Decisions During Drought – NSW Woolgrowers

Many woolgrowers will face complex and emotive decisions regarding their business, animals and pasture resources going into and coming out of drought. For many, maintaining sheep helps diversify income, improve risk management and provide benefits to the cropping phase through weed control, nitrogen and organic matter.

Drought planning is not about making profits - it is about minimising any losses. These key messages and tips are designed to support decision making during drought.

1. MAKE A PLAN

The projected income, the cost of continuing until the drought breaks, and the cost of restarting all need to be pulled together to form a view on your likely financial position in the next financial year – a plan for your farm business.

To assess your financial position, consider your total debt servicing commitments (including interest, leases, hire purchase and capital repayments) from the next financial year onwards and how much of your budgeted profits for the next financial year onwards these will consume.

Base the budgeted profits on historical returns rather than any forecast prices that are given (unless of course there is the ability to lock that forecast price in through hedging instruments). An opinion of where markets will be is a dangerous thing to budget on. Very few opinions would be offered if those who formed them were held accountable for the times when they were wrong.

Put simply you need to assess whether, under the worst case scenario:

1. You will be going backwards (losing equity) if you embark on this strategy.
2. You will be getting by, but effectively be working for the lenders because most of your anticipated profits will go to debt servicing commitments each year.
3. You will be back on your feet and able to continue farming from the next financial year onwards without financial constraints limiting your ability to take opportunities as they arise.
   Tip: Look for a level of profit before interest and tax from the next financial year onwards that will be twice the debt servicing cost.

Rework all three components of the plans until you are happy with the outcome. The final plan might fall somewhere between selling the farm now, and feeding the majority of livestock through the drought. The answer is not a reflection on past management performance as there are a range of things outside the control of management that may lead to this answer. In fact, the most progressive managers of farms often feel the effects of drought the most.

The drought decision web

To make effective decisions going into drought, aim to leave yourself in a position in 12 months that will allow you to operate the business into the future with a suitable level of profit after interest. Drought planning is not about making profits - it is about minimising any losses.

Consider three things:

1. The impact of the drought on income this year.
2. The costs of continuing on until the drought breaks (feeding costs, overheads, drawings and debt servicing costs).
3. The costs of re-starting each enterprise.

There is a high degree of uncertainty at this time, so these decisions are not easy to make. No-one can predict with certainty what will happen but by looking at a range of scenarios you can make good decisions that will ensure you survive the drought.

Because of the degree of uncertainty you need to look at near-worst-case scenarios as well as the middle-of-the-road scenarios. Even though there might be only a small chance of the worst case scenario happening it does not mean no chance - you need to know that you could survive that outcome.

2. SEEK ADVICE AND HELP

All of the economics are of no value if the emotional toll of implementation is too high, so all of the above needs to be considered in that context:

1. Seek help with the decision making process to bring in ideas, objectivity and support to help make the decisions
2. The planning process and the initial decision making is the most stressful part of the drought. Procrastination and lack of objective planning just prolongs the agony of making the decisions. As an example, if you hold on because you are hoping for an early autumn break and it doesn’t come, then the stress levels will be magnified because the costs incurred with the drought will have been magnified many times.
3. Consider the time commitment to a livestock feeding program through the drought. You and your family will need breaks throughout the drought. Build in the cost of getting someone else to feed your livestock for short periods throughout the drought.

Seek information and support through professional channels including:

1. Drought Hotline
2. Rural Financial Counsellors
3. Your farm consultant or
4. Bank Manager.

Contact an advisor who can work through your situation and help you plan for the future.

3. THE IMPORTANCE OF SHEEP IN YOUR BUSINESS

Long term analysis of profits from farm businesses shows that more money is made in the enterprises that you are efficient at managing and for which you have the expertise and interest. In other words drought on its own is not a good reason for wholesale enterprise change. The reasons for having sheep in the farm business are wide and varied, so think hard before using drought as an excuse to make wholesale changes.

The primary goal is to get back up to full capacity as soon as possible after the drought, so consider both your destocking AND restocking strategies. Think about the genetic quality of sheep that might be available post-drought, and also the disease risks that you might face in a restocking strategy. Both of these factors have economic importance and should be valued in the decision on whether to sell or retain sheep.

Where it does not pay to keep all of your sheep, and restocking with sheep is not likely to be a consideration, consider other possible enterprises in order to fill the capacity gap. Agistment, trading or backgrounding cattle, or some extra cropping where possible may be viable options.

4. WHEN IS THE DROUGHT MOST LIKELY TO BREAK?

We cannot know this for sure but we can use historical weather data to estimate when this will happen. In our experience people who have not analysed historical data tend to underestimate how long the drought might go on for.

In 2008, nowhere on the western side of the Great Dividing Range in NSW (excluding summer rainfall areas) had a significant chance of a break before April based on historical rainfall records. The definition of a break is when there is enough pasture growth to stop feeding.

Even in high rainfall areas the chance of a break in April was only 50%. It was not until the end of May in high rainfall areas that the chance of a break was greater than 70%.

Lower rainfall areas use a rule of thumb of a break two weeks later per 100mm less rainfall from 700mm to 300mm. This meant the cost of maintaining the business through the drought needed to be looked at until June and July 2008.

Account for fixed overhead costs such as rates and rents that have to be paid, drawings and wages, debt servicing costs and feeding costs for livestock where it makes sense to retain them rather than sell them. Review all discretionary expenditure such as repairs and maintenance or capital expenditure and decide if it can be delayed or not.

5. DECIDE WHICH LIVESTOCK TO KEEP

There are a number of tactical changes you can make to help leave your net income in the best possible situation in a drought year. These are broken down into cropping decisions and livestock decisions. Both involve weighing up the budgeted income from weight gain or grain harvested against the value of the grass/crop as conserved hay, silage or a standing haystack for consumption by stock later.

Surplus livestock decisions

1. Get a valuation on all livestock destined for sale (steers/lambs/wethers, surplus heifers/ewe hoggets, dry cows/ewes, CFA cows/ewes) now and work out the net income on farm if they were to be sold over the next few weeks.
   Tip: At times like this, the prices move quickly so it is best to be conservative.
   Tip: Get your price on farm or allow for a substantial drop in estimated price if they go to the open market.
   Tip: Consider wool income and whether to shear before sale in your calculation.
2. Calculate the stocking rate (heads per hectare) that these classes of stock normally destined for sale will occupy over the coming months.
3. Estimate the likely additional income if the season were to improve and they were kept.
4. Estimate the likely additional income if the season were to continue to deteriorate and they were kept.
   Tip: Be particularly conservative on price if the stock are not at target weight because this will be a forced sale.
   • Estimate the alternative sources of income from the area that they will occupy if they were sold and seasonal conditions improved. Consider fodder conservation options, the value of pasture area set aside as a standing haystack for grazing later, or the option to take agistment.
     Tip: You need to consider wastage in the harvest process whether it be for hay (up to 40%), silage (up to 20%) or building a standing haystack for grazing later (up to 50%).
   • Estimate the alternative sources of income from the area that they will occupy if they were sold and the seasonal conditions continued to deteriorate.
     Tip: Give consideration to what might happen with fodder prices should the season improve or deteriorate.
   • Weigh the opportunity cost of income not earned if the season improves (the difference between the income from livestock and the alternative income source if they are sold) against the cost of not selling (the difference between the value of the pasture saved and the income earned from livestock) if the season deteriorates.
   • Consider what chance of a turn-around in season is required to justify keeping the livestock now.
     
     As a guide:

• Assume sheep gaining weight will require 2kg of pasture dry matter per day if they stay, or the potential to accumulate pasture if they are sold early.
• Allow 50% wastage of pastures grazed after haying off.

Cropping decisions

1. When assessing potential grain yield prospects consider soil moisture, plant growth stage, green leaf area, tiller numbers and grain number per head. Consider soil moisture levels and the time between consecutive rainfall events from here on in.
2. Measure the dry matter in the crop by cutting samples at forage harvest height, drying and weighing.
3. Compare the costs and income associated with harvesting for grain/fodder or grazing.
4. Consider seed requirements and the area required for grain harvest to provide adequate seed for next year.
   
   As a guide:

• A cereal hay/silage yield of 1.5 tonnes per hectare needs a grain yield of 0.6 t/ha to provide equivalent returns.
• A canola hay/silage yield of 1.5 tonnes per hectare needs a grain yield of 0.45 t/ha to provide equivalent returns.

Calculating the cost of feeding livestock

The cost of feeding livestock that will be retained should not be viewed as a fixed cost. It may be sensible to sell now, save the money on feed and buy back into livestock, or replace them with and alternative enterprise when the drought breaks (see Which Sheep do I Keep?(pdf 0.59Mb)). Know what you will do when the drought breaks because historical analysis has shown those who do not replace quickly in the interim between droughts lose more in opportunity cost than they lost in the drought itself.

Make decisions on each class of livestock, and then the varying grades within each class of livestock (i.e. age or quality grades).

As a guide:

1. For most of the sheep/wheat belt, the net cost of supplementary feeding a dry sheep for six months in 2008 was at least $18 per DSE. Further west in the pastoral areas the net cost of feeding ewes for up to 9 months was at least $65 per DSE.
2. Under the same conditions in the sheep/wheat belt, the net cost of supplementary feeding a cow/calf unit was $50 per DSE. Further west in the pastoral areas, the net cost was at least $62 per DSE.
   Tip: Agistment options may be more appealing this year but be sure to get a good handle on what it will take to make that work well.
   Tip: Grain may be a cheaper source of energy for feeding livestock as opposed to roughage in the form of hay or silage.

Use the following table to quickly calculate the weekly cost of maintaining various classes of sheep under droughtlot conditions using wheat as the supplement (13.1 MJ/kg @ 90% moisture). In arriving at a full cost remember to allow for additives, roughage and labour. The costs will vary according to livestock class, feed type and cost, condition score to be maintained and whether you are feeding in a droughtlot or paddock situation.

Weekly feed costs for a range of livestock classes and grain prices (droughtlotting)

More detailed costs of feeding can be obtained from programs such as Stockplan^® and Lifetime Wool Feed BudgetTables for Dry Times.

6. DROUGHTLOTTING/CONFINEMENT FEEDING

At some point in your calculations it will pay to feed the remaining sheep through the drought, because the more sheep you sell now the cheaper it is likely to be to feed the remainder as they will start on feed rations later and are likely finish a little earlier.

In addition, ram breeding flocks, sheep of high genetic merit that have been carefully selected over many years, or ewes that you estimate will be difficult to source post drought may have an intrinsic value higher than meat values.

Under severe conditions, droughtlotting is recommended for many reasons:

• Care of the property with less land degradation (wind and water erosion)
• Quicker pasture recovery with rain
• Greater control of feeding and water supplies
• More simple and regular checking of the results of feeding and livestock condition.

The AWI publication, Managing sheep in droughtlots (pdf 1.11Mb), highlights the purpose, benefits and experiences of woolgrowers managing sheep in confined areas during drought

7. KEEP UP SOCIAL CONTACT WITH FRIENDS, COMMUNITY AND RELATIVES

Sustained drought has a significant impact on individuals and families. Health professionals recommend that during drought, farming families recognise and acknowledge what can be a very emotional period.

Positive ways of coping with drought include:

• Taking time to be with family and friends.
• Trying to keep the rest of your life as normal as possible.
• Openly discussing issues relating to drought and its impact on family income.
• Looking after yourself (eating properly, exercising).
• Expressing your emotions and letting your family talk about their emotions.
• Taking more care when driving or working around the farm.
• Remembering your sense of humour and laughing.
• Taking breaks and holidays away from the farm whenever possible.

Australian Wool Innovation Limited (AWI) and Meat & Livestock Australia (MLA) engaged Sandy McEachern from the consultancy firm Holmes, Sackett Pty Ltd to develop key messages and tips to support decision making during drought.

These key messages are supported by a range of resources which can be accessed through the AWI website here.