Marginal Reaction in Detail

The testing guideline Marginal Reaction
(Comparing two or more actions):
Which action provides the greatest return, in terms of my/our holistic goal, for the time and/or money spent?
You could ask this question as, “Where is the biggest bang for the buck?”

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We use the Marginal Reaction concept a great deal.  In fact, it has almost unlimited uses.  For instance, you can use it to decide whether your time is more valuable welding up a piece of equipment or erecting a fence, or retiring to the office to create an even more effective plan for the forthcoming year.  One of those actions WILL give you more dollars back in for the hour of time you put out.  All other things being equal, you would let somebody else do the other jobs.

Marginal reaction and the effect of building paddocks
The principle of Marginal Reaction applies when considering the benefit of adding paddocks to a grazing cell, only this time the benefit is inverse.  Each additional paddock produces a lower Marginal Reaction than the previous one did.  

For instance, when the expected plant recovery period is 75 days and there are only two paddocks for the animals to move between, each paddock must be grazed (on average) for 75 days to allow the other paddock 75 days of recovery.  If a third paddock is created, on average each paddock now need be grazed only 37.5 days.  That’s a high marginal reaction for the investment.  You can see it on the blue line on the graph below.



If adding a new paddock, to increase the count from 24 to 25 paddocks, the average graze period per paddock reduces by only a fraction of a day - a much smaller marginal reaction.
 
However, this low marginal reaction is offset by the fact that there is a beneficial straight line effect to stock density, and to the graze : recovery ratio, which experiences a very high gain in marginal reaction, as seen by the upward sloping line superimposed on the chart.

Marginal reaction is very important when implementing a land plan
Developing a farm has three distinct and logical phases.  Please take time to think through the sequence shown below.  It helps avoid putting the wrong fence in the wrong place, and when it is time to build a fence, the financially most effective fence is always constructed first.

Step 1. Create the land plan
Until you know what the end product will be, even if it takes 20 years to develop, you have no idea where is the right spot to put a fence, a set of yards etc.

If you build a fence without the end plan in mind, all you will do is ‘build a fence’.  What you need to do is ‘build a fence that meshes in completely with the future development plan we have created’.

Step 2. Build infrastructure when the appropriate Weak-link supports your decision
It is rare for instance, that you would build a new fence unless the Weak-link in the Production chain in your business was the Resource Link.  The effect of building fences is more grass grown, and you only need grow more grass when the Resource Link is the weak link.  If it is other than this, much as you might like a new fence, you will be wasting your money!

Similarly, unless the weak link in the enterprise were the Marketing Link, a potato producer would be unlikely to build a new controlled atmosphere storage shed, in order to gain a financial advantage by delivering product to market over a longer time span. 
Remember, the Weak-link is dynamic and moves from link to link.  The trick is to spend the right money on the right link at the right time!
Step 3. Build the thing that gives you the highest Marginal Reaction at the time of the investment
The image below helps to explain the principle some more.  In this simple case there are just two fences to choose from.  (For the purpose of the exercise please assume that the planning has been done, and these are just two of a further thirty future fences that have been planned.  There is a sound reason for their location).  

It is estimated that Option 1 - the longer fence (1,250 metres long including some fencing around an existing water point) will cost $3,000 to construct, or $2.40 per metre ($3,000/1,250m).

On the other hand, Option 2 is a shorter fence, just 800 metres long.  The problem is that in order to have a water point in both of the paddocks the new fence will create, a new dam must be simultaneously constructed in the lower paddock.  In this situation, you must add the cost of the water ($4,000) to the cost of the fencing ($1,000).  The project is to build a new fence, and its real cost of $5,000 works back to $6.25 per constructed metre of fence ($5,000/800m).

The conclusion: if the decision were to be made now, Option 1 provides the highest Marginal Reaction (in this case, cheapest cost) per metre of fence erected.  That does not mean that Option 2 does not happen.  It just means that this year, under these conditions it is not the highest Marginal Reaction.  It will rise to the top and take its place some time in the future.



Key Point
In practice, you can set up a Table in a spreadsheet, which for each fence yet to be built, shows:
Length
Cost
Other costs
Real cost per metre or kilometre
Provided that the Weak-link is the Resource link, you build the fence or fences that give the highest marginal reaction this year.  

Next year (or more precisely, next time) the Resource link is the Weak-link, recalculate the sheet, including all unconstructed fence alternatives.  You may be very surprised at how fences change construction priority as costs for different aspects of the project vary from year to year.


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