economic impact of drought

Hello Nathan, There are two issues here: 1) Economic impacts are caused by efforts of production eg, to produce a bale of hay requires planting, growing and harvesting - what the price happens to be at the time of harvest really doesn't affect the backward links. 2) What happens when farmers gain or lose profits? Invest or save for a rainy day or pull from savings? Spend like a normal household? In IMPLAN we make an assumption that proprietor income is spent like wage and salary income through households and other property income is a leakage (retained earnings, invested elsewhere or dividended who knows where). There are two things to look at. Is the liquidation of the herd a long term affect? That is, will this be loss of future cattle production happen over future years - that will cause an economic impact to be measured. Second, how is the net loss (local hay growers' gains minus local cattlemen's loss) of farmer income going to be handled? A loss of household spending (simplistic IMPLAN assumption) or do you have local information? If there is an overall loss of profit, I would assume that there would be a loss of spending but that would be mitigated by pulling from savings or investment. A more drastic loss would occur if the cattlemen pull up stakes and go seek a living elsewhere. I think calling the entire loss a loss of household spending would overstate things. Are any of these losses mitigated by insurance or futures contracts?

Thanks for the response and suggestions. A couple of points of clarification. Our study is estimating only the short term losses on cattle farms due to the drought. The major sources of economic loss on farm for the cattle farms is 1) increased input costs due to purchasing high priced hay from outside the area (imported) and 2) loss of value of production due to cattle being sold early (lower weight) at a deflated price. 1) hay - the issue with hay is that with little to no forage growth this year after April due to the drought, farmers had to purchase hay from outside of the state rather than graze on grass or produce their own hay. 2) lost profits - cattle farmers have lost well over $100 per head and are likely not spending like a normal household. We have seen anecdotal evidence that the loss of income on farms is negatively affecting small businesses in rural communities due to lack of income to spend on everyday items as well as inputs needed for the farm. The liquidation of the herd is a real long term affect on production as it will take years to rebuild the herds. But we don't know how many farms are going to be rebuilding or gone for good and how the herd will rebuild. Cattle inventory numbers are very low, historically low and it will take several years for the sector to recover. Another complicating factor is that we know cattle have been sold at a loss, but we don't know where those sold cattle are going, if they are "leakages" or not. So the issue becomes how to best measure the impact of the overall loss of profit on the cattle farm (due to lost forage and lost income). Most of our farms are small acreage farms with limited financial resources. I think we can assume that cattle farms have gone through savings and/or investments as evidenced by the liquidation of herds. The nature of the cattle business is such that you only sell your calves and breeding stock if you have no other choice. So savings would mitigate somewhat the overall loss, but I don't think it would have much affect. We really don't have any local data other than the net income loss of the cattle farms. None of the losses will be mitigated by insurance or futures contract on these farms. Any advice on how to NOT overstate the loss of income? I agree that assuming the whole number is a loss of household spending would overstate the impact due to spending from savings.

Hi Nathan, Since the herd size has decreased, there will be less inputs needed to support the cattle operations, so you will want to model that loss via the Cattle ranching sector (sector 11). One way to do this is to look at the current Intermediate Expenditures for sector 11 (under Customize > Study Area Data) and then if the herd size fell by 50%, you could multiply current IE by -0.05 and run that as an Industry Spending Pattern for sector 11. The increased hay prices will have no effect on local hay industry assuming the higher prices stemmed from having to import hay from outside of the study area. However, this increase in price might be associated with a decrease in the expenditures on other things (e.g., maintenance/replacement of farm equipment, profits, etc.) but those will have to be a judgment call in the absence of data on this. We would recommend just mentioning it in the report an additional impact that was not measured. Or you could model some of the more likely scenarios (e.g., one scenario where the increased expenditures on hay were run as negative expenditures on equipment repair, another scenario where you assume such and such, etc.) and state them as such - i.e., as possibilities. The spending of household income is trickier. As you note, ranchers would not likely sell their herd unless they had already burned through savings; however, the selling off of the herd does provide the rancher with positive income. So the short-term impact on household spending may be virtually nil. Let us know if you have any further questions. Thanks