I had an actual conversation with Microsoft Bing’s new A.I. . . . as in artificial intelligence . . . chatbot this morning. After so much press about this new A.I. tool’s usefulness to regular folks, I thought I’d give it a try.
Remember, an A.I. chatbot is not to be fully trusted. It is more like a really, really smart friend that pretty much knows everything, but based on your experience with this friend, they don’t always put the facts together perfectly for the right answer. Knowing that, I asked Bing, “If absolute changes in cost or percentage changes in cost were more important?”
As a test of Bing, I also asked it a politically charged question. The answer it gave had good facts on both sides of the issue and left the final decision up to me. That was good I thought. So, now with some confidence of a valuable conversation with a robot of sorts, I proceeded with my question. If this was a “dairy-only” chatbot, I would have simply asked, “When I manage feed costs for my clients, is it more important to discuss and consider the absolute cents per cow change, or is the more appropriate question related to the percentage change in feed costs?”
Why does this question matter?
Perhaps it is mostly related to messaging to my clients. However, in the end, it really matters how it changes the dairy’s balance sheet or profit and loss statement. But if I really intend to be a meaningful and financially significant adviser to my client, I need to be sure I am correctly sorting out potential changes in feed cost. This issue would most likely come up in a project to look for some feed cost savings due to expected tighter margins. I have been doing a lot of that these days. It is not 2022 anymore!
Let’s look at the dairy
I think the basic economic question is best illustrated by looking at feed cost changes in a small dairy compared to a large dairy. We have the opportunity to serve clients milking from less than 200 cows to in excess of 10,000 cows. While sitting across the desk from an owner on each of these extremes, does a 5-cent per cow reduction in feed costs have the same meaning?
I should probably stop now and ask for grace from trained economists as I proceed. These questions really do sit in the classroom of basic microeconomics. As the son of a Ph.D. agricultural economist and having chosen animal science as a profession for myself, I wade carefully into the waters of classical economic thought. Having said that, here we go.
Now, let’s go back to the very large and the very small dairy both contemplating a ration change that saves 5 cents per cow. I expect the large producer is doing math in their head that over a year’s time, the nickel savings could buy a tractor. The smaller producer may be less enthused. But in actuality, are the two scenarios really any different? To be honest, I am not sure!
If the large dairy is milking 10,000 cows, that nickel savings, if maintained for a full year, would result in $182,500 in reduced cost. You could, in fact, buy a tractor with that. The producer milking 200 cows can look forward to almost $3,700 of savings.
It seems fair to expect a different emotional response to my new ration that saves 5 cents from these two producers. Does considering this difference in emotional response violate the principles of basic business economics?
This question is so important to me because I do my primary work in only a portion of the dairy business. I deal mostly with feed and milk economics. How can we manage costs and maximize revenue while being sure to keep the cows healthy? This is what I need to be the best at. But, when considering the new tractor purchased by the large dairy and the seemingly small pile of money saved at the small dairy, is my feed cost management goal the same in each case?
Now, back to my conversation with the chatbot. I used terms like variable cost and cost of goods sold to get the bot talking. In the end, just like the politically charged question I asked first, the bot shared some details about managing costs and the math to do the calculations. Then it told me that both absolute changes in cost and percentage changes in cost were important.
Here is the point
Managing costs through reductions when possible and smart investments when warranted can all contribute to a better economic result. I really think the percentage change is probably the best way to evaluate cost change opportunities. The fact that feed is the largest single cost in producing milk helps the percentage change approach be more meaningful. Also, with ever-increasing total feed cost levels, a nickel savings isn’t what it used to be.
The challenge in some of these questions as you go from dairy to dairy is most obviously dominated by the size of the herd. If the potential feed cost savings were earmarked for a new pushup tractor, that tractor cost is the same for the large dairy and the small dairy. But that truth is outside of the basic feed milk economics that I call my home. I think the risk here is to incorrectly perceive a feed cost change and either over-interpret it or undervalue it in making the right business decisions.
One of my favorite tasks in building diets is finding ways to do it cheaper but obtain the same results. The fact that I am managing as much as 70% of the total cost of producing milk makes that a pretty good hobby for me. But we need to lean on the math and make sure we make good decisions that truly improve the farm’s bottom line. For me, I need to listen to the needs and goals of each client to help them make the best decisions for feed cost investments.