AG ECONOMICS AND MANAGEMENT

June, 1998

Drought Impact on Agriculture in the Billions of Dollars

Texas producers annually earn about $14 billion in cash crop receipts in good years, contributing about $45 billion to the Texas economy. The economic loss could result for industries associated with the harvesting, transportation, processing and marketing of agricultural and food products in the state. One in five Texas jobs depend on agriculture and agribusiness. With a projected producer loss of this magnitude, the 1998 drought could ultimately impact about 40,000 jobs statewide.

Citrus producers are fighting to keep their orchards alive. Some citrus producers in the Rio Grande Valley have been unable to irrigate their crop since early May. Irrigation plays a major role in the sustainability of the citrus crop. Up to half of the irrigation districts in South Texas are expected their systems.

Economists estimate that in the Rio Grande Valley half of the normal production of fall vegetables likely will not get planted due to lack of irrigation water, resulting in $55 million in losses. The probability of significant fall vegetable planting declines.

Consumers already are seeing the impacts of the reduced horticultural crops through higher retail prices and the lack of certain, preferred Texas-grown produce.

The drought, since May 1998, has cost livestock producers $451 million in losses. An estimated $126 million of that total involves direct revenue losses, as ranchers have had to liquidate their herds or sell lighter-weight cattle. The other $325 million is the estimated extra feed bill producers have had just to keep cattle.

The forced liquidation would mean higher consumer beef prices than otherwise would be expected in 1999. As more cattle hit the market, hamburger prices will actually decline in the short term, but the prices of all beef cuts would run higher a year from now because of the reduction in cattle numbers.

Hay supplies are tight and will get even tighter as summer -- the normal hay growing season -- wears on. Ranchers who want to keep their cattle will have to give them supplemental feed.

According to the National Weather Service, all 10 climatic regions within the state received rainfall that was well below normal from April to June -- a critical time in the production of corn, cotton, sorghum, wheat and forage. The lower Rio Grande Valley received no measurable precipitation during May and stood at 96 percent below normal for the 90-day period ending June 30. The rest of the state averaged from one-tenth to one-fourth of the normal amount of rainfall for the same period.

By contrast, only two of the 10 climatic regions were estimated to be below normal precipitation for December through February. Unfortunately, the Trans-Pecos region and the Southwest Texas area were the two districts -- and they partially impact the reservoir levels on the Rio Grande River that is so critical for community water supplies and irrigation water in the Lower Rio Grande Valley.

Cotton, the number one cash crop in Texas, is under severe drought stress statewide. Unrelenting hot, dry weather will slash more than $500 million from cotton farmers and $1.8 billion from the economy. The lost income hits local rural businesses hardest. Yields for irrigated cotton may be reduced by 15 percent or 100 lb/acre statewide without good rains.

Corn and sorghum are the two most drought-stricken grain crops in Texas. Producer level losses are pegged at $225 million and $140 million, respectively, for these two commodities. The combined overall economic impact from production losses on the two feedgrains is estimated at about$1.2 billion.

Dryland corn and sorghum losses will be in the 40 percent to 70 percent range. Irrigated corn and sorghum losses could range from 15 percent to 40 percent.

Hay production will be down sharply in the state this year. Losses of hay production range from 80 percent in parts of East Texas to 30 percent in other regions.

It is estimated the production value of lost hay production will approach $330 million statewide for a total economic impact value totaling $1.1 billion. The first cutting of hay this summer was short due to dry weather and most forage producers also missed the traditional second cutting due to inadequate forage growth.

Here are current estimated producer losses by commodity as of July 14:

Cotton $500 million

Corn $225 million

Sorghum $140 million

Forage Crops $330 million

Horticultural Crops $100 million

Livestock $44 million

Added Livestock Feed Cost $136 million

Projected Total Losses $1.475 million

Cow-Calf Get Out of Business Now or Later Analysis

In an attempt to protect their equity through the current decline in cattle prices, many cow-calf producers will be making the decision to get out of the cow-calf business. The most pressing question in that decision is what would the cows' net income (loss) per head have to be to justify holding the cattle for sale at a later date? Timing is critical to minimize loss of equity during this period of declining prices. Assembling the cost and asset value information will help determine the appropriate sale date.

To use the worksheet, the net value of the present cow herd plus other assets that can be sold needs to be determined. Capital gain (loss) adjustments must be included for most producers because the sale of raised cows will generate a capital gain tax liability. It is advisable to discuss tax issues with the business CPA.

The next step is determining the cost of keeping the cattle for an alternative sale date. The potential use of the capital in savings or an alternative investment is a consideration. Also, there may be a potential to lease the land if the cattle are sold.

By determining the current net after tax revenue, adding extra cost of production before an alternative sales date, and adding the earnings on the capital and land lease, the total revenue required to justify waiting for the delayed sale can be calculated. It is then a question of evaluating whether the improved market will potentially reward the later sale.

The following worksheet can facilitate approximating the increase in value required to justify delaying the cattle sale.