“It doesn't matter what you do, drought increases costs and decreases revenues, especially if you have to sell off part of the factory,” says Martin Beutler, ranch economist with South Dakota State University (SDSU). Stationed in the western part of the state, Beutler is slugging through the heart of the drought with producers already forced to make tough management decisions.
Like producers in the other 17 states currently embroiled in what the U.S. Drought Monitor terms severe drought or worse, some ranchers in this part of the world have already liquidated. Others have begun to partially liquidate, or have delayed it by either hauling purchased feed to the cows or hauling the cows hundreds of miles to where there is feed. They're rolling the dice that late winter snows and early spring rains will catch up to their hopes and grow some grass.
But if the drought holds, as many forecasters predict, the decision-making will get tougher with best-case strategies varying from ranch to ranch. In every case, the only sure thing will be the benefit of soul searching that begins with defining available resources and goals.
Taking Inventory of Resources
Beutler encourages producers to take stock of what they have and can have in terms of resources — feed, land, labor, capital and management — relative to the requirements of the cattle on hand and the costs of the resources.
“Determine what's the most feasible, increasing the supply of forage and water, or decreasing the demand of livestock on these resources,” Beutler says. “This decision will be based on the goals of the operator and the operation's available resources, including additional financing.”
As you ponder alternatives, Beutler has this advice: “If it's something you've never done before, it's important to understand whether or not you have the skills and expertise necessary to do it, or if you can get them,” he says.
Likewise, whether the alternative represents a brand-new approach or a favorite ace in the hole, Beutler emphasizes that all potential income and expense need to be accounted for. “Employ a decision criterion such as partial budgeting, net present value or internal rate of return,” he says.
That includes accounting for opportunity cost. For example, SDSU Extension recently calculated the carrying costs of cows in this part of the world using feed hauled in and hauling cattle to the feed. They calculated a cost of $511/cow to bring in feed; $435/cow to haul cattle to the feed.
That compared to an annual cow cost in the range of $360 during a normal year. So, the opportunity cost to retain each breeding female — $75-151 — has to be weighed against the value of bred replacement females (see “Market Advisor,” pg. 6, December 2002 BEEF).
Again, while answers will vary by operation, Beutler says that at least in his part of the world, “I'm afraid the most economical answer will be to cull harder.”
Salt in the wound comes with the fact that as painful as such a decision is, it's always more complex than the numbers. As an example:
What is the value of the genetics in question; can they be easily replaced?
Even if the numbers say you can afford to keep cattle by hauling them to feed three states away, are the conditions and forage so different that the cattle won't perform?
What are the profit goals of the enterprise and what are the goals of the family overall?
The list goes on (see sidebar below).
In every case, Beutler points out that producers can increase their options by taking stock of the support team they've assembled over the years. This includes bankers, Extension personnel and consultants. Visiting with them about the possibilities, he says.
“Keep your bankers in the loop, let them know what you're doing or wanting to do and why,” Beutler says. “They'll usually offer you the latitude to do it. Keep people like that informed and don't hit them cold with a problem.”
He notes some banks in his area have already foregone principal payments to help producers find their way through the drought.
“Keep in mind that in a drought situation, the management goal usually is to minimize losses rather than maximize income,” he adds.
For more on drought management, visit www.beefcowcalf.com.
Drought Management Checklist
Define your goals for the enterprise, your total operation and the family.
Inventory your current resources, including land, labor, capital and management.
Look for ways to economize in the short-run, including delayed or deferred capital improvements and expenditures.
Decide whether increasing water and forage availability or decreasing the demand of livestock on those resources is the most feasible.
Explore options you believe offer the most potential by estimating the total cost and return based upon how long you believe the option will need to be employed. Costs should include both direct and indirect outlays, be it acquisition and transportation costs, interest on additional financing or lost future income.
Use a financial decision-making tool such as partial budgeting, net present value or internal rate of return.
Source: Martin Beutler, South Dakota State University