A few thoughts by John Nalivka: Added value for new markets often means added cost
June 9, 2016
Over the past few years, we have seen growing consumer demand for beef in new markets both domestically and globally. These markets range from the buy local trend that has taken hold in the U.S. market to the global market selling bred heifers to companies expanding beef production in Russia or Ukraine. Generally speaking, we could probably all agree that the benefits have been positive for ranchers in each of these examples. However, I have said for years that added value often equals added cost and if both are not put into the proper perspective, you may be left wondering why the great marketing opportunity didn't leave the bottom line (profit) very large or even worse, why it was negative.
Production changes may or may not always involve a great deal of adjustment at the ranch. For example, to breed and sell heifers to the Russian market was a viable option. But, both the added costs and the probability of losing of that market needed to be considered – realistically. Five years ago, the conversation centered on being able to supply enough beef to the rapidly growing BRIC (Brazil, Russia, India, and China) economies with their growing middle class of meat eaters. Suddenly, circumstances changed; the dollar strengthened and global economies weakened. In Russia, meat demand has fallen sharply as their economy was hit by low oil prices and the U.S. trade embargo.
In the U.S. market, both prices and costs can change in a very short time. Cattle prices fell sharply in a short time last year following two years at record high levels. At the same time, after enjoying low-cost fuel for 12 months, prices are now once again increasing. The old adage "never say never" applies!
Whether it be decisions related to the local market or decisions concerning global opportunities, it is important to assess not only the revenue stream that the market might present, but also realistically assess the associated costs. When the revenue jumps significantly, it is oftentimes easy not to think as much about the additional costs that may be incurred.
Changes occur rapidly in markets, whether they are local or global as the result of events that we have no control. Be realistic and plan accordingly – that's the foundation of managing risk.