The two kinds of risk generally associated with drought are production risk and market risk. Production risk naturally emanates from the fact that drought limits forage production and availability, which directly limits the total productivity of the operation. Increased market risk is realized when those affected by drought act in unison and dump animals on the market in an untimely manner.
To mitigate as much of this risk as possible, you should have a viable drought management plan. Such a plan will not only specify all the options of demand and supply management strategies but may also use some form of insurance product where offered.
A viable plan needs to have several characteristics, including being able to identify key decision points. A series of smaller decisions can be effective in mitigating drought impact on the operation. The key factor to remember in building a plan is that all of the options need to be carefully evaluated based on their cost of implementation. Producers can then use the combination of least cost options. In addition to the demand and supply management strategies one generally thinks about, insurance products and marketing tools should also be integrated where they can help mitigate risk.
Ranchers with experience managing drought make the following recommendations:
- Prepare for drought by increasing the health of the overall operation and maximizing flexibility.
- Write a Drought Plan that includes WHAT to do during drought and WHEN.
- When conditions require it, implement the plan and don’t second-guess it.
- After drought, have a plan for restoring the health of all parts of the ranch operation.
- Monitor how the drought plan works, and improve it as you learn.
Drought Management Plan components include:
- Communication and planning partners
- Ranch vision and objectives
- Understanding of strengths, weaknesses, opportunities and threats during drought
- Inventory of ranch resources
- Critical dates for making decisions
- Monitoring schedule
- Management strategies: before, during and after drought
- Ongoing review of drought plan
Lear more on making a Drought Management Plan and how to incorporate insurance mechanisms, disaster assistance and the tax implications of dealing with drought in A Planning Guide For Great Plains Ranchers by the University of Nebraska-Lincoln, the National Drought Mitigation Center and USDA Risk Management Agency.
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