Jennifer Ifft, Robin Reid, Cordon Rowley, Agricultural Economics
With ongoing severe drought in many parts of Kansas, cattle producers continue to face tough decisions: how to feed their cattle and whether to increase culling rates. Several safety net programs are available through Federal insurance products (Annual Forage, Pasture Rangeland and Forage–PRF, others) and the Farm Service Agency (Emergency Assistance for Livestock, Honey Bees, and Farm-raised Fish–ELAP, Livestock Forage Disaster Program–LFP, others). The purpose of these safety net programs is to make payments that would ultimately make these decisions a little less painful: money to help keep feeding your cattle or to save for eventual restocking or a combination of the two. The objective of this article is to provide an example of the magnitude of safety net payments and the financial tradeoffs that cattle producers are currently facing.
For this example, we use Finney and Labette counties, which are both experiencing urgent forage shortages. Finney County is currently classified as in exceptional drought and has been experiencing drought conditions since the end of 2021. Low to zero yields are expected for most 2022-planted grain and forage crops and most cattle producers are running low on hay or have had to purchase from outside the region. Nearly all of Labette County was recently classified as in extreme drought and most producers are using or considering alternative forage sources.
| Finney County (Exceptional Drought) | Labette County (Extreme Drought) | |||
| PRF INSURANCE EXAMPLE* NET PAYOUTS (INDEMNITIES – PRODUCER PREMIUM) | ||||
| Per Acre | 11 acres | Per Acre | 5 acres | |
| 2021 | $28 | $312 | -$1.21 | -$6 |
| 2022 – to date* | $24 | $269 | $2.12 | $11 |
| LIVESTOCK FORAGE DISASTER PROGRAM (LFP) PAYMENT | ||||
| Per Cow | Per Cow | |||
| 2022 Payment | $133.78 | $107.03 | ||
| CURRENT FEED COSTS | ||||
| Per Ton | Per cow | Per Ton | Per cow | |
| Bluestem bales | $165 | $2.06 per day | $125 | $1.56 per day |
| POTENTIAL FEED COSTS IN 3 MONTHS WITH CONTINUED DROUGHT | ||||
| Per Ton | Per cow | Per Ton | Per cow | |
| Bluestem bales | $195 | $2.44 per day | $155 | $1.94 per day |
| KANSAS – CURRENT PRICES FOR CULL COWS | ||||
| Per Cwt | Per Head (1300 lbs) | |||
| Boner – 80-85% | $77 | $1,101 | ||
| KANSAS – REPLACEMENT COSTS | ||||
| Yearling heifers | Bred heifers | |||
| Current prices | $950-$1,300 | $1,500-$2,500 | ||
| Historic range | $800-$1,100 | $900-$1500 | ||
*2022 payment information is through the May-June interval only, others have not been reported or completed. For 2022 for both counties, indemnities are already larger than premiums in this example.
Assumptions
PRF estimated net payments use 90% coverage for hay at a 100% protection factor and assume all 6 intervals are covered at roughly equal shares over the year. Examples were estimated for Finney county grid 21716 and Labette county grid 20840 using the PRF decision support tool. Net payouts are measured as indemnities minus premiums. Indemnities may be paid when actual local rainfall falls below the historic average. Producers have several options to personalize PRF based on their operation’s needs; results from individual policies may be different. Most 2021 and 2022 indemnities were paid out during winter intervals. 2022 PRF coverage is still in progress; data reflects premiums and indemnities through June only. With continued drought in Labette, indemnities for summer months may be larger. PRF can cover acres in hay or grazing; grazing coverage is lower cost and has indemnities on a per acre basis. The 11-acre and 5-acre increments are estimated to match with each county’s average stocking rates per pair.
LFP payments are calculated by the Farm Service Agency as $47.29 per cow, multiplied by a 60% payment factor and then by 94.3% to reflect current budget sequestration. That per month payment is multiplied by 5 months for Finney County (D4-Exceptional Drought status), and by 4 months for Labette County (D3-Extreme Drought status). Stocking rates must be under 11 acres/pair for Finney County and 5 acres/pair for Labette County or payments will only be made on the number of head within these stocking rates and not the entire cow herd. While not shown in the table above, assistance is also available for trucking hay to drought areas such as these counties through the FSA ELAP.
For current forage costs, we used the price of large round bluestem bales. The price per ton was recorded from the USDA AMS weekly Kansas direct hay report from the districts of both counties and a $15 per ton transportation cost was added as farmers will most likely have hay delivered from other parts of the state or other states. We then assumed a 1300-pound cow eating 2% of her body weight in forage, roughly 25 pounds a day. Potential forage costs are based on a price spike that occurred from May of 2011 to August of 2011 when hay prices increased roughly $30 per ton. This timeframe was selected because the drought condition in that time period resembles current conditions. Even higher prices could occur if the drought continues and becomes more widespread; likewise hay prices could decline if drought conditions improve. While producers may also increase supplements (vitamins, crude protein, etc.) during a drought as well as consider alternative energy sources (for example, DDGs), round bluestem bales are a typical primary feed source purchased during a drought.
Cull cow prices were are based on the Kansas weekly cattle auction summary report released by the USDA AMS, for boner cows (80-85% lean), assuming a 1,300-pound cow. If a producer decided to cull or increase culling, they may also consider buying replacements in the future. For the yearling heifers we looked at current auction prices through online markets and weekly cattle auction reports. Historical auction prices came from older USDA AMS weekly report files. The same process was used for bred heifers.
Discussion
Having to purchase costly hay or other feedstuffs, coupled with high transportation costs, is a difficult decision, especially with uncertainty when precipitation and soil moisture will return to normal. Likewise, selling healthy, still-productive cows or breeding stock can be both financially and personally painful. While each operation is unique, the financial tradeoff many producers face is to (1) purchase forage for cows until growing conditions improve, (2) increase culling rates and restock when feed prices and growing conditions improve, and/or (3) a combination of (1) and (2). Paying for feed now allows a producer to take advantage of current high feeder cattle prices and be at or closer to capacity when growing conditions improve but involves uncertainty when precipitation will return and if the feed cost can ever be recouped. Increasing culling rates saves on feed costs but can significantly increase the time it takes for an operation to return to normal or regular capacity and replacements may be at premium prices.
What role can safety net payments play when faced with these decisions? Potential PRF payments have been substantial in Finney Co., depending on coverage and intervals selected. 2022 net payouts for 11 acres to date could pay for the cost of purchasing hay for a cow for about 131 days under current prices, but would not stretch as far under higher prices, about 110 days. Potential PRF payouts in Labette Co. are much smaller due to the sudden onset of drought during the growing season, but payouts may be higher as precipitation for summer intervals is recorded/completed. However, FSA LFP payments are available in both counties and could cover about 65 days of feed in Finney and around 69 days of hay in Labette, or only about 55 days for both counties, under higher hay prices. Further, additional PRF payouts might be made under continued drought, as well as FSA disaster payments.
From a financial perspective, safety net payments could also be considered as a source of savings to restock, if a producer chooses to increase culling rates. For example, the difference between a selling cull cow and replacement heifer may be $0 to $1400 in our example. While cull cows and replacement heifers are not directly comparable from a productivity perspective, considerable financial resources may be required for restocking. Combined 2021 and current 2022 PRF payouts for hay on 11 acres and 2022 LFP payouts for a cow-calf pair in Finney Co. could go a long way in making up this difference ($714 in our example), especially if feed savings are accounted for. Cumulative safety net payments in our example are lower in Labette County, but this may change if the drought continues.
The purpose of this article is to demonstrate the role safety net program payments can play in managing drought. While every operation faces unique costs and most face tough decisions regardless, our examples demonstrate how the extra income provided by safety net programs can be substantial.
Additional Resources
Insurance
https://prodwebnlb.rma.usda.gov/apps/prf
FSA Programs
https://www.fsa.usda.gov/programs-and-services/disaster-assistance-program/livestock-forage/index
https://www.farmers.gov/protection-recovery/drought
For more information on safety net programs, contact a crop or livestock insurance agent or your local Farm Service Agency Office.
