"First, identify the sensitive variable you think you can use to improve your profitability. Second, examine what effect a small change in this sensitive variable will have on your marginal returns. Lastly, determine the marginal cost of making the small change. If marginal returns are greater than the marginal costs, move forward with making the needed change. These small changes can surely help you achieve a bigger profit and/or reduce a loss," says Walt Prevatt.
That's how the Auburn University Extension beef specialist leads off a discussion about the marginal costs and returns in the stocker business.
"Average Daily Gain (ADG), death loss, feeder price, minerals, implants, ionophores, deworming, stocking rate, altering the marketing window, grazing days, alternative feeds or byproduct feeds, and feed waste are the sensitive variables that affect the profitability of the stocker enterprise. Evaluating the marginal relationships of these sensitive variables will help us determine whether it is profitable to seek improvements in these variables," Prevatt says.
While each variable is only one component in the stocker equation, the potential of each can be dramatic.
For instance, say you purchased six-weight calves the middle of August for $103 /cwt., or $618/head, (basis Oklahoma City). Suppose you provided minerals that cost $600/ton. At 0.20 lb. intake/day and an increased ADG of 0.25 lbs./day, the marginal cost would be 6¢/head/day, or $6/head across 100 days of stockering.
After a 100-day grazing period, assume these calves weigh 800 lbs. after shrink and sell for $90/cwt., or $720/head, in December. The gross margin is $102/head ($720 - $618). The value of gain is 51¢/lb. The marginal return from adopting the above mineral program is $12.75/head (25 lbs. x 51¢/lb. value of gain). This works out to be a 2 to 1 rate of return. So, in this example, the decision to increase marginal cost with the mineral program makes sense as a way to improve profits.
That's where the true power of marginal costs and returns lies. Whether it's finding opportunity where none seems to exist before purchasing calves or trying to salvage a profit in the face of a market wreck or animal health disaster, marginal costs and returns provide flexibility. More specifically, plenty of risk management exists in the margins.