Dealing With More Than Just Dry Conditions During Drought

By: Matt Stockton, Agricultural Economist & UNL-Extension Specialist

The most recent drought conditions have grown to cover a large portion of the west and central United States, as shown in Figure 1. Those who depend on rain to provide water for either crops or livestock continue to watch and hope that conditions will change soon. Many have had to consider and implement various strategies to preserve their livelihoods. Those who have farmed and ranched for many years have seen other occasions when dry conditions limited forage production and reduced yields, which resulted in hardship and financial difficulty. Each drought has varying outcomes, depending on the factors faced by the individual farm or ranch. While drought may produce the same dry conditions for many, its effects are individualized. There are as many strategies for dealing with drought, as there are individuals who ranch and farm. Instead of writing about specific response strategies and suggesting possible solutions blindly and without knowing the details of the individual circumstances, I would rather focus on the nature of the farming and ranching businesses and the consequential interaction with dry times.

Generally, the cow calf and crop businesses are classified as commodity-based operations. This means that producers are price takers and rely heavily on productivity and cost to make a profit. During a drought, local price may see huge swings, depending on the availability of local production. For instance, when local cattle markets almost collapse, and a flood of excess livestock occurs, markets are in a period of susceptibility. Droughts, like most things, are not equal in outcomes, nor are they equally distributed, as can be seen by the map, Figure 1. We have all heard about incidents where adjacent tracts of land have been impacted differently during the same weather conditions, micro conditions, etc. While possibly located in the same general vicinity, each ranch or farm has unique resources, including soil, topography, vegetation, etc. Furthermore, each operation has unique attributes, including location, resource endowments, unsold grain, stored hay, capital, farm or ranch land condition at the time drought befalls, access to additional resources, and, probably most significantly, the managers’ abilities to prepare for and manage under such harsh conditions. Not only do producers manage differently, but they also vary in their ability to withstand the pressure caused by dry conditions.

The physical challenges posed by a drought often lead to financial stressors. Farming and/or ranching requires all the things that make businesses thrive, such as capital, labor, and proper management. This is why the health of the operation at the end of the drought depends heavily on the condition of that business just prior to entering drought. This is also true for other challenges faced by the operations. Bottomline: the store and availability of resources, as well as the skill of the manager, play key roles in the survival of the operation. For instance, a beginning rancher/farmer with a substantial debt load will have a much more difficult time remaining viable during a drought period, compared to a rancher/farmer who is debt free, simply due to the availability of capital assets. Their two operations would likely and should have very different strategies for dealing with the effects of drought. What often makes drought so devastating is the accompanying factors, such as the depression in local market prices, the scarcity of locally available supplemental resources, and reduced production without a decrease in production costs.

There are other factors that can amplify the hardship created by dry conditions. Depending on how it synchronizes with any serious drought event, and likewise with crop cycles for farmers, the cattle cycle may prove to be friend or foe to the rancher. If cow values are high, one could find a benefit in selling at least some cows and repopulating when prices are lower. But if that is your strategy, it isn’t a reliable one. Cycle effects are real and can make a difference in the final outcome, especially if the opposite case occurs. No one likes to sell undervalued cows and repurchase them at overvalued prices. It is easier to want to sell cows when one believes that they are at peak value and that they can be repurchased in the near future for less money. Unfortunately, the severity of a drought ultimately leads to poor business performance; this is true because in production agriculture, productivity is key to success. If one is looking for a cure all strategy to face an ongoing drought that’s actively hurting the operation, that is sort of like worrying about the horses getting out of an already empty barn. Therefore, drought strategies or, shall we say, business resiliency planning, should be a continuous part of being in business.

Ranching and farming use an unstable set of conditions, like forage or crop production variation, price fluctuations and cycles, disease challenges, etc. It is not a matter of will something happen that will create financial stress to the operation, but when. From my perspective, thoughts should remain critical as to whether you are adequately planning and preparing for the next challenge you or your operation will face. No one can plan or prepare for every bad thing, nor should they. No one knows in certainty what they will face, but they do know that challenges will come sometime and that should inspire some preparation. While we all give lip service to the idea of a drought plan, if drought is a future reality for your operation, it should simply be included in your business plan.

A large part of a successful business is its longevity through thick and thin. No one can say better than the operator what is best for the business. To increase the odds of being successful, annual decision processes must factor in, not only for the current year, but also when possible and practical in the coming years. Any growth strategy should consider the possibility of drought, land and other capital purchases based on the same premise, production numbers and strategies, and remain flexibly designed. The above are just a few examples of preparing for drought and the myriad of challenges faced by producers.

In conclusion, I will use an analogy to illustrate my point: there are two young consumers, who both just received credit cards in the mail. Both are identical in every way, except that Consumer One figures his current salary, how much he can afford to pay monthly, and leverages his credit card to its maximum level. This allows him to live very well, but on the edge of his means. Consumer Two uses his credit card, but only for purchases that he has the cash to pay for, and never pays a monthly interest fee. After some time passes, they both are in an accident and are injured through no fault of their own, both unable to work for the next year. Which consumer is most likely to be in a better financial position and will likely financially recover sooner after the accident? In this circumstance, I want to be Consumer Two.

Stresses of business, like the analogical accident, require the same kind of forethought to mitigate. Making choices that allow for dealing with events beyond your control and preparing for likely events, while not knowing when, but knowing the probability of their future occurrence is, in and of itself, a strategic move. This thinking does nothing to avert drought events, nor does it make being in business riskless, but rather recognizes that there are inevitable risks and that wisdom dictates making appropriate plans and adequately preparing to face the challenging conditions. Business resiliency is no accident and requires preparation, strategy, and, sometimes, good fortune. May we all have just that and find good fortune during these dry times.

U.S. Drought Monitor

Figure 1.U.S. Drought Monitor Map

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