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Long-term Drought Management

Long-term Drought Management. Eric A. DeVuyst Department 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

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Long-term Drought Management

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  1. Long-term Drought Management Eric A. DeVuyst Department of Ag. Economics Oklahoma Stage University

  2. Drought appears cyclical in Oklahoma

  3. 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)

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

  5. BILLION $ QUESTION If we might be in long-term drought, how should producers respond?

  6. Management options • 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

  7. What the cost of the “wrong” strategy? • 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?

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

  9. How to manage for options • 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

  10. Refinancing to reduce cash flow demands • 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

  11. Repayment summary • 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

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