A Few Thoughts by John Nalivka: Think marginal cost – marginal revenue
December 14, 2017
Closely aligned with retained ownership, whether backgrounding or finishing, is the notion of adding value to your calves as well as capturing that added value and to increase your revenue. I have written about knowing and understanding your costs of production. As you investigate and make decisions to add value, costs are a big deal. Some value adding decisions concerning production, marketing, or management do require additional cost. I have often said, "added value equals added investment." I think we can all agree that nothing of value is usually free.
An investment to implement a plan to add value to your ranch production with an aim toward increasing annual revenue is one thing. However, significantly increasing your annual cost of production to implement that same strategy is a different situation.
Let's take a quick look at how the economic principal of marginal cost – marginal revenue applies to these decisions. This principal is a basic concept applied to ranch production economics. Simply stated, you will maximize net return for your ranch by maximizing your production to the point where the revenue from an additional pound of production no longer exceeds the variable costs that are incurred as a result. This applies to increasing production as well as adding value to production, i.e. utilizing grazing capacity with yearling cattle or raising and marketing bred replacement heifers.
Today's consumer demands a quality product produced in a transparent food system. Once the package is off, quality and consistency are what differentiates the product that the consumer wants to buy and will continue to buy. My last statement entails a lot and can be onerous. But, it provides opportunity for every cattlemen if you are committed to long term success, you must also be committed to what the consumer wants to buy.
Today's beef industry rewards quality and making changes to beef production on your ranch with the consumer in mind and an aim toward increasing revenue is the only approach. However, in making the big decision, the economic fundamentals are important. Understanding marginal cost – marginal revenue is one of those fundamentals.