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 years
Cool phase (more La Ninas, drier)
Warm phase (more El Ninos, wetter)
Atlantic Decadal Oscillation (AMO)
Varies every years
Warm phase (dry)

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

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

6. Management options Cut-n-run? Buy heifers now?
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 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 With refinancing
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