Tuesday, March 3, 2009



Dave Pratt from RMC in the USA wrote an article today that clearly points out how a producer operating in the commodity arena can increase profit by choosing the correct strategy.
Here at KLR we know that the lower the Cost of Gain the easier it is to make more profit and also find more trading opportunity's in the market.

Dave Pratt, Ranch Management Consultants, Inc.

A story was related to me by an Executive Link member at our last EL meeting that underscored the reason the low-cost strategy is the most profitable strategy in ranching. The example was related to him by a rancher from Mexico attending our recent school in Abilene, Texas.

Imagine a cow/calf operation that produces $100,000 of income and incurs $80,000 in costs. It makes a profit of $20,000. Cutting costs by $20,000 (25% of $80,000) will double profit from $20,000 to $40,000. You can also double the profit of the business without changing the cost structure, but you'd have to increase the scale of the business by 100%.

In other words, you'd need to grow the business from $100,000 of income and $80,000 in expenses to $200,000 in income and $160,000 in expenses.

Here are a few questions you may want to consider as you choose the strategy that holds most promise for you:

1. Which strategy requires less labor?

2. Which strategy requires more capital investment?

3. Which strategy involves more risk?

4. Which strategy will be more profitable if cattle prices go down?

Of course, if you pursue the low cost strategy and then increase the scale of the business, profit is quadrupled. But first things first, and the first thing is to build a low cost business.

Dave Pratt --------- Ranch Management Consultants

Dave has been a guest speaker for KLR Mastermind a couple of time and is always full of easy to understand principles, he also has a great website with lots of resources - take a look by clicking on the link above.

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