It isn’t just ranchers in the Southwest who have been forced to sell off parts of their cowherds due to drought this year. Cattle producers in much of the Great Plains, Midwest and Southeast have also seen parched pastures that succumbed to the worst drought for many since the 1980s.

The droughts of 2011 and 2012 have led to liquidation of hundreds of thousands of cows and other cattle. The lack of native pasture, quality hay and/or water left ranchers no choice but to sell. However, this unexpected increase in revenue likely won’t create terrible tax requirements for a ballooning income resulting from cow sales, says a Texas AgriLife Extension economist.

Internal Revenue Service Section 1033 provides livestock producers with flexibility in having to declare these sales as income for 2012, says Stan Bevers, AgriLife Extension economist in Vernon, Texas.

“Many ranchers in Texas, New Mexico and Oklahoma had a lot of cowherd liquidation in 2011,” Bevers says. “As we entered 2012, many ranchers found themselves with excessive income because of all of the cows they had sold. Now, a similar situation is facing ranchers in other states, which suffered severe drought this year. More cows had to be sold.”

Many ranchers are wondering about federal income tax implications and if they have to declare all of the additional revenue received as 2012 income. Bevers says ranchers who faced liquidation can defer the tax on the gain by using IRS Section 1033.

“With this provision, producers can postpone the gain on the abnormal sales of breeding cows as income,” he says. “However, proceeds from the sales due to drought have to be used to repurchase the same type of females. But with Section 1033, a typical two-year designation can be extended to four years. ”

In addition, ranchers who were forced to sell weaned calves that would have normally been sold the following year may also take advantage of deferring that income.

“They can use IRS Section 451,” Bevers says. “Section 451 allows you to postpone recognition of income from one year to the next. There are a lot of specifics involved if ranchers use this deferral method. So producers need to consult with their accountants and other financial advisors to determine the best approach.”

Don't replace until you're ready

Even before the 2011 drought and the more widespread drought this year, the beef industry was seeking to rebuild a dwindling cowherd. And it’s only natural for cow-calf operators to want to start replacing liquidated herds. However, even with late summer and fall rains, much of which was spawned by Hurricane Isaac, sudden forage growth doesn’t necessarily mean pastures can support massive restocking.

Bevers advises producers to make sure their land can facilitate new breeding stock. And, they should make sure the females they purchase are ready to produce a calf and are on a sound animal health and nutritional program.

He notes that established cow-calf operations have been built based on the number of cows in an operation. “SPA (Standardized Performance Analysis)data indicates that producers need to remember that half their costs are fixed costs,” he says. “If you have 300 cows and have to cut that to 200 because of drought or other reasons, then your fixed costs per cow go up.”

 Calf prices should be good in the next few years, he says, “Therefore, it’s important to purchase a female with a high probability that she will put a calf on the ground and get one weaned.”

Expect to pay high prices for replacements, especially cow-calf pairs. “If we receive widespread rain this fall and winter, it will be ‘Katy bar the door,’ on prices,” Bevers says. “Some pairs are well over $2,000 now. Some Missouri sales have seen young pairs bring $2,250.”

In areas in which dry weather has persisted, lower prices can be seen. “There were some pairs in North Texas sold for $1,450 in late summer,” Bevers says. “That was an indication that the environment isn’t ready to stock just yet. Those pairs should have brought $1,800 if you looked strictly at economics.”

With tight feeder cattle supplies, calf prices coming out of the drought are expected to improve, after backing off some during the summer. Volatility was expected to continue in all cattle markets, due to higher corn prices.  March, April and May 2013 feeder cattle futures prices were in the $152-$157/cwt. range in early fall, about $10 higher than September prices.

“Most analysts think we’ve seen the lows,” Bevers says. “Forecasts are for a quick run-up in calf prices in January and February 2013. We lost more than 960,000 cows last year.  That equates to about 640,000 less calves this ear.  When we already have low numbers, then take out that many cows and have an lighter number this year, if you’re a stocker operator, you need to buy early.”

Bevers adds that stocker operators and cattle feeders should consider enhancing their risk management programs to protect prices. “Overall, cattlemen are eternal optimists,” he concludes.

“We hear reports that an El Nino weather pattern is in the forecast. That should mean more rainfall the coming year. If you’re in the cattle business, you have the attitude that ‘we’ll get through this.’”