AFPC AGRICULTURAL & FOOD POLICY CENTER TEXAS A&M UNIVERSITY SYSTEM

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IMPACT OF DROUGHT ON TEXAS AGRICULTURE AFPC Policy Briefing Series 98-4 July 1998 AFPC AGRICULTURAL & FOOD POLICY CENTER TEXAS A&M UNIVERSITY SYSTEM Agricultural and Food Policy Center Department of Agricultural Economics Texas Agricultural Experiment Station Texas Agricultural Extension Service Texas A&M University Web Site: http://afpc1.tamu.edu

IMPACT OF DROUGHT ON TEXAS AGRICULTURE AFPC Policy Briefing Series 98-4 Ronald D. Knutson Edward G. Smith Roland D. Smith Agricultural and Food Policy Center Department of Agricultural Economics Texas Agricultural Experiment Station Texas Agricultural Extension Service Texas A&M University July 1998 Web Site: http://afpc1.tamu.edu

AFPC Briefing Series The briefing series is designed to facilitate presentation by AFPC related to requests for specific policy impact analyses. The materials included in this package are intended only as visual support for an oral presentation. The user is cautioned against drawing extraneous conclusions from the material. In most instances, the briefing series will be followed by an AFPC Working Paper. AFPC welcomes comments and discussions of these results and their implications. Address such comments to: Agricultural and Food Policy Center Department of Agricultural Economics Texas A&M University College Station, TX 77843-2124 or call 49-845-5913.

Impact of Drought on Texas Agriculture Briefing for Secretary of Agriculture College Station, Texas July 29, 1998 Ronald D. Knutson Edward G. Smith Roland D. Smith AFPC AGRICULTURAL & FOOD POLICY CENTER TEXAS A&M UNIVERSITY SYSTEM

Status of Federal Farm Policy Lump sum payments Higher than would have been under target price through 1998 Indeterminate through 22 Increased diversification resulting from flexibility provisions Crop Insurance Most common coverage is approximately 5% yield (CAT or limited additional) 1998 situation particularly unfavorable for Texas Reduced yield Depressed prices Compounded by 1996 adversities

Impact of 1998 Weather Adversities: Assumptions BASELINE TASS 1996 production conditions FAPRI 1998 1998 Weather Alternative Extension Service 1998 estimates of drought

Texas Southern Plains Moderate Cotton Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 1 75 5 25-25 -5 99% 99% 8% 8% 99% 98% 92% 9% 88% 67% 59% 62% 63% 61% -75-1 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Southern Plains Moderate Cotton Farm Probability of Losing Real Net Worth (%) 1 84 8 1998 Drought 6 64 57 57 54 4 2 29 29 23 19 18 18 2 1997 1998 1999 2 21 22

Texas Rolling Plains Cotton Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 6 4 2-2 81% 8% 49% 49% 47% 47% 5% 48% 48% 71% 69% 7% 54% 55% -4 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Rolling Plains Cotton Farm Probability of Losing Real Net Worth (%) 1 8 74 1998 Drought 6 61 57 57 6 4 36 36 36 34 35 34 42 2 1997 1998 1999 2 21 22

Texas Coastal Bend Cotton Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 1 5-5 99% 99% 86% 86% 98% 95% 94% 97% 98% 79% 78% 8% 81% 86% -1-15 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Coastal Bend Cotton Farm Probability of Losing Real Net Worth (%) 1 8 1998 Drought 92 87 85 82 87 6 51 51 49 49 53 58 62 4 2 1997 1998 1999 2 21 22

Texas Northern Plains Moderate Grain Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 15 1 5 18% 6% 6% 1% 4% 4% 6% 5% 4% 9% 3% 7% 5% 8% 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Northern Plains Moderate Grain Farm Probability of Losing Real Net Worth (%) 1 8 1998 Drought 6 4 38 24 24 19 2 13 13 1 1 1 7 4 6 1997 1998 1999 2 21 22

Central Texas Moderate Dairy Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 35 3 25 2 15 1 5 51% 43% 35% 37% 27% 16% % 1996 1997 1998 1999 2 21 22

Central Texas Moderate Dairy Probability of Losing Real Net Worth (%) 1 8 6 65 52 56 5 62 73 4 2 1997 1998 1999 2 21 22

Dairy 1998 vs. 1996 Drought Feed prices much more expensive in 1996 Milk production normally declines during summer heat Erath County Representative Dairies Moderate size dairy (4 cows) must change structure to survive over baseline period Large dairy (825 cows) is profitable under the baseline Hopkins County Representative Dairies Hopkins County Representative Dairies Area lost more than 3% of producers in last 4 years Moderate size dairy (21 cows) is profitable under baseline but only most efficient producers remain 21 cow dairy not profitable enough to move to next generation ---> continued change will occur Large dairy (65 cows) is profitable under baseline

Cattle and Sheep Cycle Inventory liquidation phase of cycle Texas producers caught trying to rebuild herd from 1996 drought Tx producers relatively less ability to begin to respond to higher anticipated cattle prices as supplies contract due to drought Other issues Reduced weaning weights Reduced conception rates Lower feed prices relative to 1996 Sheep 1996 drought factor in 1996 inventory decline Reduced lambing rates and weights Drought on top of adjustments to program changes

FARM Assist Pilot Program A whole farm strategic planning tool designed to provide farmers and ranchers the flexibility to proforma analyze their operation under risk employing a wide array of risk management tools.

How will it work? FARM Assist 85 75 Pilot Regions One-on-one assistance Risk Management Specialist Professional Report Specifically tailored to each subscriber Delivered and explained Fee based Database Subscriptions start September 1, 1998 5

Implications Dryland farmers in big trouble Affects whole agriculture community Relative benefits of 1996 Farm Bill indeterminate over full life of bill Need strong export demand to fulfill objectives Producers must be able to assess risk management alternatives

Appendix

Texas Southern Plains Large Cotton Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 3 2 1-1 69% 69% 34% 34% 32% 8% 66% 57% 61% 51% 26% 26% 24% 23% -2 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Southern Plains Large Cotton Farm Probability of Losing Real Net Worth (%) 1 8 1998 Drought 6 6 43 4 32 29 2 2 16 16 16 12 9 8 3 1997 1998 1999 2 21 22

Texas Blackland Cotton Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 6 4 2-2 99% 99% 99% 99% 99% 99% 94% 99% 98% 99% 98% 92% 94% 92% -4-6 -8 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Blackland Cotton Farm Probability of Losing Real Net Worth (%) 1 8 6 1998 Drought 6 6 67 99 93 92 93 92 8 7 72 69 4 2 1997 1998 1999 2 21 22

Texas Northern Plains Large Grain Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 7 6 5 4 3 2 1 2% 9% 9% 6% 6% 5% 4% 9% 1% 6% 1% 1% 1% 3% 1996 1997 1998 1999 2 21 22 1998 Drought 1998 Drought

Texas Northern Plains Large Grain Farm Probability of Losing Real Net Worth (%) 1 8 1998 Drought 6 4 2 23 16 16 9 4 3 1 1 1 1 1 2 1997 1998 1999 2 21 22

Texas Moderate Rice Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 2 15 1 5 6% 4% 1% 1% 1% 1% 1% 1996 1997 1998 1999 2 21 22

Texas Moderate Rice Farm Probability of Losing Real Net Worth (%) 1 8 6 4 2 7 1 1 1 1 1 1997 1998 1999 2 21 22

Texas Large Rice Farm Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 35 3 25 2 15 1 5 12% 5% 6% 2% 1% 1% 2% 1996 1997 1998 1999 2 21 22

Texas Large Rice Farm Probability of Losing Real Net Worth (%) 1 8 6 4 2 7 2 1 1 1 1 1997 1998 1999 2 21 22

Central Texas Large Dairy Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 12 1 8 6 4 2 1% 1% 1% 1% 1% 1% 1% 1996 1997 1998 1999 2 21 22

Central Texas Large Dairy Probability of Losing Real Net Worth (%) 1 8 6 4 35 2 5 2 1 1 1 1997 1998 1999 2 21 22

East Texas Moderate Dairy Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 25 2 15 1 5 1% 3% 1% 1% 1% 1% 1% 1996 1997 1998 1999 2 21 22

East Texas Moderate Dairy Probability of Losing Real Net Worth (%) 1 8 6 4 2 19 3 1 1 1 1 1997 1998 1999 2 21 22

East Texas Large Dairy Net Cash Farm Income ($1,) Probability of Refinancing Deficits (%) 7 6 5 4 3 2 1 1% 3% 2% 1% 1% 1% 1% 1996 1997 1998 1999 2 21 22

East Texas Large Dairy Probability of Losing Real Net Worth (%) 1 8 6 4 35 2 11 3 3 2 1 1997 1998 1999 2 21 22

Table 1. FINANCIAL IMPACTS OF THE 1998 DROUGHT ON REPRESENTATIVE TEXAS SOUTHERN PLAINS (TXSP1682, TXSP3697) COTTON FARMS. TXSPI682 TXSPI682 TXSP3697 TXSP3697 BASELINE 98 DROUGHT BASELINE 98 DROUGHT Average Annual % Change in Real Net Worth 1997-22 1.1-3.56 8.15 3.44 Cost to Receipts Ratio (%) 1996-22 Average 86.37 1.42 8.11 88.68 Total Cash Receipts ($1) 1996 162.95 162.95 72.22 72.22 1997 296.53 296.53 96.15 96.15 1998 298.29 13.81 969.72 557.64 1999 33.8 33.8 987.17 987.17 2 31.18 31.18 984.53 984.53 21 33.53 33.53 993.89 993.89 22 36.75 36.75 18.13 18.13 1996-22 Average 281.76 257.83 946.26 887.39 Total Govt Payments ($1) 1996 18.58 18.58 51.99 51.99 1997 19.16 19.16 53.62 53.62 1998 2.35 2.35 56.95 56.95 1999 19.74 19.74 55.25 55.25 2 18.8 18.8 5.59 5.59 21 14.56 14.56 4.75 4.75 22 14.11 14.11 39.5 39.5 1996-22 Average 17.8 17.8 49.81 49.81 Net Cash Farm Income ($1) 1996-32.23-32.23 4.31 4.31 1997 74.54 74.54 25.16 25.16 1998 75.59-69.42 259.26-16.88 1999 79.93 65.27 266.55 236.97 2 75.33 6.7 257.33 228.51 21 7.97 56.17 256.13 227.96 22 71.5 55.64 262.31 233.13 1996-22 Average 59.38 3.1 227.43 158.59 Prob. of a Cash Flow Deficit (%) 1996 99. 99. 69. 69. 1997 8. 8. 36. 36. 1998 7. 99. 41. 99. 1999 71. 98. 53. 68. 2 7. 92. 49. 65. 21 73. 92. 5. 69. 22 74. 91. 43. 61. Ending Cash Reserves (1,) 1996-78.18-78.18-8.3-8.3 1997-65.77-65.77 38.2 38.2 1998-55.63-194.6 17.26-22.69 1999-49.48-188.14 154.74-151.94 2-4.81-187.97 23.76.114.39 21-4.83-199.1 236.91-98.25 22-39.7-27.74 288.25-63.85 1996-22 AAverage -52.82-16.2 135.59-98.71 Prob. of Refinancing Deficits (%) 1996 99. 99. 69. 69. 1997 8. 8. 34. 34. 1998 67. 99. 32. 8. 1999 59. 98. 26. 66. 2 62. 92. 26. 57. 21 63. 9. 24. 61. 22 61. 88. 23. 51. Prob. of Losing Real Net Worth (%) 1996 1. 1. 1. 1. 1997 29. 29. 16. 16. 1998 23. 84. 16. 6. 1999 19. 64. 12. 43. 2 18. 57. 9. 32. 21 18. 57. 8. 29. 22 2. 54. 3. 2. Processed 7/27/98 9:12 File D:\rollup\OUTPUT\FLIPSSTA.OUT

Table 2. FINANCIAL IMPACTS OF THE 1998 DROUGHT ON REPRESENTATIVE TEXAS ROLLING PLAINS (TXRP265), BLACKLAND(TXBL12), AND COASTAL BEND(TXCB17) COTTON FARMS. TXRP265 TXRP265 TXBL12 TXBL12 TXCB17 TXCB17 BASELINE 98 DROUGHT BASELINE 98 DROUGHT BASELINE 98 DROUGHT Average Annual % Change in Real Net Worth 1997-22.53-3.15-5.29-7.75-6.54-1.54 Cost to Receipts Ratio (%) 1996-22 Average 89.13 97.69 98.56 19.48 13.33 113.38 Total Cash Receipts ($1) 1996 29.45 29.45 139.4 139.4 259.37 259.37 1997 229.81 229.81 188.36 188.36 421.57 421.57 1998 238.11 135.86 192.1 112.55 44.53 232.83 1999 238.42 238.42 268.25 268.25 438.6 438.6 2 243.33 243.33 273.84 273.84 441.41 441.41 21 242.93 242.93 275.4 275.4 443.79 443.79 22 244.9 244.9 271.27 271.27 447.45 447.45 1996-22 Average 235.28 22.67 229.75 218.39 413.17 383.5 Total Govt Payments ($1) 1996 25.5 25.5 17.28 17.28 34.38 34.38 1997 26.57 26.57 18.24 18.24 35.25 35.25 1998 28.36 28.29 21.83 21.18 42.7 4.81 1999 27.47 27.47 22.78 22.78 41.2 41.2 2 25.9 25.9 2.4 2.4 37.14 37.14 21 2.21 2.21 16.48 16.48 29.92 29.92 22 19.59 19.59 15.97 15.97 28.96 28.96 1996-22 Average 24.62 24.61 19. 18.9 35.53 35.35 Net Cash Farm Income ($1) 1996 37.9 37.9-48.83-48.83-63.72-63.72 1997 5.95 5.95 14.36 14.36 3.35 3.35 1998 56.72-29.36 12.7-62.33 45.73-99.14 1999 52.75 46.24 37.23 29.18 35.39 21.52 2 54.95 48.47 38.51 29.91 31.33 16.71 21 52.1 45.54 34.22 25.26 23.76 8.63 22 43.95 37.6 33.45 23.81 17.63 1.45 1996-22 Average 49.9 33.83 17.38 1.62 17.21-12.3 Prob. of a Cash Flow Deficit (%) 1996 49. 49. 99. 99. 99. 99. 1997 57. 57. 99. 99. 86. 86. 1998 62. 98. 99. 99. 8. 99. 1999 66. 84. 94. 99. 84. 95. 2 64. 78. 94. 98. 86. 94. 21 67. 76. 96. 99. 89. 98. 22 72. 78. 94. 99. 91. 99. Ending Cash Reserves (1,) 1996-7.61-7.61-82.43-82.43-12.49-12.49 1997-5.58-5.58-13.25-13.25-11.4-11.4 1998-3.27-79.7-127.5-21.98-115.72-254.13 1999-18.41-94.28-138.57-219.74-136.59-277.36 2-16.28-96. -154.18-242.33-164.88-316.3 21-2.25-14.58-178.72-273.45-26.59-367.86 22-38.34-128.63-195.8-298.31-247.2-421.5 1996-22 Average -15.68-73.77-14.6-23.7-154.76-264.2 Prob. of Refinancing Deficit (%) 1996 49. 49. 99. 99. 99. 99. 1997 47. 47. 99. 99. 86. 86. 1998 5. 81. 99. 99. 79. 98. 1999 48. 8. 94. 99. 78. 95. 2 48. 71. 92. 98. 8. 94. 21 54. 69. 94. 99. 81. 97. 22 55. 7. 92. 98. 86. 98. Prob. of Losing Real Net Worth (%) 1996 1. 1. 1. 1. 1. 1. 1997 36. 36. 6. 6. 51. 51. 1998 36. 74. 67. 99. 49. 92. 1999 34. 61. 7. 93. 49. 87. 2 35. 57. 72. 92. 53. 85. 21 34. 57. 69. 93. 58. 82. 22 42. 6. 8. 92. 62. 87. Processed 7/27/98 9:12 File D:\rollup\OUTPUT\FLIPSSTA.OUT

Table 3. FINANCIAL IMPACTS OF THE 1998 DROUGHT ON REPRESENTATIVE TEXAS NORTHERN HIGH PLAINS(TXNP16), (TXNP55) GRAIN FARMS. TXNP16 TXNP16 TXNP55 TXNP55 BASELINE 98 DROUGHT BASELINE 98 DROUGHT Average Annual % Change in Real Net Worth 1997-22 8. 6.65 11.22 1.14 Cost to Receipts Ratio (%) 1996-22 Average 7.12 73.23 65.23 68.8 Total Cash Receipts ($1) 1996 393.3 393.3 1476.1 1476.1 1997 348.17 348.17 1312.15 1312.15 1998 348.9 288.8 1299.31 158.43 1999 345.43 345.43 1298.5 1298.5 2 355.14 355.14 1329.64 1329.64 21 355.73 355.73 1339.79 1339.79 22 362.13 362.13 1363.91 1363.91 1996-22 Average 358.25 349.67 1345.57 1311.15 Total Govt Payments ($1) 1996 27.74 27.74 84.85 84.85 1997 32.2 32.2 12.87 12.87 1998 4.4 39.14 13.78 125.51 1999 39.37 39.37 128. 128. 2 35.42 35.42 115.29 115.29 21 29.15 29.15 96.4 96.4 22 27.85 27.85 9.87 9.87 1996-22 Average 33.16 32.98 16.96 16.21 Net Cash Farm Income ($1) 1996 137.96 137.96 592.93 592.93 1997 17.68 17.68 462.69 462.69 1998 19.54 4.91 464.2 196.53 1999 18.33 13.99 471.5 459.76 2 115.4 111.44 496.18 487.33 21 113.95 11.8 53.87 497.56 22 115.99 113.2 515.64 511.27 1996-22 Average 115.5 13.68 5.94 458.3 Prob. of a Cash Flow Deficit (%) 1996 6. 6. 9. 9. 1997 24. 24. 27. 27. 1998 3. 69. 3. 72. 1999 25. 25. 17. 16. 2 33. 38. 16. 23. 21 34. 39. 11. 13. 22 3. 32. 21. 2. Ending Cash Reserves ($1) 1996 71.41 71.41 26.51 26.51 1997 113.45 113.45 393.21 393.21 1998 144.85 9.84 57.85 37.15 1999 176.42 127.91 671.44 498.66 2 29.9 159.18 846.2 672.83 21 233.66 18.45 144.23 862.93 22 264.3 27.69 123.8 141.54 1996-22 Average 173.39 135.85 77.62 576.69 Prob. of Refinancing Deficits (%) 1996 6. 6. 9. 9. 1997 4. 4. 6. 6. 1998 6. 18. 5. 2. 1999 5. 1. 4. 9. 2 4. 9. 1. 6. 21 3. 7. 1. 1. 22 5. 8. 1. 3. Prob. of Losing Real Net Worth (%) 1996 1. 1. 1. 1. 1997 24. 24. 16. 16. 1998 13. 38. 4. 23. 1999 1. 19. 3. 9. 2 7. 13. 1. 1. 21 4. 1. 1. 1. 22 6. 1. 1. 2. Processed 7/27/98 9:12 File D:\rollup\OUTPUT\FLIPSSTA.OUT

Table 4. FINANCIAL IMPACTS THE 1998 DROUGHT ON REPRESENTATIVE TEXAS RICE (TXR2118, TXR375) FARMS AND CENTRAL AND EAST TEXAS(TXCD, TXED) DAIRIES TXR2118 TXR375 TXCD4 TXCD825 TXED21 TXED65 BASELINE BASELINE BASELINE BASELINE BASELINE BASELINE Average Annual % change in Real Net Worth 1997-22 1.48 7.44 1.15 12.8 8.49 8.6 Cost to Receipts Ratio (%) 1996-22 Average 7.32 79.89 9.93 8.31 77.3 81.81 Total Cash Receipts ($1) 1996 495.82 149.22 119.55 252.6 558.44 1773.86 1997 491.32 1412.24 955.97 2342.98 526.38 1665.35 1998 477.9 1374.92 974.92 2388.55 537.66 1698.46 1999 478.63 1384.94 989.22 2421.5 546.53 1723.71 2 472.88 1373.43 12.85 2454.2 553.96 1747.26 21 461.59 1341.79 113.29 248.61 559.39 1765.43 22 461.28 1337.8 123.75 257.46 564.3 1783.37 1996-22 Average 477.6 1376.33 997.8 2442.48 549.52 1736.78 Net Cash Farm Income ($1) 1996 154.28 329.2 288.34 976.97 23.35 672.69 1997 153.54 323.55 3.97 278.76 9.14 188.62 1998 145.88 287.9 66.56 43.24 113.87 269.8 1999 15.73 36.19 78.85 447.36 123.49 31.84 2 146.68 293.33 81.65 459.27 127.31 311.42 21 136.56 256.77 7.56 45.99 124.48 31.84 22 131.79 235.13 58.56 448.26 122.45 29.91 1996-22 Average 145.64 29.31 96.5 494.98 129.3 333.87 Prob. of a Cash Flow Deficit (%) 1996 6. 12. 1. 1. 1. 1. 1997 14. 21. 89. 51. 4. 5. 1998 12. 24. 54. 1. 22. 29. 1999 13. 2. 68. 9. 16. 3. 2 8. 25. 56. 8. 15. 21. 21 9. 28. 72. 9. 17. 24. 22 9. 35. 76. 1. 17. 22. Ending Cash Reserves ($1) 1996 63.75 129.15 14.91 551.1 99.48 377.94 1997 119.95 256.54 69.45 582.93 19.31 379.63 1998 163.99 333.67 56.31 772.9 148.29 48.93 1999 21.31 427.6 41.44 974.88 19.6 587.12 2 268.64 52. 37.5 1198.57 238.52 723.41 21 32.14 599.21 15.8 1414.35 286.42 849.82 22 375.36 652.1-13.41 1623.65 331.45 971.6 1996-22 Average 217.45 416.9 49.55 116.91 2.58 624.27 Prob. of Refinancing Deficits (%) 1996 6. 12. 1. 1. 1. 1. 1997 4. 5. 16. 1. 3. 3. 1998 1. 6. 27. 1. 1. 2. 1999 1. 2. 35. 1. 1. 1. 2 1. 1. 37. 1. 1. 1. 21 1. 1. 43. 1. 1. 1. 22 1. 2. 51. 1. 1. 1. Nominal Net Worth ($1) 1996 461.33 1576.26 992.9 278.88 685.3 1953.96 1997 536.71 1814.24 977.46 223.46 752.54 274.95 1998 61.17 1992.42 121.87 2537.7 83.95 232.22 1999 672.44 229.61 17.31 2871.11 92.6 2552.51 2 737.25 2371.1 188.71 3142.9 987.8 2744.98 21 796.62 2514. 19.3 3374.64 149.8 295.6 22 854.94 266.57 165.9 3571.7 197.45 331.9 1996-22 Average 665.76 2154.88 143.81 2829.51 93.42 259.45 Prob. of Losing Real Net Worth (%) 1996 1. 1. 1. 1. 1. 1. 1997 7. 7. 65. 35. 19. 35. 1998 1. 2. 52. 5. 3. 11. 1999 1. 1. 56. 2. 1. 3. 2 1. 1. 5. 1. 1. 3. 21 1. 1. 62. 1. 1. 2. 22 1. 1. 73. 1. 1. 1.

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