The Effects of Drought and Disaster Payments on the Missouri Cattle Industry

Transcription

1 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 (573)

2 Millions 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 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 $250 $200 $150 $100 $50 $ 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 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.

3 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

4 Table 1. Effects of the 2012 Drought on US Cattle Markets Drought (Million head) Beef Cows (Jan. 1) Cattle and Calves (Jan. 1) (Million pounds) Beef Production 25,995 25,790 24,320 23,755 Beef Domestic Use 25,755 25,476 24,687 24,767 Beef Exports 2,452 2,589 2,573 2,266 Prices (Dollars per cwt) Total All Grades, 5-Area Direct Steers #, Oklahoma City Feeder Steers No Drought (Million head) Beef Cows (Jan. 1) Cattle and Calves (Jan. 1) (Million pounds) Beef Production 26,332 26,372 24,263 23,526 Beef Domestic Use 25,958 25,817 24,654 24,625 Beef Exports 2,578 2,823 2,564 2,183 Prices (Dollars per cwt) Total All Grades, 5-Area Direct Steers #, Oklahoma City Feeder Steers No Drought Less Drought (Million head) Beef Cows (Jan. 1) Cattle and Calves (Jan. 1) (Million pounds) Beef Production Beef Domestic Use Beef Exports Prices (Dollars per cwt) Total All Grades, 5-Area Direct Steers #, Oklahoma City Feeder Steers Page 2

5 in 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 ( 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. Page 3

6 Table 2. Missouri Beeef Cow Operations, by Size, 2012 Size of Operation Beef Cow Inventory Beef Cow Operations Average Inventory per Operation ,831 12, ,240 10, ,101 14, ,540 5, ,778 2, , , , , , Total 1,683,731 46, 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 USDA did retroactively make LFP and LIP payments for this period immediately after passage of the 2014 farm bill, which most producers received during 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. Page 4

7 Table 3. Missouri Livestock Disaster Payments Total LFP $ 300,216,185 $ 16,088,959 $ 6,228 $ 318,515,680 LIP $ 407,490 $ 369,478 $ 592,690 $ 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 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. Page 5

8 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 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 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 $ 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 This includes LFP and LIP payments made for the 2012 through 2014 years in 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. Page 6

9 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 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 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 Page 7

10 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 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 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 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 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. Page 8