The Effects of Drought and Disaster Payments on

The Effects of Drought and
Disaster Payments on the Missouri
Cattle Industry
July 2016
Dr. Scott Brown
Assistant Extension Professor
215 Mumford Hall
Columbia, MO 65211
(573) 882 – 3861
[email protected]
The Effects of Drought and Disaster
Payments on the Missouri Cattle Industry
Dr. Scott Brown, Extension Agricultural Economist, University of Missouri
Executive Summary
The 2012 drought caused many Missouri cattle producers to alter plans for the size of their cattle
herds. The lack of pasture and hay left cattle producers will few options but to liquidate at least a
portion of their herds. The 2012 drought was one of the worst seen in years. According to the
National Drought Mitigation Center, nearly 36 percent of Missouri land carried a D4 designation by
August 2012. Some weather experts suggest a D4 level droughts occurs only every 50 to 100 years.
The 2012 drought triggered the United States Department of Agriculture to make disaster payments
under the Livestock Forage Program (LFP) to Missouri livestock producers. These payments were
not received until 2014 because of the lack of federal budget authority until the 2014 farm bill was
signed into law. Figure 1 shows LFP payments for the year they covered.
Figure 1 Livestock Forage Program Payments for Missouri Livestock Producers
$350
$300
Millions
$250
$200
$150
$100
$50
$2012
2013
2014
2015
The US cattle industry would look very different today if the 2012 drought had not occurred. Prices
for Missouri calves were pushed lower by the record drought-induced feed costs experienced over
the period. Econometric estimates show feeder cattle prices were more than $5 per hundredweight
lower in 2012 and 2013 as a result of the 2012 drought.
The 2016 Missouri General Assembly passed SB641 that would exempt disaster program payments
from state income tax calculations. SB641 is retroactive to 2014 which covers the 2012 LFP
payments that many Missouri producers received in 2014. The effect of SB641 for the 2014 year
could reduce state income tax collections by $11.8 million.
The income tax refunds available under SB641 will come at an opportune time for cattle producers
and rural Missouri communities who are dealing with lower cattle as well as other agricultural
commodity prices. These monies will multiply through local communities as cattle farmers make
purchases that might otherwise have to be delayed this year due to the lower cattle price situation.
The Effects of Drought and Disaster
Payments on the Missouri Cattle Industry
Dr. Scott Brown, Extension Agricultural Economist, University of Missouri
The drought of 2012 and subsequent effects has had a marked effect on the Missouri cattle industry
for the past several years. Many cattle producers found themselves in a situation where they had to
liquidate at least a portion of their herd in order to have enough pasture and hay to support the
remaining cattle they kept during the worst of the drought.
Beyond the direct effects of the lack of pasture, record high corn and soybean meal prices only made
the situation worse for Missouri cattlemen. The effects of the 2012 drought were felt well beyond
Missouri as many other states also experienced the 2012 drought as well.
Although it is impossible to know exactly how the cattle industry would have looked in absence of
the 2012 drought, an analysis with assumptions about what feed costs and pasture availability would
have looked like had normal or average weather prevailed was conducted. This analysis employed a
partial equilibrium model of the US cattle industry in an attempt to capture the underlying effects of
the 2012 drought.
It takes multiple years for the cattle industry to adjust to events as severe as the 2012 drought. Table
1 shows results of the partial equilibrium model simulation that assumes there was no 2012 drought
in comparison to what was observed by the industry with the 2012 drought.
Cattle and calf inventories would have been over one million head larger by 2015 without the 2012
drought. Beef cow inventory shows some of the largest changes with an additional 900,000 head of
beef cows in the industry had the drought not occurred.
The 2012 drought had effects on the price of cattle received by producers. The record high corn
prices that resulted from the drought meant that Missouri calves destined for feeding were worth
less than they would have been without the drought. The model estimates that feeder cattle prices
would have been $5.52 per cwt higher in 2012 had the drought not occurred. That difference grows
to $5.76 per cwt in 2013 as feed costs made feedyards bid less for calves to enter the yard.
To put these prices changes into context for Missouri cattle producers, the $5.52 lower feeder cattle
prices found in table 1 reduces the value of the Missouri feeder cattle inventory by over $50 million
Table 1. Effects of the 2012 Drought on US Cattle Markets
2012
2013
2014
2015
Drought
Beef Cows (Jan. 1)
Cattle and Calves (Jan. 1)
30.3
91.2
Beef Production
Beef Domestic Use
Beef Exports
Prices
Total All Grades, 5-Area Direct Steers
600 - 650 #, Oklahoma City Feeder Steers
25,995
25,755
2,452
122.86
158.19
(Million head)
29.6
29.1
90.1
88.5
(Million pounds)
25,790 24,320
25,476 24,687
2,589
2,573
(Dollars per cwt)
125.89 154.56
158.84 225.07
29.3
89.1
23,755
24,767
2,266
148.12
226.52
No Drought
Beef Cows (Jan. 1)
Cattle and Calves (Jan. 1)
30.4
91.3
Beef Production
Beef Domestic Use
Beef Exports
Prices
Total All Grades, 5-Area Direct Steers
600 - 650 #, Oklahoma City Feeder Steers
26,332
25,958
2,578
121.26
163.71
(Million head)
30.2
29.9
90.5
89.2
(Million pounds)
26,372 24,263
25,817 24,654
2,823
2,564
(Dollars per cwt)
122.90 154.76
164.60 220.86
29.9
90.2
23,526
24,625
2,183
149.84
223.97
No Drought Less Drought
Beef Cows (Jan. 1)
Cattle and Calves (Jan. 1)
0.1
0.1
Beef Production
Beef Domestic Use
Beef Exports
Prices
Total All Grades, 5-Area Direct Steers
600 - 650 #, Oklahoma City Feeder Steers
336
204
126
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-1.60
5.52
(Million head)
0.6
0.9
0.5
0.7
(Million pounds)
582
-57
341
-33
235
-8
(Dollars per cwt)
-2.99
0.20
5.76
-4.21
0.6
1.0
-229
-142
-82
1.72
-2.55
in 2012. Cattle remains very important to Missouri with cash receipts measured by the United States
Department of Agriculture (USDA) topping $2 billion.
Current estimates show that for every $1 in cash receipts generated by the Missouri beef cattle
industry, the total economic impact is $1.64 by the time the cash receipts move through the Missouri
economy. The impacts of the cattle industry into the rest of the Missouri economy remains
extremely important. A recent study by the University of Missouri’s Commercial Agriculture
Program (http://beef.missouri.edu/industry/mobeefindustry.pdf) shows that the cattle industry
added $1.433 billion to Missouri Gross Domestic Product in 2014 and created over $0.5 billion in
labor income.
Missouri Cattle Structure
The latest information from USDA’s 2012 Census of Agriculture highlights that Missouri’s cattle
industry is made up of many small producers. The average herd size is about 36 beef cows per
operation and over 60 percent of our beef cow inventory is on farms with 100 or less beef cows (see
table 2).
Although there has been much consolidation in agriculture over the last several years, the cow-calf
industry has been the slowest to make the move to larger operations. In fact, many of Missouri’s
cow-calf producers would consider themselves part time as many of them have off-farm jobs to
supplement their farming operations. There are over 46,000 beef cow operations in Missouri
according to USDA-NASS. This compares to slightly more than 15,000 corn for grain farms.
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Table 2. Missouri Beeef Cow Operations, by Size, 2012
Size of Operation
Beef Cow Inventory
Beef Cow Operations
Average Inventory per Operation
58,831
140,240
439,101
397,540
310,778
238,891
61,961
36,389
12,060
10,285
14,448
5,981
2,385
880
98
24
5
14
30
66
130
271
632
1,516
500 +
98,350
122
806
Total
1,683,731
46,161
36
1-9
10-19
20-49
50-99
100-199
200-499
500-999
1000 +
Source: USDA, National Agricultural Statistics Service
Livestock Disaster Programs
There are two main disaster programs available from USDA for cattle producers. They are the
Livestock Forage Program (LFP) and the Livestock Indemnity Program (LIP). These programs are
authorized under federal farm bills and have operated for many years.
One unique aspect of these programs occurred during the 2008 farm bill process. These programs
were only provided funding until October 1, 2011 under the 2008 farm bill. Given the 2014 farm bill
was not signed until late January 2014 these programs had no monies available to use until the
passage of the 2014 farm bill. This funding gap occurred during the severe drought of 2012. USDA
did retroactively make LFP and LIP payments for this period immediately after passage of the 2014
farm bill, which most producers received during 2014.
Table 3 shows payments Missouri producers received under the LFP and LIP programs over the
FY2012 to FY2015 years. A majority of these payments were LFP payments due during FY2012.
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Table 3. Missouri Livestock Disaster Payments
2012
LFP
LIP
$ 300,216,185 $
$
407,490 $
2013
16,088,959 $
369,478 $
2014
6,228
592,690 $
2015
Total
$ 318,515,680
241,747 $
1,616,593
TOTAL
$ 320,132,273
According to USDA, an eligible livestock producer who owns or leases grazing land or pastureland
physically located in a county rated by the U.S. Drought Monitor as having a:
D2 (severe drought) intensity in any area of the county for at least eight consecutive weeks during
the normal grazing period is eligible to receive assistance in an amount equal to one monthly
payment;
D3 (extreme drought) intensity in any area of the county at any time during the normal grazing
period is eligible to receive assistance in an amount equal to three monthly payments;
D3 (extreme drought) intensity in any area of the county for at least four weeks during the normal
grazing period or is rated a D4 (exceptional drought) intensity at any time during the normal grazing
period is eligible to receive assistance in an amount equal to four monthly payments; or
D4 (exceptional drought) in a county for four weeks (not necessarily four consecutive weeks) during
the normal grazing period is eligible to receive assistance in an amount equal to five monthly
payments.
The monthly payment rate set in 2012 by USDA was $51.81 per beef cow and is set based on feed
costs or the normal carrying capacity of the eligible grazing land.
The drought of 2012 was severe. According to the National Drought Mitigation Center, nearly 36
percent of Missouri land carried a D4 designation by August 2012. Beginning in the first week of
July 2012 and continuing for the remainder of the year over 90 percent of Missouri land was in a D1
designation or higher. The 2012 drought was the only time in this century that a portion of Missouri
land carried a D4 designation.
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The LIP provides benefits to livestock producers for livestock deaths in excess of normal mortality
caused by adverse weather.
Missouri 2016 General Assembly, SB641
The Missouri Legislature finally passed SB641 during the 2016 legislative session. The bill attempts
to exclude from income any disaster payments provided to agricultural producers provided as a
result of a loss. LFP and LIP payments would be excluded from income for state income tax
purposes.
The fiscal note provided with SB641 calculates the lost revenue to the state from SB641at $17.2
million for 2014 and as much as $51.5 million for FY2017 since SB641 allows the deduction for tax
years 2014 through 2016.
It is instructive to look at the effects of SB641 on a year by year basis. For 2014, the combination of
LIP and LFP payments received in 2014 totals $317.7 million. Missouri producers received 2012
through 2014 payments in 2014 after the passage of the 2014 farm bill in early 2014. If a 6 percent
tax rate is assumed, the maximum tax loss to the state of Missouri would total $19.1 million.
It is important to examine the impact that the cost for filing an amended tax return will have on the
expected fiscal impact of SB641. If you take the LFP and LIP payments made in 2012 through 2014
and divide them by the number of beef cows in Missouri it shows that each beef cow received
$188.68 in these payments over that period. The tax savings at a 6 percent tax rate is $11.32 per cow.
Many producers will need to pay an accountant to file an amended return for 2014 to recoup the
savings of SB641. Given the cost charged for an amended return relative to the benefit, it is assumed
that most producers with 50 cows or less will not find it financially attractive to file an amended
return.
Given the data on beef cow inventory in table 2, if those with less than 50 cows do not apply for a
refund, it reduces the expected cost to the Missouri budget to $11.8 million for 2014. This includes
LFP and LIP payments made for the 2012 through 2014 years in 2014.
There was only $242,000 in LIP payments made in 2015 so there will be little to no interest by many
producers to file a 2015 amended return. Even under the maximum, the cost to the Missouri budget
totals only $14,505.
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Thus far in 2016 USDA has not made any LFP payments. Given current weather conditions it is
unlikely that any LFP payments will occur in 2016. It is difficult to assess LIP payments since
weather events may still occur that will result in LIP payments. It may prove difficult to see LIP
payments hit the level found in 2012.
The combination of 2014 through 2016 disaster payments likely falls below $12 million in costs to
the Missouri budget. That will be significantly less than the nearly $52 million estimated in the fiscal
note attached to SB641.
Future Disaster Payments
It remains difficult to forecast future weather conditions. The effect of SB641 on the Missouri
budget depends heavily on how weather occurs in the future. The drought of 2012 was one of the
most severe experienced in years and provides a glimpse of the highest budget effects of SB641.
Other years like 2015 show the effects of SB641 on the Missouri budget to be near zero.
Figure 1 provides a look at the percent of Missouri land that was in a D1 drought designation or
higher on an annual average basis. That provides some measure of expected effects in a given year
but the duration of the event will remain important as well. For Missouri, 2012 was the only time
period in figure 1 where a portion of the land was in the D4 classification.
Figure 1. Percentage of Missouri Land with a D1 Designation or Greater, Annual Average of
Weekly Data
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The United States Drought Monitor provides the real time drought classification schemes that have
become how nearly everyone in agriculture refers to intensity of the dry weather situation (see
http://droughtmonitor.unl.edu/aboutus/classificationscheme.aspx). It remains difficult to assign
probabilities to a particular level of drought (Dx) occurring as the climate we live in changes over
time. Some climate experts will suggest a D4 designation occurs once every 50 to 100 years but there
is no concrete data available to clearly draw that conclusion. They suggest a D2 designation occurs
every 10 to 20 years.
Summary
The Missouri cattle industry remains important to Missouri agriculture and Missouri’s general
economy when the ripple effect of cattle revenue is taken into account. Current data shows that the
Missouri cattle industry made up $1.433 billion of Missouri’s total Gross Domestic Product in 2014.
Weather often plays an important role in the current situation for cattle producers. The 2012
drought caused a critical situation for many cattle producers as the lack of hay and pasture forced
cattle liquidation that otherwise would not have occurred. The level of drought experienced in 2012
does not happen very often.
The Livestock Forage Program administered by the USDA is the primary program available to cattle
producers to help with periods of drought. It paid Missouri producers over $300 million for losses
they faced in 2012. This level of LFP payments to Missouri producers had not occurred for years.
The 2016 Missouri General Assembly passed SB641 that would exempt disaster program payments
from state income tax calculations. SB641 is retroactive to 2014 which covers the 2012 LFP
payments that many Missouri producers received in 2014. The effect of SB641 for the 2014 year
could reduce state income tax collections by $11.8 million. The effect of SB641 on 2015 and 2016
state income tax collections is very small since the covered disaster programs did not provide many
and in some cases zero disaster payments to Missouri producers.
The income tax refunds available under SB641 will come at an opportune time for cattle producers
and rural Missouri communities who are dealing with lower cattle as well as other agricultural
commodity prices. These monies will multiply through local communities as cattle farmers make
purchases that might otherwise have to be delayed this year due to the lower cattle price situation.
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