Nalivka: Can You Benefit From Economies of Scale?

Speaking at the American Farm Bureau’s recent convention in Puerto Rico, Agriculture Secretary Tom Vilsack said, “the agriculture industry’s success should be felt by all farmers, not just those who benefit from the economies of scale.”   My response to Secretary Vilsack is that he uses that term rather loosely.  Economies of scale is important to every aspect of food production – meat processing companies, feedlots, animal health companies, grain elevators, supermarkets, and many others.  It is vitally important to most businesses in a free-market economy.  Economies of scale create efficiencies in production, marketing, and distribution which in turn reduce costs which in turn increase net profit.  Those two words – net profit – are vital to success.

Economies of scale is not a difficult concept, and it is one that certainly does not need our government using it to decide what is fair.  I recently participated in a podcast where I was asked to provide my views on how ranchers with cow-calf operations could really gain the greatest advantage of this much anticipated market strength. 

My thoughts on that matter have not changed much over the last few decades.  It all begins with knowing and understanding the economics of your operation.  What are your costs of production and where is there opportunity or perhaps the need to reduce those costs.  I am the last person you will ever hear saying that you need to simply reduce costs.  I have enough ranch experience to know that the answer is not always that simple.  The better answer is to take a look at costs and understand how each of those costs supports production on your ranch.

So, getting back to economies of scale, this concept pertains to costs per unit of production.  Rather than viewing your operation and cost of production in terms of the number of calves that you raise and market, think in terms of the pounds of beef produced and marketed.  You produce for the beef market and thus, pounds of beef is a more relevant unit of production to make sound management decisions in regard to both production and costs of production.  It’s about per unit costs not just costs and ultimately, net profit.  It’s not about the size of your ranch in terms of land, it’s about the quantity and quality of beef marketed as a result of your total ranch resources – grazing, water, supplemental feed, and human resources.

Economies of scale is key to profitability in a free-market economic system.  While some may take that to be unrealistic, what is more unrealistic, is letting USDA fix the problems of agriculture with a statement like the one made by Secretary Vilsack concerning economies of scale.  The solution is NOT more tax dollars to the producer who apparently doesn’t benefit from economies of scale.  That’s not sound economic policy!