Times are changing. We’ve been in an era I call the golden age of production efficiency. During this time, if you wanted to make money in the cattle industry, you had to out-manage your colleagues by producing a commodity product more efficiently than the next. Cost containment and management expertise were the keys to improving the bottom line.
We are transitioning now to the era of value creation. This hasn’t been a seismic shift in that low-cost, high-efficiency production models are still rewarded. But in today’s marketplace, they are no longer the drivers of profitability, but just an indicator of long-term viability.
Profitability is being driven by value creation. Value is created by producing a superior product, and that is being driven by the interaction between superior genetics and the ability to manage those genetics to maximize their potential.
Today, that ability dwarfs production efficiency. Perhaps that’s because we’ve done so much on the efficiency side as an industry that the low-hanging fruit has been harvested. Another possible factor is that managers have become so adept at focusing on efficiency that differences between producers are becoming more incremental.
We continue to improve efficiency, but the adoption of improvements is rapid and fairly universal. Previously, the leaders in production efficiency used to enjoy significant advantages that were long-lived. Today, advantages tend to be short-lived. As a result, profitability and competitive advantage are being affected by genetics and the ability to properly manage those genetics.
In addition to value creation, the other managerial focus is margin maintenance or expansion. Production efficiency again was the key; now it has shifted to proper risk management. Again, the ante has been raised.
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For example, large-scale feeding of cattle was driven in part by economies of scale, but also by a disciplined approach to risk management. That discipline is still vital, but astute analysis and selective strategies are now the key to maintaining these margins. That raises the degree of difficulty and level of sophistication required by a large degree.
Management expertise and genetics are being rewarded at unprecedented levels, so much so that averages describe sector profitability, but mean little to profitability on an individual basis. As one producer commented to me, “These are pretty exciting times. I just wish they had futures markets that would allow me to manage the risk associated with Mother Nature and the halls of Congress.”
I could actually envision a system that might allow you to hedge the risks associated with Mother Nature, but the roulette wheel looks like it is still as good of a hedge as any against the next market disruption courtesy of Washington, DC.
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