It is said that the best way to survive a drought is to have a plan instead of being forced into one. Exceptional drought is forcing tough decisions for Oklahoma cattle producers. Worry doesn't accomplish anything so channel that energy into strategic thinking and then implement, monitor and adjust your plan as needed. Some producers have already liquidated all or part of the cow herd. Some are waiting to see if fall forage and/or wheat pasture is possible. Here, we address things to think about with respect to selling more cows, provide some analysis of potential costs and repurchase possibilities, and point you to a tool that can help you in analyzing your personal situation.
Factors that influence the shape of your drought plan will include your goals, your financial position, ability and willingness to spend, risk tolerance and tax situation. Factors that affect the decision about when to sell cows include the costs of keeping the cows--costs of feed and water, vet med, drought/heat impacts on expected reproduction, etc. -- plus the expected change in sale price of the livestock if any, and the opportunity to earn a return on the proceeds from sale of livestock or reduce interest payments. The tax consequences of weather-related sales must also be considered (these were addressed in the previous issue of this newsletter).
Assessing Your Situation
What is your most important goal? Make money or minimize losses? Or hang onto cattle? Would you consider liquidating the herd and restocking with other livestock (could be stockers rather than cows) when forage becomes available? Perhaps you've been considering retirement. Are you ready to cash in and leave the business? Would you like to identify a younger partner who might want to use the land resources when forage conditions improve? What kind of risks are you willing to take? An objective assessment of your business current financial position and recent financial performance will depend on a current set of financial statements (cash flow, balance sheet, income statement) along with some enterprise analysis if your operation is diversified beyond cow/calf.
A goal to maintain the cowherd regardless of cost may be reasonable if you have exceptional genetics and unlimited resources (or plenty of time to recoup losses). If this is not the case, a different strategy may be needed.
If your financial position is good (you have low levels of debt and untapped credit reserves or can self-finance using savings), you can take more risks and may have the flexibility to hold onto cattle to see if fall/winter forage becomes available by buying feed and/or hay or wheat pasture. Still, you'll want to be vigilant with respect to costs and watch for market opportunities to sell at high prices.
Let's assume that you're concerned about not degrading your forage base long-term and are considering selling some cows with an eye toward repurchasing cows in the future. What factors do you need to consider?
Factors That Impact the Price Increase That Can Be Paid to Repurchase Cows Later
The current sale value of the cow is important. The value varies from one situation to the next and may be lower than they would be if not in a drought. On the other hand, prices are being supported somewhat by the overall high price levels in the general cattle market. Use a number that represents your situation (for example, $1,000-$1,200).
How long will the difficult environmental conditions last? Do you think you will be able to establish winter forage (cheapen cow costs) or are we looking longer term? Current forecasts suggest that the drought is likely to persist. Consider the possibility of feeding through April which suggests a longer feeding period and a later repurchase date.
What are your costs per day to keep the cow? These costs will not be incurred if the cow is sold and may include hay, grain, pasture rent, water hauling, repairs, veterinary medicine and more. The largest expense will be feed, which could be $2.00 to $3.00 per cow per day. Other costs might be 20 to 40 cents per day. We'll ignore "fixed" costs because you probably will not sell your machinery or facilities if you plan to purchase breeding females when conditions improve.
What is the opportunity cost on your money? If you sell the cows you will have some money to either invest or reduce interest payments on borrowed money. While this may be small relative to other factors, it is still a consideration. If the pasture from which cattle are removed has some grazing potential and using it would not result in longterm damage, renting out the land may generate some additional income related to the sale of cattle.
The table that follows shows the break-even sell-repurchase margin examples results of calculating the price increase that could be paid per head for replacement females at a later date based on reduced maintenance costs of $2.50, $3 and $3.50 per day with a 5% opportunity interest rate and an $800 current sales values for the cow. It assumes that maintenance costs would be incurred up to the date that cows would be repurchased. The length of the feeding period plays a huge role in this calculation and is, of course, the least certain.
You may download the spreadsheet tool used for this analysis, the Repurchase Decision Calculator, free from the beefextension.com website to analyze your personal situation. The following screen capture shows the data entry in the Excel spreadsheet
Evaluating immediate and alternative sale date revenues and costs informs the decision about cow herd culling and repurchase decisions. Factors that impact the decision include the cost of maintenance, expected changes in per head values and/or death losses, plus earnings on proceeds from an early liquidation or land lease opportunities. The total required increase in value required to justify delaying sale can be calculated. It is then a question of evaluating the risks associated with each of the estimates to decide what is best for you.
What will be the cost of replacement in the future? The driving factor in the decision about whether to sell now or continue feeding is the spread between cow value now and the cost to replace in future. You may want to consider comparing costs of a bred cow now versus a pair in the spring. The cost of a replacement in the future will depend on many factors, including how large of a geographic area is trying to rebuild at the same time. Will you be lucky at the expense of others? We expect high valued replacements when conditions improve (a very high spread).
Consult your income tax advisor to determine the tax consequences of liquidating all or a part of the enterprise. Income from the sale of raised cows is typically regarded as capital gain. For purchased cows, the sales price in excess of the tax basis is ordinary income. Proceeds from the sale of calves are ordinary income. For information on tax consequences of drought sales of livestock, see OSU fact sheet, AGEC-788.
All are posted on the www.beefextension.com website under Drought Resources. Tax Consequences of Weather Related Sale of Livestock. AGEC-788, Cooperative Extension Service, Oklahoma State University. Chapter 32, Oklahoma Beef Manual, Drought Management Economic Considerations Cow Repurchase Decision Calculator
Source: Rodney Jones, OSU NW Area Extension Economist, Enid, OK, Damona Doye, OSU Extension Economist and Sarkeys Distinguished Professor, JJ Jones, OSU SE Area Extension Economist, Ada, OK