A Multi-Period Analysis of Two Common Livestock Management Strategies Given Fluctuating Precipitation and Variable Prices
Ritten, John P., Frasier, W. Marshall, Bastian, Christopher T., Paisley, Steven I., Smith, Michael A., Mooney, Siân, Journal of Agricultural and Applied Economics
Many areas of the US recently endured a severe drought and management strategies to cope with the lack of forage production varied. A multi-period mathematical model is presented that estimates the outcomes of two common producer responses to changes in precipitation, partial liquidation and purchasing hay, given fluctuating cattle prices over a long term planning horizon. Results were further summarized with regression analysis and selected elasticities were calculated to reflect the sensitivity of outcomes to variability in precipitation and livestock prices. Although little impact was seen from utilizing additional hay as a strategy during drought, producers who follow this strategy are in a position to market more animals immediately post drought in general, resulting in better long run financial outcomes. Elasticity estimates suggest that profitability is more sensitive to variability in prices but that optimal choices of management strategies are more sensitive to variability in precipitation.
Key Words: Drought management, mathematical programming, herd liquidation, price cycle, cattle management
JEL Classifications: Q12, C61, D24
Recent droughts have had a major impact on cattle producers in the Intermountain West (Nagler et al., 2007). Drought negatively affects forage production, which can force ranchers to carry smaller herds, increase purchased feed, and/ or increase acreage grazed. Although ranchers need not graze all available standing forage in any given year, available standing forage limits their grazing decisions. Moreover, these decisions are made in the face of variable market prices. Bastian et al. (2006) point out that path dependencies may exist when producers make drought management decisions coupled with cattle prices that may be relatively high or low. Producers must make management decisions given fluctuations in both natural and economic forces. Given the prevalence of drought, it is somewhat surprising that relatively little published research exists that examines long-term implications of drought management strategies coupled with variable cattle price environments.
How should a producer respond if the weather is favorable but the market is down, or conversely if prices are up but poor precipitation has negatively affected range condition? Both variable weather and cattle prices affect management decisions and ultimately profitability. It is obvious that producers must consider both weather and market forces when making grazing decisions. Yet these exogenous forces often do not move together. Thus, producers must consider their impacts jointly when making management decisions.
While information about the future states of these factors will be limited, some management strategies may be able to alleviate some of the impacts of poor forage production during drought, allowing producers the ability to take advantage of high prices. Bastian et al. (2006) found that Wyoming cattle producers most often utilized partial herd liquidation and feeding additional hay as strategies to cope with extended periods of drought. Yet the long-term economic consequences of these strategies are not well understood. The objective of this research is to determine if supplemental feeding may be able to improve the financial well being of the firm as a drought management strategy as compared with a more traditional approach of only partial liquidation given variable livestock prices. This paper also examines the relative impacts of variability in prices and weather on producers' optimal management decisions.
Review of Relevant Literature
Ramsey et al. (2005) analyzed Standardized Performance Analysis data from Texas, Oklahoma, and New Mexico for significant factors that impact cow herd production, costs, and profitability. The authors found that herd size positively impacted profit and reduced per unit costs but did not affect production as measured by pounds of weaned calf per female exposed to breeding. …