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Economic impacts of implementing drought management strategies

Pancho J. Abello for Progressive Cattle Published on 24 June 2021

While drought conditions have improved in some areas at the time of this writing, severe drought is still affecting most of the West where cow-calf production is centered in rangelands highly dependent on rainfall.

Having a management system that considers the frequency and severity of drought is important, and has a significant economic and long-term financial impact.

A long-term model was used analyzing economic implications of drought management practices. Results show that integrating different production practices creates better financial results. This model represents a west Texas ranch. However, these results can be used in different areas. Proactive and reactive strategies including using USDA’s Pasture, Rangeland, Forage (PRF) insurance; pre-purchasing hay; early weaning and early culling were evaluated. The model was used to analyze the productivity implications and financial impact of different approaches for restocking following the drought, raising your own heifers, purchasing cows or moving cattle off the ranch during drought.

Implementing these strategies indicates a positive difference of $347 per breeding cow unit (BCU) during the first year and a difference of $481 per BCU across two consecutive years compared to the alternative. Drought always creates a negative economic impact with or without a plan. Having and implementing a plan is crucial to reduce risk, decrease losses and leave the ranch in better financial position to recover after the drought.

Pro-active strategies like PRF have been shown to be an important positive tool in many cases. PRF is based on the historical rainfall index for your specific (grid) land location. Payments are triggered when there is a shortfall from the grid’s normal historical precipitation. In our analysis, we chose a higher protection percentage during the spring and summer months when most of the forage is produced. The decision support tool from the USDA (prodwebnlb.rma.usda.gov/apps/prf) can be used to indicate the estimated indemnity payments from the last 20 years, at least.

In this analysis, PRF indicated a positive net benefit, and it generated significant payments in drought years when it was needed most. (Learn about PRF at legacy.rma.usda.gov/pubs/rme/prfinsprog.pdf)

Hay prices have increased during the last 20 years but have significantly increased during drought periods. Pre-purchasing hay to store for future use reduced long-term hay costs. About 18% of the estimated economic savings above could be attributed to this strategy.

Early culling of open or poor-performing cows during a drought had the highest impact on the operation (34%). Early culled cattle have a higher sale weight, reduced feed consumption across the ranch and higher prices. Keeping a cow that is not performing or producing a calf is extremely expensive. The sooner these decisions are made when drought condition are present, the higher the impact on the bottom line.

Early weaning at five months rather than the traditional later weaning is used as a tool that reduces costs and resource requirements. Savings were achieved from less feed needs and improved cow herd conditions for re-breeding, accounting for approximately 19% of the positive difference.

Restocking strategies

Restocking strategies consider the business financial position, long-term profitability, cash flow, time required to build back livestock, equity lost during drought and other productive variables such as forage productivity, genetics or leasing alternatives. Results from restocking the herd with own raised heifers, purchasing cows after the drought and moving cattle off the ranch during the drought were analyzed.

Moving a portion of the cattle off the ranch during the drought showed the best results in terms of average cash flow over the next seven years, the time to rebuild livestock equity and the time to restock the ranch (three years). Evaluating this alternative should include all costs related to having to lease land in an area where forage is available (leasing cost, transportation, higher labor, feeding and supplementation). It benefits from not having to sell their genetics and culling part of the herd in a distressed market or when compared with high purchased cow prices in the future.

Restocking with own raised heifers required the least amount of debt and risk. However, it took the longest to restock the ranch, rebuild livestock equity and might have the lowest average cash flow, depending on purchased cow prices. Accurate heifer production costs are required to analyze this strategy, as actual costs could be higher than purchasing replacements.

Restocking with purchased cows was the second-best option to repopulate in terms of average future cash flow when the cow purchase price was lower than $1,800 per head and had the shortest time to rebuild the herd. However, this option required the highest amount of debt incurred by the business. Purchase price for breeding cows were analyzed using the Cow Bid Price Decision Aid (agecoext.tamu.edu/resources/decisionaids/beef) for purchasing a cow with seven years’ calving opportunities. Using estimated future calf prices, production costs (assuming a low stocking rate and land rent cost for all the property), the maximum price paid for a cow was $2,210. Purchasing cows at higher prices than this reduced business solvency, average cash flow and the time required to rebuild the herd.

These drought strategies do not consider long-term strategies such as using correct genetics, cow size, stocking rates or having an appropriate grazing system – which all have an important economic impact on long-term sustainability of the ranch and were assumed to be already in place. The financial position of the ranch will play a major role while analyzing management alternatives, risk and defining best restocking strategies after drought conditions are over.  end mark

Pancho J. Abello
  • Pancho J. Abello

  • Assistant Professor and Extension Specialist
  • Texas A&M AgriLife Extension Service
  • Email Pancho J. Abello

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