Getting More Cows is Not The Answer

A wealthy Eastern family bought a large ranch in Wyoming. One of the family members moved to the ranch to manage it. After several years, he told my brother he needed to get more cattle, as he wasn't making it with what he had.

Terry, a career cattleman, was managing a ranch for a large company, which owns several ranches, asked what he meant. Joe,(not his real name)explained that he only had about 500 head and had lost about $25,000 the previous year. If he could up his herd to around 1,000, he'd make some profit.

Terry pointed out that he had lost $50 per cow and asked how much would he have lost if he had 1000 cows. Joe stared at him for minute, as he realized he would have lost more. "If a bigger herd would only have increased my losses," he asked, "How can you make money in this business?" He went on to explain that in their primary business, increasing sales increased profits.

Terry pointed out that in that business, they could cut production costs per unit by increasing production in the same facility. Making more money on the ranch required reducing production costs also. Merely increasing the number of cows would not automatically reduce production costs, because the cost of feed would remain the same for each cow.

In order to make a profit, one must be more efficient in his use of time and money to increase yield for his investment. For example, if 2 pounds of alfalfa hay will produce 1 pound of beef, but 4 pounds of grass hay are required, then alfalfa hay at twice the price is cheaper because it takes less effort to feed and store.

Selling cattle earlier, before they have reached maximum weight may make more profit because you may be able sell them before it is necessary to begin feeding, saving a significant amount. Selling calves in the fall rather than wintering them and selling as finished cattle may make more money for the same reason. Simply increasing volume, will not increase profits if there is not a profit for each unit.

During the last recession finance companie discovered that they could package debt and sell the packages, called derivatives, to investors for around 115% of the package value. Because the jump in interest rates and penalties for late payments made them very attractive, they sold quickly. The Bank could then lend that 115% and repeat the profit. Banks lowered their lending standards in order to increase their number of loans. Eventually, too many people were unable to make their payments, and the derivatives became unprofitable, making them impossible to sell. This ultimately led to the present credit crisis.

One of the current suggestions for resolving the credit is for the federal government to buy the bad derivatives. This will cause new demand for derivatives, putting us back to where we were 6 years ago, with readily available credit.

Unfortunately, This is very much like Joe's idea that getting more cows will automatically make a profit. Unless the program is changed, it is inevitable that we will get the same results. Increasing the demand for derivatives will give a temporary increase in available loans, but will ultimately increase the losses in the long term. Sooner or later we will come to another crisis, with much larger losses.

Following the same path can only lead to the same result. Doing it more vigorously only increases the amount of the results, it does not change what they are. That can only be changed by doing something different.

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