Financing herd rebuilding after the 2011 drought

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The drought of 2011 had long-lasting impacts on cow-calf producers in the U.S. Southern Plains. Between January 2011 and January 2012, beef cow numbers in Texas were down 13.1%, down 14.3% in Oklahoma and down 10.9% in New Mexico (Livestock Market Information Center, 2012), leading to a 3.1% reduction in the U.S. beef cow herd. Rebuilding herds poses many financial challenges to individual producers, particularly generating sufficient cash flow to rebuild. Large numbers of cull cows were marketing during the summer of 2011, depressing cull cow prices. So, many cull cows generated lower revenue than sales made earlier in the year. Combined with high feed prices, cash reserves for many producers are not sufficient to immediately rebuild herds. With reduced cow numbers in 2012, beef supplies are tight, leading to higher prices for replacement heifers. Now, cow-calf producers have to bid expensive replacement heifers away from feedlots. These factors combine to make rebuilding financially difficult. To advise producers on rebuilding, we have developed and analyzed financial impacts of herd rebuilding strategies for Oklahoma producers.

Analyzing rebuilding strategies is complicated by several factors, including the pre-drought financial position of the producer, degree and timing of herd liquidation, management skill of the producer, off-farm income, family living expenses, and uncertainty over future replacement heifer prices, calf sale prices, and production expenses. While our analyses do not accurately model any single producer, they provide a framework for producers to analyze the financial implications of their rebuilding strategies and suggest approaches that are more financially feasible than others.

Rebuilding Strategies and Scenarios

Producers who liquidated entire breeding herds in 2011 face the biggest cash flow demands associated with rebuilding. Their difficulties are compounded with a lack of cow-calf income in 2012. So, we focus our analysis on these producers with three land tenure positions: rent all land, owned land with land debt, and owned land without land debt. Land tenure positions are analyzed under three rebuilding strategies: slow rebuilding using stockers, fast herd rebuilding with cow/calf pairs, and leasing cows. We assume that pasture can only be stocked at 50% of historical levels in 2012, 75% in 2013 and 100% thereafter.

Our base herd is a 100-head (85 mature cows and 15 bred heifers) commercial cow-calf herd with 15 replacement heifers and three bulls as of January 1, 2011. The cows are assumed to be moderate-framed and 1100 pounds on average. All breeding stock, including replacement heifers and bulls, and calves are assumed to have been sold in July 2011. Two ranches are modeled, one with native pasture (1,000 acres) and one with introduced grass pasture (160 acres each of fescue and Bermuda, for a total of 320 acres).

Three land tenure scenarios are considered. In the first scenario, the producer purchased pasture in July 2011 and borrowed 50% of the total investment. Introduced pasture is assumed to have been purchased ten years prior to the drought (July 1, 2001) at $1,000 per acre and has a current market value of $1,400. Assuming 50% debt financing and 6% interest rate over 20 years, the July 1, 2011 loan balance was $160,000. Similarly, native pasture was purchased for $800 per acre in 2001 and has a current market value of $1,100 and July 1, 2011 loan balance of $400,000.The second scenario has pasture with no debt. The final land tenure scenario has land rented with rental rate varying by forage type.

In the slow-rebuilding strategy, with no cows on pastures, forage is available for a grass stocker enterprise. The profitable stocker enterprise turns investment dollars more quickly than cows. Additionally, stocker heifers can be used as a replacement heifer source. Our fast-rebuilding strategy has producers buying cow-calf pairs over three years. While achieving target herd size quickly, this strategy has the highest cash flow demands and higher incurred debt. Finally, we evaluate leasing cows as a rebuilding strategy. While this option may not be available to all producers, it may relieve cash flow stress for producers who have opportunities to lease cows.

Full details of our model assumptions and results will soon be available as an extension factsheet. We summarize our results here.

Results

In Table 1, annual herd inventories and purchases are reported for the slow-rebuilding strategy with stockers following total liquidation on introduced pastures. Stockers are utilized to provide income and source of replacement heifers. Forage that would normally be grazed by cows is instead grazed by stockers. As of January 1, 2012, the breeding herd inventory is zero cows and bulls. Stockers are purchased in the spring of 2012 with stockers sold in the fall except for 20 heifers that are retained to begin rebuilding. In 2013, cow/calf pairs and more stockers are purchased, including 25 heifers. This continues until 2015 when no additional purchases are made. Bulls are purchased in 2013 and 2014. By 2016, the rebuilding is complete.

Cash flow is problematic for most of the introduced and native pasture scenarios in most years. If a cash reserve was generated from the herd liquidation in 2011, the reserve is sufficient to cover annual cash flow deficits in all years. If a producer did not preserve cash from the 2011 liquidation, additional debt would be acquired in most of the years and scenarios.

Table 1 reports the inventory and purchase assumptions for the fast-rebuilding strategy. Because of the added debt associated with cow-calf purchases, these scenarios all have higher cash flow demands than corresponding slow-rebuilding scenarios. As with the slow -rebuilding scenarios, the debt-free, owned land and rented land scenarios have the best projected cash flow. Given a 2011 liquidation-generated cash reserve, the owned, debt-free pasture (either introduced or native) producer has sufficient cash flow avoid debt accumulation from fast rebuilding. Similarly, producers leasing pastures can avoid debt accumulation. However, producers owning pasture with debt, either introduced or native grasses, have operating debt accumulating by the end of the 2015. Debt-to-asset ratios improve from 2014 to 2015, indicating that more term debt is paid than operating debt is accumulated.

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So, fast rebuilding may be feasible for even producers with outstanding debt on land if their pre-2011 financial position was healthy.

For cow leasing strategies, rebuilding will take several years. While leasing has the lowest cash flow demands, it also generates the lowest net cash flow. Operating debt accumulates for all of the introduced pasture scenarios and the owned land with debt native pasture scenario. This strategy appears to work best with two native pasture scenarios: owned debt-free and leased. In the remaining leasing scenarios, operating debt accumulates in 2014 or 2015. It is important to note that no debt for purchasing cows has accumulated in these leasing scenarios, but the owned cow herd increases over time. The producer retains heifers from his/her share of the calf crop. So, the owned cow herd increases steadily after 2013.

Results are from our analyses are encouraging (Figures 1 & 2). Regardless of land tenure, pasture type, or rebuilding strategy, rebuilding appears to be financially feasible assuming proceeds from herd liquidation were preserved to assist with financing. In some scenarios, operating debt accumulates, but generally debt-to-asset ratios remain healthy throughout the years analyzed. However, our analyses are limited to producers who were in reasonable financial health prior to the 2011 drought. Producers who were financially struggling prior to 2011 will likely be in worse condition following the drought. Regardless of financial position, producers should seek advice from their county Extension educator about an appropriate rebuilding strategy given local pasture conditions. Free confidential farm business planning assistance is available through OSU IFMAPS program at 1-800-522-3755.

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Kirsten Clark    
www.smartbusinesscashflow.com  |  June, 04, 2012 at 03:55 PM

Any future planning should include preparing a Cash Flow Projection. This is an effective tool that helps businesses understand how actual cash will be used as the new financial period is planned out. Once the Cash Flow Projection is set up it's just as important to track the actual figures and re-evaluate the projected figures.

Anthony    
KY  |  June, 09, 2012 at 08:26 PM

We in Western KY are now experiencing what Texas and other south western states did in 2011. The question becomes do we liquidate now. purchase feed supplies. or more importantly cash rent the ground for row crop production. Cash rents are increasing to the point that we can't run cows period.

BARD    
West Central SD  |  June, 10, 2012 at 07:07 PM

Had a good grazer tell a producer meeting just the other day that the cash rents for farm ground equal his gross $ per acre that he can get grazing. Couple with that the crop insurance available, and we may have to call our congressmen boys, while the farm bill debate is on!!


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