The industry has preached for decades the importance of being a low-cost producer. Being a low-cost producer means keeping input costs low, which is essential in a commodity business, as it tremendously impacts the bottom line.
While I have preached low-cost production, I’ve always questioned how much can be done on the input cost side. Certainly, some producers do a great job of timing their purchases, stockpiling supplies, etc., when the conditions warrant, but realistically, with commodity inputs, the market is pretty well established and pretty transparent. It seems to me that producers can do far more by decreasing their dependence on purchased inputs than they can by purchasing those inputs more effectively.
Of course, there are certain items that are worth paying more for. It’s a little like grocery shopping – generic brands make sense for some purchases, but more expensive brands are appropriate in others.
In agriculture, we buy a lot of commodities; by definition, one wants to buy them as cheaply as possible – hay, fuel, etc. We also buy a lot of products that are differentiated, some of which merit paying more in order to get the best. Thus, it isn’t surprising that low-cost producers spend more on genetics and herd health than high-cost producers, for example.
The following is my non-scientific, non-economic list of things that I consider worth paying more for to get quality.
• Good genetics. Nothing affects a livestock operation’s long- and short-term profitability more than the bull power it utilizes. Relatively speaking, better genetics are a great value as they contribute more back than the cost for the additional quality.
The tricky thing with purchasing genetics, however, is that price and genetic value aren’t always highly correlated. Thus, buying semen on bulls that are in short supply probably doesn’t make sense if you’re a commercial cattleman. And we all know that you can sometimes buy similar genetics but at vastly different prices from different operations.
Buying a seedstock operation’s reputation can pay dividends if leveraged in your own marketing program, but it doesn’t always make good financial sense. One of my mentors always told me I would never regret buying the best genetics I could afford. More times than not, cutting corners on genetic inputs means cutting profit potential as well. Going forward this will become increasingly more true.
• Good people. Whether you’re hiring consultants, professionals or day workers, the good ones always make you money and the poor ones cost you far more than you save.
• Good equipment and tools. Having the right tool for the job, any mechanic and carpenter will tell you, allows the job to be done more quickly and correctly, and usually saves both time and money. This is an area where innovative purchasing methods may be a key; after all, buying good used equipment, or partnering with other producers on those items that are not used frequently enough to justify the cost, may enable you to make more money.
Admittedly, I’ve never sat down and figured out if I really could justify the cost of having the hydraulic chute over my old head banger. Partly this is because I have no idea how to calculate the difference.
Among the differences, the hydraulic chute allows me to work cattle much faster, more safely, and the cattle are easier to handle. I also know I would never consider parting with it.
In our own operation, we’ll probably never purchase a new tractor or truck, but we will buy the best used ones we can afford. Another plus of good equipment is that it helps you retain good people and keep good genetics safe and healthy.
• A good horse. I understand that four-wheelers and pickups have replaced horses on many operations today. I realize one doesn’t have to feed, shoe or saddle a four-wheeler. Plus, a four-wheeler won’t stop when you point it over the edge of a cliff.
But if you’re going to own a horse, it most always pays to own a good one. All one has to do is move and sort cattle with someone with a good horse and dog, then try to do the same with someone with a bad horse and dog, and the question is settled.
• Good boots. I’m a sucker for Walmart specials, but I’ve found that boots are no place to cut corners. I’ve found that good boots last five times as long as poor boots, and tend to be twice as enjoyable to wear over the same time frame. As a result, good boots usually end up costing you less than cheap boots in the long run. Amazingly, I found this thinking even holds up when buying boots for young boys, who have a tendency to outgrow a pair of boots before they can wear them out.
Here’s my personal cost/benefit analysis tool:
Most cattlemen’s business goal is to produce as good a product as possible as efficiently as possible, in order to create enough value to make a good living from those efforts. There’s no simple way to answer the question of whether it’s worth it to pay more for item A than item B. Sometimes, the cost/benefit analysis can be determined by pure economic calculations based on good science, while, at other times, it is impossible to assess.
For those latter instances, I’ve created my own step/decision model.
- Can I afford to pay for the higher-quality item? If the answer is no, then the cheap route is the only answer.
- Will I feel good about paying more for that item when I get it home?
- Will that purchase make life better for my customers, my employees, my family, myself, the cattle or the land?
- If the answer is yes, then, how much better?
- I then conduct my own simplistic cost/benefit analysis by asking myself this question: if someone was to offer me the cheaper version for free, and the higher-quality version for the difference in price between the two, would I pay the difference or just take the free item?
- Finally, if I was to invest the difference in cost between the two items, would I invest it on this purchase?