This paper analyzes the financial implications of drought management strategies for a model ranch in South Texas. The 2006 drought that affected Texas livestock producers left many cattlemen asking the age old question, "Should I cull to reduce my herd size or purchase feed to maintain my current herd".Livestock Production/Industries,

Hanselka, Wayne

Kaase, Greg H.

Klose, Steven L.

Paschal, Joe C.

Young, Mac

English

Research Papers in Economics

 
 
 
 
 
Long Term Financial Impacts of Drought 
Management Strategies 
 
 
 
 
 
 
 
 
Greg H. Kaase, Texas A&M University 
Mac Young, Texas A&M University 
Steven Klose, Texas A&M University 
Joe Paschal, Texas A&M University 
Wayne Hanselka, Texas A&M University 
 
 
 
Selected Paper prepared for presentation at the 
Southern Agricultural Economic Association 39
th Annual Meeting, 
Mobile, Alabama, February 4-7, 2007 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Copyright 2007 by Kaase, Young, Klose, Paschal and Hanselka.  All rights reserved.  Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided that this copyright 
notice appears on all such copies.* Authors are Risk Management Specialist, Risk Management Specialist, Assistant Professor, Professor, 
and Professor.      
1
Presented Paper, Southern Agricultural Economics Association 39
th Annual Meeting, 
Mobile, Alabama, February 4 -7, 2007 
 
 
Long Term Financial Impacts of Drought Management Strategies 
 
Greg H. Kaase, A. Mac Young, Steven L. Klose, 
Joseph C. Paschal, and C. Wayne  Hanselka* 
 
 
Abstract: 
  This paper analyzes the financial implications of drought management strategies for a 
model ranch in South Texas.  The 2006 drought that affected Texas livestock producers left 
many cattlemen asking the age old question, “Should I cull to reduce my herd size or purchase 
feed to maintain my current herd”.  
 
  Many South Texas counties have been adversely affected by drought situations since 
November 2005.  Livestock ranches and cattlemen in this area have responded by implementing 
different management strategies to reduce the effects of low rainfall totals and loss in forage 
production.  To offset the loss in forage during a drought, supplemental feeding is generally 
increased as well as the culling of cow herds at heavier than normal rates.  Since hay shortages 
have been felt across all of Texas during the 2005-2006 growing season, cattlemen have seen a 
substantial increase in supplemental feeding expenses.  Coupled with culling and herd 
replacement costs after a drought, livestock ranches are seeing how these management strategies 
impact their financial well-being.  
 
Assumptions 
 
The Financial And Risk Management (FARM) Assistance financial planning model was 
used to evaluate and illustrate the individual financial impacts of a prolonged drought on a 
representative (hypothetical) commercial cow-calf ranching business in South Texas.   The 
program known as FARM Assistance is founded in stochastic farm-level research methods.  
Developed as an outreach program by Texas Cooperative Extension, the complex research tool is   2
made available to any Texas Producer.  In essence, FARM Assistance is a decision support 
system (DSS) which addresses the decision steps of formulating and evaluating business 
alternatives.  A DSS like FARM Assistance can simplify the evaluation step for farm managers, 
increasing the likelihood that they will use more formal and accurate evaluations of alternative 
strategies (Klose and Outlaw, 2005).  Kaase, et al (2003) describe the FARM Assistance process 
as a unique combination of a state-of-the-art computerized decision-support system and 
extension risk management specialist working one-on-one with producers to provide 
individualized economic and risk assessment evaluations.  As Klose and Outlaw (2005) explain, 
the philosophy of the FARM Assistance analysis process is to provide information to help 
producers choose among long-term strategic alternatives.  To accomplish that objective, the first 
step is to create a baseline.  The baseline represents the current strategic plan for moving the 
operation through a 10-year planning horizon.  The baseline then serves as a benchmark for 
comparing the financial implications of alternative plans. 
This study looked at two scenarios commonly utilized during drought situations; 
purchase feed to keep herd size numbers the same (Scenario 1) and sell cows to reduce herd size 
by 20% (Scenario 2).  The representative ranch chosen was a 2,000 acre ranch located in DeWitt 
County with the basic assumptions and characteristics given in Table 1.  Production costs and 
estimates for overhead charges were based on typical rates for the region.  Cattle prices were 
obtained from a representative south-central Texas livestock commission report for March 10, 
2006.  A similar study was conducted by Young, Paschal, Hanselka, Klose, & Jupe (2006) which 
compared a representative ranch in South Texas during normal rainfall and extended drought 
situations.  In that study, the authors found that in the two-year drought scenario, the profitability   3
of the ranch was severely impacted over the ten year planning horizon. In our study, both 
scenarios are exposed to the same drought conditions, only management strategies are different.     
The representative ranch was analyzed over a 10-year period.  In scenario 1 where the 
cow herd size remained constant and additional feed (hay & supplement) was purchased, a 10% 
replacement rate was used in each of the 10 years.  The base year for the analysis is 2006 and 
projections are carried through 2015.  The assets, debts, machinery complement, and scheduled 
equipment replacements for the projection period were the same in both of the scenarios.  Long-
term livestock price trends follow projections provided by the Food and Agricultural Policy 
Research Institute (FAPRI, University of Missouri) with costs adjusted for inflation over the 
planning horizon.  
The projected financial position and performance was evaluated across five major 
categories including liquidity, solvency, profitability, repayment capacity and financial 
efficiency.  Representative measures were chosen for each of these five categories and are 
presented in tabular and/or graphical format for each scenario.  Each measure chosen provides 
information with respect to the projected variability in the ranches financial position and 
performance.  When taken as a whole, these measures provide insight into the risk bearing ability 
of the ranch throughout the planning horizon. 
 
 
 
 
 
 
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Table1.  Representative South Texas Ranch Assumptions     
Selected Parameter  Purchase Feed – Maintain 
Cow Herd Size 
 (Scenario 1) 
Sell Cows to Reduce Herd 
Size 
 (Scenario 2) 
Operator Off-Farm Income  $24,000  Same 
Spouse Off-Farm Income  $35,000  Same 
Family Living Expense  $30,000  Same 
Ownership Tenure  100%  Same 
Debt Situation  Low  Same 
Initial Herd Size  200 cows, 8 bulls  Same 
Calf Weaning Rate  85%  Same 
Herd Replacement  Bred Heifers  Same 
Supplemental Feeding  Salt/Mineral Blocks  Same 
Hay Fed/Cow/YR 2006  4.0 tons  3.5 tons 
Hay Fed/Cow/YRS 07-15  2007 - 2.5 tons  2008–2015 – 
1.2 tons 
2007- 2.25 
tons 
2008-2015 – 
1.2 tons 
Protein Cubes Fed/Cow/Year  2006 - 
400 lbs  
2007 -
300 lbs 
2008Æ 
200 lbs 
2006 -
360 lbs  
2007 – 
300 lbs 
2008Æ  
200 lbs 
Cow Culling Rate/Year  10%  20% in 2006, 10% 2007-2015 
Steer Weaning Weights  525 lbs  Same 
Heifer Weaning Weights  475 lbs.  Same 
Steer Prices  $1.25/lb.  Same 
Heifer Prices  $1.18/lb.  Same 
Cull Cow Prices  $0.48/lb.  Same 
Cull Bull Prices  $0.48/lb.  Same 
Bred Heifer Prices  $855/head  Same 
Replacement Bull Prices  $2,500/head  Same 
Hay Prices  $135/ton-2006, $110/ton-2007, 
$85/ton – 2008-2016 
Same 
Range Cube Price  $.08/lb.  Same 
 
  
Results 
 
A comprehensive financial projection including price and weaning weight risk of the two 
different scenarios are illustrated in Table 2 and Figures 1 and 2.  Table 2 represents the average 
outcomes for selected financial projections, while the graphical presentations (Figures 1 & 2) 
illustrate the range of possibilities for the selected variables.  Total cash receipts average 
$108,860 over the 10-year period for the scenario which looks at maintaining the current cow 
herd size and buying supplemental feeds, 4.8% more than the scenario which reduces the herd 
size in 2006. However, if we take a look at the initial year of the projection (2006), we see that 
total cash receipts for scenario 2 averages $139,620 or 8.2% more in receipts than scenario 1.    5
This reflects the 20 % culling of cows in scenario 2 in 2006.  From 2007-2010, the total cash 
receipts are much lower in scenario 2 due to smaller herd size.  The lower cash receipts in 
scenario 2 reflect herd culling in 2006 and then rebuilding the herd in 2007 – 2010.  Average 
cash costs were $165,530 in 2006 for scenario 1 which maintained the current herd size, while 
average cash cost for scenario 2 in 2006 was $134,446.  This is a difference of 23.1% in cash 
costs in 2006.  Looking at the 10 year average, the study found only a 4.9% difference in cash 
costs, with scenario 1 averaging $99,120 in cash costs and scenario 2 averaging $94,449 in total 
cash costs.   
 
Table2.  Representative Ranch Financial Projections – Selected Indicators 
Scenario 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Avg. 
Total Cash 
Receipts 
($1,000) 
           
Maintain  Herd    129.02 122.09 114.56 108.94 104.45 101.17 99.32  100.44 103.15 105.43 108.86 
Herd  Culling  139.62  99.55 95.97 96.07 97.96 101.17  99.32 100.44  103.15  105.43  103.87 
Total Cash 
Costs ($1,000) 
           
Maintain  Herd    165.53  129.85  89.90 86.53 85.78 86.62 86.13 86.30 86.97 87.60 99.12 
Herd  Culling  134.45  109.20  86.99 87.91 92.33 86.62 86.13 86.30 86.97 87.60 94.45 
Net Cash Farm 
Income ($1,000) 
           
Maintain  Herd    -36.51  -7.76 24.67 22.41 18.67 14.56 13.19 14.14 16.18 17.83 9.74 
Herd  Culling  5.18  -9.64 8.98  8.16  5.63  14.56 13.19 14.14 16.18 17.83 9.42 
Ending Cash 
Reserves 
($1,000) 
           
Maintain  Herd    -2.89  11.40  47.20  85.53  129.53 163.20 196.94 232.03 269.14 307.90 144.00 
Herd  Culling  35.78  43.33  67.10  94.26  126.47 161.05 195.72 231.62 269.37 308.38 153.31 
Real Net Worth 
($1,000) 
           
Maintain  Herd   1,831.37 1,848.78 1,872.51 1,889.87 1,896.15 1,909.82 1,934.20 1,974.20 2,023.03 2,070.90 1,925.08 
Herd  Culling  1,834.42 1,851.59 1,873.01 1,889.26 1,895.02 1,909.15 1,933.90 1,974.22 2,023.32 2,071.30 1,925.52 
Debt-to-Asset 
Ratio (%) 
           
Maintain  Herd    11.43 10.98 10.51 10.36 11.19 10.93 10.69 10.49 10.29 10.09 10.69 
Herd  Culling  10.96 10.71 10.39 10.27 11.12 10.88 10.66 10.47 10.29 10.09 10.58 
 
  Although profitability over the ten-year period between the two scenarios is not greatly 
different, in 2006 there is a 14% difference in Net Cash Farm Income between herd culling 
(scenario 2) and maintaining the herd (scenario 1).  Net cash farm income (NCFI) for 2006 is 
projected to be -$36,510 for the scenario which maintains the current herd size and $5,180 for 
the herd culling scenario (Table 2, Figure 1).  For 2006-2015, NCFI is projected to average   6
$9,740 for scenario 1 and $9,420 for Scenario 2.  The negative NCFI in 2006 for scenario 1 is 
largely due to the increased feeding costs associated with feeding 200 cows, while the NCFI for 
scenario 2 portrays receipts from culled cows as well as a reduction in feed costs.  In the years 
required to rebuild the herd, the profitability advantage is in scenario 1 where average NCFI is 
$14,497.50 compared to only $3,282.50 for scenario 2, where the herd size is smaller and the 
ranch is purchasing replacements to rebuild capacity.  Over most of the 10 year projection, cash 
receipts are projected to generally decline along with the projected cattle prices.  Figure 1 also 
illustrates the risk in NCFI, with the range indicating profit levels from approximately -$63,800 
to $44,300 for the scenario which maintains the current herd size (scenario 1) and -$28,500 and 
$44,300 under scenario 2 (culling the herd size).  These ranges suggest that there is significant 
risk of operating losses over the projected period.   The shaded area of the graph suggest that the 
operation is expected to have a 50% chance of realizing a -$49,100 to $27,100 profit level in 
scenario 1 and -$19,100 to $27,100 in scenario 2.      7
Figure 1.  Projected Variability in Net Cash Farm Income for the South Texas 
Representative Ranch. 
 
                 
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
Note:  Percentages indicate the probability that Net Cash Farm Income is below the indicated level. 
The shaded area contains 50% of the projected outcomes. 
$1,000   $1,000  8
  The liquidity of the ranch is measured by the ending cash balance (Table 2, Figure2).  
This figure shows the impacts of each of the two scenarios on the risk associated with ending 
cash balances by pointing out the probability that ending cash will fall below zero, requiring a 
carryover debt.  In scenario 1, average ending cash values are projected to range from -$2,890 to 
$307,900 during the ten-year period.  This compares to the average ending cash values in 
scenario 2 which are projected to range from $35,780 to $308,380.  Figure 2 illustrates average 
ending cash balances and risk of cash shortfalls.  During the first two years of the study, scenario 
1 has a 62% and 26% probability of carryover debt, while scenario 2’s probability of carryover 
debt is minimal.      
  Overall equity and solvency measures are similar between the two scenarios.  The Real 
Net Worth values for scenario 1 average $1,925,080 over the 10 year period while scenario 2 
averages $1,925,520 (Table 2).  Likewise, the ten-year average debt to asset ratios between 
scenario 1 and 2 are 10.69% and 10.58% respectively.   
 
Implications 
    Some observations that may affect management decisions in future droughts include: 
•  Current high cattle prices may be masking the effects of drought and high feeding 
costs 
•  With the high cattle prices and the hay shortage today, the best management options 
may not be the same as during cyclic periods of low cattle prices and low or high hay 
costs 
•  A producer must weigh the future cost of herd replacement when making decisions to 
cull and how much to cull   9
•  Ability to “manage” a drought is directly affected by the operation’s debt situation. 
  The projected results of this study further depict why these two strategies of herd 
management are continually discussed during drought situations.  Unfortunately, there is still no 
clear cut answer on which strategy is the most beneficial to livestock producers long-term.  Each 
individual operation must assess their short and long term goals and decide for themselves on 
which management strategy would be the most valuable. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   10
Figure 2.  Ending Cash Reserves and Probability of 
Having to Refinance Operating Note for the South 
Texas Ranch. 
              
  $1,000        Percent  
 
                
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
 
 
 
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References: 
Kaase, G. H., McCorkle, D. A., Klose, S. L., Outlaw, J. L., Anderson, D. P., & Knapek, G. M. 
(2003, February).  “Business success: What factors really matter?”  Paper presented at the 
meeting of the Southern Agriculture Economics Association, Mobile, Alabama. 
Klose, S. L. & Outlaw, J. L. (2005).  Financial and risk management assistance:  Decision 
support for agriculture.  Journal of Agricultural and Applied Economics, 37 (2), 415-423. 
Young, A. M., Paschal, J. C., Hanselka, C. W., Klose, S. L., & Jupe, M. (2006, September).  
“Impact of prolonged drought on South Texas ranches”.  Texas Cooperative Extension, 
Department of Agricultural Economics, Texas A&M University System, FARM Assistance 
Focus Paper, Number 2.  Available at:  
http://farmassistance.tamu.edu/publications/focus/focus2006-2.pdf.   
 

Business success: What factors really matter?” Paper presented at the meeting of the Southern Agriculture Economics Association,

Financial and risk management assistance: Decision support for agriculture.

Impact of prolonged drought on South Texas ranches”.

Long Term Financial Impacts of Drought Management Strategies

Long Term Financial Impacts of Drought Management Strategies

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