Stockton: Use drought plan for decisions
As part of a viable drought plan, stockmen need to prepare themselves to make key decisions that can affect their profit or loss, according to a University of Nebraska Agricultural Economist Matt Stockton. Stockton, who is based in North Platte, Neb. spoke about making decisions during a drought during the 2012 Nebraska Grazing Conference in Kearney, Neb. on Aug. 14-15.
Stockton said when producers are facing tough decisions during a drought, the first thing they need to do is acknowledge whether there is a drought and determine their alternatives. Some factors that affect the decision-making process are knowledge, which is based on things you can or do know; tradition, which are things from your perspective; emotion, or what you feel; limiting options, which are things you refuse to do or think about; and self honesty or integrity.
Make sound decisions
Stockton admitted to producers that some of these factors can make it harder to reach a sound decision. For example, in the case of tradition, the ranch may always have been run a certain way. Stockton said another example is limiting your options. A producer who has already decided selling his/her cattle is out of the question limits their options. Buying expensive hay to feed through the winter may be the only viable option left.
The economist encouraged producers to consider all their alternatives, and try not to put all their emphasis on tradition, emotion and limiting their options when determining the best solutions during a drought.
“In the case of tradition, be careful it doesn’t keep you from being willing to try something new,” he told nearly 200 ranchers during the meeting. “It is important to keep an open mind, and make decisions prior to the fact.”
Stockton said producers may make different decisions based on if they feel the drought may last another two years or another two months.
“These questions may not be answerable,” he said, “but they do affect the choices you have to make.”
Adjust and consult
Once producers have a drought plan and have started to implement it, they shouldn’t be afraid to make changes to it if a better opportunity comes along, the economist said.
“Make your decisions based on facts. Many of the questions that need answers require a lot of thought and work on the part of individual managers,” he explained. “No one can tell you which are the correct choices, and many of the choices you make could mean the difference between success and failure.”
Because ranchers are price-takers for the most part, Stockton said it is crucial to control costs as much as possible during a drought.
“We need to control our costs, because we can’t control our revenue. It is important to determine how much something will cost,” he explained, using as an example feeding cattle through a drought.
If stockmen don’t take the time to determine what it would cost, it is like purchasing a car or a piece of equipment without asking the price first, he said.
Producers shouldn’t be afraid to consult experts to become more knowledgeable about the decisions they are making and to help them make the right decisions, Stockton stressed. As an example, he referred to a rancher who had decided to sell his cattle and planned to use the money to live off of for a couple years until he could get back in.
“It is important to pay attention to things like selling cows and paying the taxes on the revenue, if it isn’t deferred. Living on that income may cause problems with being able to buy cows back later,” he said.
Stockton urged producers who are considering selling their cows to speak with an accountant or someone knowledgeable about that part of the business to set up a plan.
When Stockton asked the ranchers if drought affects profit, a consensus of “yes” was heard throughout the room. As ranchers look at lighter weaning weights, thinner cows and higher winter feed costs, among other expenses, Stockton encouraged producers to determine where they stand financially.
“If you think there is going to be a loss, estimate how much that loss will be so you understand where you are going,” he said.
“The decision-maker needs to understand the amount of risk his/her choices will create, and the amount of risk he/she or the business can withstand,” he said. “None of these decisions are easy, but objectivity will help you make the best choices based on their merit.”
He continued, “The ability to move past emotion and make a clear choice is difficult, but it will help you move forward. Choices need to be made thoughtfully, in a time when there is no panic and before a crisis, not during.”
Know your costs
Stockton said producers can use a program like Cow-Q-Lator to determine what the profit outcome would be of different scenarios they have by inputting their costs. More information about the Cow-Q-Lator can be found at agmanagerstools.com.
“I feel to make good choices, we need to have as much knowledge about the outcome as we can,” he told producers. “To remain in the business, our costs must be less than our revenue. In the short term, this may not always be the case, but by knowing our costs, we can see if we should be making a different choice.”
Stockton left producers with a final thought.
“One question that everyone should probably think about is, what is my expected profit given the drought? If profits are severely negative, operators should consider alternatives to continuing production or find ways to cut expenses,” he said.
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments to firstname.lastname@example.org.