premiums, some ranchers have been able to retire long-term debt by selling small amounts of land at top dollar to buyers looking for home sites with a view.
The problem is that the drought will end. But, once land is sold, it's gone. A subdivision in the middle of a ranch can disrupt cattle operations.
There's hope that Congress may come through with emergency aid. More than half the country is suffering drought, recovering from drought, or under a drought watch.
That means drought, or the threat of it, has hit a lot of states, and every one of them has seats in Congress up for grabs this fall. So ranchers and farmers have substantial leverage to get help from Congress.
But the best strategy may not depend on Washington. It may be the one devised on the ranch, where each operator crafts operating and financing strategies to outlast drought. If a rancher does both well, he boosts his odds of survival.
The alternative is to wing it and hope the weather changes. But smart managers don't trust their futures to Mother Nature. They hope for the best and plan for the worst. When they've done everything they can, they pray for rain.
Two obvious rules for drought survival are to avoid unnecessary outlays and cut expenses, but every rule has exceptions.
Many people have deferred buying new equipment or vehicles. If you have cash, there are good deals out there.
But some cuts can lead to disaster, says Damona Doye, Oklahoma State University economist. Insurance is one.
“People are often tempted to cut insurance,” she says, “but if you're already vulnerable, the last thing you can afford are big medical expenses if an emergency arises.”
Doye advises against dropping life insurance, too.
“If the breadwinner dies, you don't want the survivors to deal with a big farm loan,” she says.
Drought And Tax Relief
Many drought-stricken ranches may be eligible for relief from the Internal Revenue Service (IRS).
One tax break applies to producers in areas eligible for federal hardship assistance from the USDA. The provision allows them to defer taxes on cattle sold because of drought, and it may allow them to avoid those taxes entirely if they reinvest in new cows within two years, says Mike Hardin, Extension tax specialist at Oklahoma State University.
For example, if you normally sell 10 mother cows a year but drought forces you to sell another 20, the sale receipts for those 20 may be tax exempt.
Here's how it works:
Assume sale proceeds for the 20 head came to $15,000 or $750/head. If the rancher reinvests the full $15,000 within two years and buys 20 head, he may be able to avoid taxes on the full amount.
The rules are tricky, though. For instance, if the price of replacement cows rises and the rancher can only get 18 head for $15,000, then he will owe taxes on $1,500 because he did not replace two of the cows.
But if the price went down, and he gets 21 replacement cows — one more than he sold — no taxes may be owed as long as he spent the full $15,000. He also potentially would owe no taxes on the $15,000 if he replaced all 20 at a price higher than he sold them for — for example, 20 cows for $16,000.
The law allows ranchers to do anything they want with the sale proceeds. For example, they can invest them in an interest-bearing account, then pull the money out when they re-stock. However, any interest earned is taxable, Hardin says.
Another tax code provision applies to financial losses of any kind, including red ink brought on by drought.
When ranchers lose money, they can apply the losses to past years in which they paid taxes — up to five years back. This reduces taxes for the earlier periods and entitles them to a refund now.
Or they can use the loss to offset profits in the future (up to 20 years.) This would reduce future taxes.
Because either provision can be complicated, Hardin suggests ranchers get help from a tax preparer trained in agricultural tax law. The tax code may include other provisions that could help deal with drought-related losses. Check with an agricultural tax specialist.
Resist A Credit Card Fix
As the drought squeezes ranch profits, some operators may be tempted to into tap credit cards. Credit cards offer a source of quick cash if your bank has said “no” to further borrowing. But they also may pave the way to the poorhouse.
“You see more and more credit card debt being used to finance things on ranches or farms,” says Damona Doye, Oklahoma State University Extension agricultural economist. “It's a very expensive way to finance assets.”
Often the annual interest runs 15% or more, whereas a bank might charge 5% or less for the same loan, she says.
If you get into financial trouble, the rates may climb even higher. A recent report by the Associated Press said some credit card issuers had raised interest rates for high-risk borrowers to 30% or more.
Doye advises ranchers to avoid credit cards.
“A credit card payment can quickly become another sizable bill,” she says.
For those using credit cards and now facing high interest rates, she suggests looking for lower rate options. Debt consolidation sometimes carries both a lower rate and lower monthly payments.
If your credit is still good, you may be able to transfer high-rate balances to a lower rate card. Be sure to read the fine print. Low introductory rates may turn into high, long-term rates. And penalties on some low rate cards may be severe if you are late on payments.