long-term drought management

Long-term Drought Management

Eric A. DeVuystDepartment of Ag. Economics

Oklahoma Stage University

Drought appears cyclical in Oklahoma

Oceanic influences on our weather

(Source: G. McManus, Assoc State Climatologist)

• ENSO (El Nino-Southern Oscillation)• Varies every 1-3 years• El Nino (cool and wet)• La Nina (warm and dry)

• Pacific Decadal Oscillation (PDO)• Varies every 20-30 years• Cool phase (more La Ninas, drier)• Warm phase (more El Ninos, wetter)

• Atlantic Decadal Oscillation (AMO)• Varies every 20-40 years• Warm phase (dry)

Recent droughts are infants!(Source: G. McManus, Assoc State Climatologist)

YIKES!

If we might be in long-term drought, how should producers respond?

BILLION $ QUESTION

Cut-n-run?◦ Get out now

Buy heifers now? ◦ Gamble that drought is over

Hold the course? Maintain herd #s?◦ Buy feed if necessary

Weather the storm?◦ Cut herd even further

Manage for options?◦ Maximum flexibility

Management options

Cut-n-run◦ May miss profitable opportunities◦ Tax consequences!!!!!!!!!!!!!1◦ Lose livelihood

Buy heifers now◦ If drought continues, bred heifer revenue > cost◦ Damage to pastures◦ High feed costs◦ Drinking water

Stay the course (maintain herd size)◦ May need to cull later in depressed market◦ Damage pastures◦ Drinking water?

What the cost of the “wrong” strategy?

Weather the storm (cut herd further)◦ Too few cows if it rains?◦ Subset of Options strategy

Manage for options (flexibility)◦ If it rains, make hay!

Sell, stock pile◦ Summer stockers◦ Stock pile forage for fall/winter grazing◦ Pasture weaned calves◦ Lease grazing

What the cost of the “wrong” strategy (cont)?

Match herd size to resources given that drought will continue◦ Reduce pasture damage/stand loss◦ Keep purchase feed bill to minimum◦ Genetics matched to environment?

Too high milk EPDs Too large-framed cows

How to manage for options

Interest rates remain low Even if cash flow is not an issue, refinancing

can save $s Purchase assumptions

◦ Purchased 160 acres @$1,100 per in 2005◦ 25% down, 6% interest, 25-year note

Refinance assumptions◦ Refinance in January 2013, 3.5% interest over 25

years

Refinancing to reduce cash flow demands

Original note◦ Paid off in 2030◦ Annual payments of $10,326◦ Total interest paid over 25 years just over

$126,000 With refinancing

◦ Paid off in January 2036◦ Annual payments of $6,784 ($3,542 per year

lower)◦ Total interest paid over 30 years about $110,000

Refinancing can help cash flow for farms/ranches with structured debt

Repayment summary