Opportunity Costs

Its time to revisit the notion of opportunity costs. Opportunity costs are measured by the value of the next best alternative that you rejected when you make a decision. Opportunity costs and in fact all costs predate the invention of money. Even in our religious and wisdom writings, opportunity costs abound. For instance, what was the cost to humanity of Eve eating the apple? No money exchanged hands but the cost was the loss of paradise in exchange for knowledge. What is the current (and on-going costs) of choosing your current spouse, if you have one? That usually gets the point across.

Costs arise out of scarcity. Since you cannot be married to two people at the same time unless you move to the panhandle of Texas and join a certain religion, you are a scarce resource. When you commit to one, the cost is all you left behind.

Assume you interview two managers for a key position and both have decent resumes but one is clearly more creative, careful and likely to perform above expectations.  You know that you will have to pay her 20% more than the other one or she will be bid away to another farm in a year or two.  You decide to hire the cheaper one at "industry average cost" for managers.  How long will it take for the "average performer" to kill the advantage in salary reduction you received.  On most farms of any size it can be a matter of days.  The opportunity cost of hiring the "cheaper" one is the classic mistake that "cost only" producers constantly make.  Granted it is difficult to know the outcomes in advance on hiring decisions.   

Many people in government need to consider the opportunity cost of the ethanol subsidies and mandates.  Many producers in North America need to consider the opportunity cost of hunkering down and waiting for the pass-through of prices to finally happen.  Likewise, they need to consider the opportunity costs of eliminated expenses (like vaccinations, medications, genetic improvements, feed ingredient use and withdrawl, average loads weights etc.).

Opportunity costs become real, money costs but the original decision which created them is often long forgotten and not tied to the revenue decline.

Many "cost only" producers do not acknowledge that all expenses are tied to revenues.  Eliminating an expense often changes revenue (sometimes positively!).  The assumption however is usually that revenues remain unchanged so profits must go up if expenses are reduced.  Sometimes cashflow dominates and forces expense reduction for simple survival but more often than not, it is the failure to tie expense reduction to revenue that leads to big opportunity costs and the subsequent reduction in profitability and viability.

Investments and expenses both represent initial outflows of cash.  Investments however, anticipate returns.  Expenses are money down a rat hole.  I am suggesting that producers refuse to pay any additional expenses and only make investments in their operations from this point forward.