My View From The Country

The Debate Over Operational Paradigms Continues

Both the philosophy of genetics/value-added production and that of commodity/low-cost production have proven to be fatally flawed if taken to extremes.

I recently was forwarded a blog by one of the industry’s experts on low-cost production methods who argued that his management principles are more important than genetics. I know many people who credit this person’s philosophies and management paradigm with transforming their operations.

While he made valid points in his blog entry, it made me laugh because it reminded me of a longtime debate I find fascinating. That is the debate between genetics and value-added production vs. commodity and low-cost production.

I find the debate amusing because I believe both camps are 90% right in their arguments, but end up being 90% wrong because of the basic fallacy they both accept. The fallacy is that these concepts are aligned against each other. While there are some antagonisms, in general, they are anything but mutually exclusive. Rather they are two components of the same equation.

A Closer Look: The Low Cost Vs. High Quality Debate

My background has given me an up-close and personal view of the ludicrousness of both positions. I first saw this debate up close in grad school when the economists and range guys had such a drastically different view than the animal breeders and meat guys. It simply worked better for the economists to treat cows or steers, or whatever was being analyzed, as interchangeable pieces.

And it certainly makes it easy to decide things like whether to buy or raise replacement heifers. Of course, anyone who has ever made that decision understands that can be comparing apples to oranges. It’s possible to see more than $300 in differences in both annual cow costs and in fed-steer profitability, but the values are not that high for most producers.  

The difference in outlook exists within segments as well. It’s true even in the seedstock segment, where some producers focus almost entirely on output and quality, and others focus on reducing inputs and increasing efficiency.

Both philosophies have proven to be fatally flawed if taken to extremes. While the margin operators can succeed in contrast to fixed-cost producers by focusing on just one side of the equation, we still see the low-cost guys paying attention to quality and vice versa.

The commodity system used to let low-cost producers get away with producing a low-quality product. Meanwhile, the value-based marketing revolution allowed producers to get away with not being concerned with costs of production. Those days are gone.

It makes the experts happy and it certainly would be simple if we could just focus on managing our grass, marketing our cattle more effectively, managing our risk, using the right genetics, or making the right decision based on financial metrics, etc., but we can’t! In today’s hyper-competitive environment, managers must integrate all of these things.

The experts in all these areas understand the impact that their particular area can have, and they are right about the importance of what they are preaching. Yet, almost without exception, they also fail to understand the importance of the other areas and the tradeoffs that must be considered.

They are all evolving to focus on managing one’s resources, marketing one’s product, or building a breeding program from a more holistic and systematic approach, but it is a difficult transition. There are still those who embrace the segmented approach, believing that the marketing system will continue to not assign values properly for the product as it moves forward in the chain. It could be argued that they are right today, but those types of decisions hopefully will look terribly shortsighted in the future.

Discuss this Blog Entry 9

Anonymous (not verified)
on Nov 16, 2012

What is value-based marketing? That depends on your market. For some, it is based on a carcass grid. For others, it is price differential at the local auction for weaned calves. There are still many more of the latter. And there is no way they will be squeezed out because most of them do not have to make a profit, as economists would calculate, to keep operating. In addition, their actual costs are lower. Realistically, what is the dollar value of the time they spend on their cow herd? Nothing. Last time I saw the numbers, these make up about 70% of the producers with about 30% of the cows.

Also, what are the "right" genetics? Are they the same for, say, eastern Colorado, western Ohio, central New Mexico, and southern Louisiana? I think not.

troy (not verified)
on Nov 20, 2012

Value-based marketing is anything that differentiates the product based on value. It ranges from selling pre-conditioned calves to taking it direct to consumer and everything in between. The "right" genetics are differently operation specific relative to environment, mgt, marketing program, etc.... Industry targets are relatively narrow and well defined how you reach them are very varied, and not everyone will aim for same target. One of the great fallacies about "hobby ranchers" is that they do not respond to economic signals. True may use bad math and assume the land and labor is free, but they respond to economic signals.

Ken Stephens KEG Hereford Ranch (not verified)
on Nov 16, 2012

I pretty much agree. I do think that low cost and inputs should come first. Efficiency has a fairly high heritability and our work with RFI is helping to improve on an all ready efficient herd. This lowers our cost of feed which is our major cost. Working with genetics to improve our muscling and marbling is helping with the quality part. Our main antagonism is that by leaving the calves on the cows as long as possible and by limit feeding the cows before and after calving we limit the steer calves from marbling to their genetic potential.

troy (not verified)
on Nov 20, 2012

I agree. I've always liked the analogy that if the cattle business was a poker game, Being a low-cost producer is the table stakes that let you sit at the table, you cant survive without beinf efficient. I don't think you can win without being willing to go all in either that is what the quality side represents

Jim McGrann (not verified)
on Nov 20, 2012

Their is very little ranch level financial data to support views. What is the ROA for seedstock operations?

troy (not verified)
on Nov 20, 2012

I wouldn't disagree on the lack of integrated data.
I hate to be a cynic but I try to learn all I can from the economists understanding that their basic premise that a cow is a cow fatally flaws any conclusion. What was your point on seedstock ROA? -- Troy

Jim Sturrock (not verified)
on Nov 20, 2012

As a CEO of an agriculture business consideration must be given to: P&L, Financing, Range-land Health, marketing, wild life, legal confrontations, nutrition, maintenance of facilities, genetics and health of the inventory. And as the CEO your responsibility covers all as a balancing act, in a one man show not just one or two! It only takes one subject being out of balance to have a negative effect on the sustainability of the business what ever it maybe, restaurant-house builder-convenience store etc.

troy (not verified)
on Nov 20, 2012

well said!

D. A. (not verified)
on Nov 20, 2012

The conception-to-consumer grass-fedparadigm is working well for smaller producers like us. We produce both seedstock (since 1965) and beef (since 2003). We couldn't compete with bigger operations in supplying backgrounders or feedlots with truckloads of weaned calves all the same age, but we can readily supply more quality and individualized customer service at less cost. Folks like us are not likely to take over the market share of the bigger operators; however, we can actually recapture some of the market that beef has lost in recent years by educating consumers on the nutritional benefits of grassfed beef. Some of our customers are converted vegetarians and vegans who would not otherwise eat beef. Our seedstock customers are professional cattlemen who appreciate efficient cows that can survive and thrive on pasture and easy-handling Hereford bulls.

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What's My View From The Country?

As a fulltime rancher, opinion contribur Troy Marshall brings a unique perspective on how consumer and political trends affect livestock production.

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Troy Marshall

Troy Marshall is a multi-generational rancher who grew up in Wheatland, WY, and obtained an Equine Science/Animal Science degree from Colorado State University where he competed on both the livestock...

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