Thursday, April 17, 2014

Managing Drought Risk on the Ranch

Financial Options after Drought

Livestock after drought.
Image: Pat Reece.

After a drought period is over is a good time to reflect and assess the performance of your response to drought conditions. 

It is important to evaluate each of the actions that you implemented during the drought and determine their value. It is also important to understand how each of the actions relates to effectiveness of the overall strategy. This evaluation will help you understand how to prepare and plan for the next drought.

As part of this effort it is important to inventory the condition of your resource endowments and the financial status of your ranch. This is the time of recovery and your actions during this period are critical to business success and future sustainability of your operation. Your production methods and choices coupled with your business decisions can speed or slow the recovery process. The recovery strategy is just as critical as the drought response plan.

The next lists of items are a few things we think managers of ranches should consider, from a financial perspective, as they recover from a drought:

1. Which part of your operation to keep? Keep only those parts which contribute positively to profitability.

Just as you have a plan to cope with drought, you should also have a plan to guide your business through recovery from a drought period. As part of any business you should be making a periodical assessment of all the enterprises within the operation.

With the end of the drought comes the opportunity to look at your enterprise mix and evaluate how each has either contributed to or hindered drought mitigation, and to determine how these enterprises might aid or hinder in the recovery process. It is hopeful that you will identify weak and strong links in your business so that you can make the necessary changes in your enterprise mix to strengthen your operation. You may decide to add or remove parts or whole enterprises, based on this assessment.

2. Are you getting a read on the financial health of your ranch after a drought?

Assessing the financial health of your ranch after a drought is very critical it is the foundation that you will base the future. By knowing where you stand financially you will then be able to assess your next move based on your personal and business goals. A sound and healthy financial base is one where growth and expansion may be considered, a weak or shaky position leaves you vulnerable to possible business collapse and leaves you very few options to make a recovery.

Your financial analysis will help you pin point those area of your operation you need to improve on and those that are adding to your success. Indicators of financial health such as cash flow, debt to equity ratio, and net worth are helpful in this regard. Similarly, the development of a whole farm and enterprise budget procedure can be used to assess profitability associated with the different alternative operations in your ranch.

3. Can external forces alter your drought recovery plan?

Most droughts are confined to a specific area or region. Depending on the region it may or may not affect the national market. In most cases the market prices, which may show transitory variations from the national market, will reflect the overall market conditions for the product, cattle. In the case where a local drought has occurred and is over and the market is experiencing low prices, financial recovery may be hindered; the opposite is the case in a high price situation.

Consideration of the market situation is probably the single most important variable you will need to consider. In recent study about owner retained fat cattle, William and Stockton, found that profitability was more dependent on input costs and market prices than any other set of variables.

Market outlook for both inputs and outputs will guide you on what kind of ranch operations will be most profitable. For example, inputs such as pasture rental rates are low and cow inventories are low with the demand for beef high, you might reasonable expect high prices for the next few seasons. Under these conditions it would make sense to reduce your cull rate and perhaps increase the number of weaned calve and to acquire access to more feed resources to accommodate a larger number of animals. As with any decision, careful consideration for the market’s volatility need to factored into the choice.

4. Do you need an inventory reassessment? Has your resource endowment changed? Use your resource assessment as the part of your recovery plan.

You need to take account of how the drought has affected your resource base. This information is valuable in that it will give you a starting point to manage from. Given the current conditions you can choose the method where-by recovery will not only enhance the biological environment but will provide financial stability. Again, depending on your financial health and the current state of the market, decisions can be made to use the resources wisely. It is important to keep a close eye on your resources, since they are what drive the cow-calf business. Overused resources are likely to have hidden cost and be less productive than well managed ones.

The time period after a drought is an opportunity to learn from past mistakes and remove deficiencies that might be present in your current ranch operation. As with many things if you can’t measure, it is difficult if not impossible to manage. A clear understanding of your current ranch capacity and condition provides the foundation to build a successful operation. It is wise to consider the integration of personal and business goals with knowledge and information relating to the ecology and science for a physically sustainable financially sound well managed ranch.


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