Long-term Drought Management
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Transcript of Long-term Drought Management
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Long-term Drought Management
Eric A. DeVuystDepartment of Ag. Economics
Oklahoma Stage University
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Drought appears cyclical in Oklahoma
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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)
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Recent droughts are infants!(Source: G. McManus, Assoc State Climatologist)
YIKES!
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If we might be in long-term drought, how should producers respond?
BILLION $ QUESTION
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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
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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?
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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)?
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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
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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
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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