Friday, July 25, 2014

Something's fishy in Alaska in the canned salmon market. Let's go to the graphs.

Another day, another easy pickin' economics lesson pulled from the headlines.

"Alaska Governor asks the Federal Government to buy Surplus Canned Salmon"

Gov. Sean Parnell has asked a federal agency to buy about 1 million cases of canned pink salmon to ease a glut that has weighed down prices for Alaska fishermen this year. 
Parnell made the request in a letter to U.S. Agriculture Secretary Tom Vilsack this week. He wants the USDA to purchase $37 million worth of canned pink salmon under a federal law that allows for buying surplus food from farmers and donating it to food banks or other programs. 
USDA purchased $20 million worth of salmon earlier this year, which Parnell called an important first step in reducing inventories to help slow a price decline that he said threatened the 2014 fishing season. 
He said remaining unsold inventories are driving prices to levels that threaten harvest activity this year and next, with the price of canned pink salmon 23 percent lower than a year ago and the advance price paid to fishermen down about 33 percent.
By purchasing the surplus canned salmon from Alaskan fish processors, the Governor is essentially asking for a de facto PRICE FLOOR be imposed on the market for Canned Salmon.

The thinking is this: Buy the surplus so the processors (1) don't have to unload it at lower prices (this is not mentioned in the article) and (2) the price the processors pay fisherman for their catch for the upcoming season will not decrease.  Easy, right?

Let's go to the graphs to see how this plays out.  Hope it helps you in understanding your lesson on this topic.

"I, Chocolate". Why is chocolate so cheap when SO MANY people have to get paid to get it to us?

I cannot answer that question. No one can (we can only suppose).  It is part of the miracle that is markets operating in as free an environment as possible.

The World Cocoa Foundation has this terrific report on the state of the Cocoa/Chocolate market.

One section of the report serves as a reminder of just how difficult and complex it is to bring a seemingly simple product to market for the masses to enjoy at a relatively low price.  If you start to list out ALL the steps and cooperation that is necessary to complete production it is mind boggling.

Read all the steps involved...and these are just an overview and only scratch the surface.  Many other steps and processes are not accounted for.

(Go here for an explanation of "I, Pencil" and "I, Smartphone")

Meanwhile after you read this think about it the next time you consume a good (durable or non-durable) and make a mental list of the processes involved in getting it to you.  You will run out of mental capacity before you run out of supply chain steps.  :)

Cocoa Value Chain

Growing: Cocoa trees grow on small farms in tropical environments,
within 15-20 degrees of latitude from the equator. Cocoa is a delicate
and sensitive crop, and farmers must protect trees from wind, sun,
pests, and disease. With proper care, cocoa trees begin to yield pods
at peak production levels by the fifth year, and they can continue at
this level for ten years.

Harvesting: Ripe pods may be found throughout the continuous
growing season; however, most countries have two peak production
harvests per year. Changes in weather patterns can dramatically affect
harvest times and yields, causing fluctuations from year to year.
Farmers remove pods from the trees using long-handled steel tools.
Pods are collected and split open with a sturdy stick or machete, and
the beans inside are removed. A farmer can expect 20 to 50 beans per
pod, depending on the variety of cocoa. Approximately 400 beans are
required to make one pound of chocolate.

Fermenting and Drying: Farmers pack the fresh beans into boxes or
heap them into piles covered with mats or banana leaves. The layer of
pulp that naturally surrounds the beans heats up and ferments the
beans. Fermentation lasts three to seven days, and it is the critical
step that produces the familiar chocolate flavor. The beans then dry
for several days in the sun or under solar dryers.

Marketing: After the dried beans are packed into sacks, the farmer
sells them to a buying station or local agent, who transports the bags
to an exporting company. The exporter inspects the cocoa and
transports it to a warehouse near a port.

Packing and Transporting: The exporter ships the beans to the
processing location, where the cocoa is moved to a pier warehouse
until needed. Details of export process vary by country. The buyer
conducts a quality check to accept delivery and the cocoa is stored
until requested by the processor or manufacturer. Trucks or trains
carry the cocoa in large tote bags or loose in the trailer to the
manufacturer’s facility, on a “just-in-time” basis.

Roasting and Grinding: Before processing, the beans are thoroughly
inspected and cleaned. The inside of the cocoa bean is called the nib.
Depending on the manufacturer’s preferences, beans can be roasted
whole, or the nib can be roasted alone. Once the beans have been
shelled and roasted (or roasted and shelled), the nib is ground into a
paste. The heat generated by this process causes the cocoa butter in
the nib to melt, creating “cocoa liquor.”
Cocoa liquor does not contain alcohol and is solid at room
temperature. It can be further refined, sold as unsweetened baking
chocolate, or used in chocolate manufacturing.

Pressing: The cocoa liquor is fed into hydraulic presses that divide
liquor into cocoa butter and cocoa cakes. The cocoa cake can be sold
into the generic cocoa cake market, or ground into a fine powder.
The processor may pre-treat the cocoa liquor with an alkali solution
(alkalizing), which reduces acidity. This treatment is known as
“dutching” and produces Dutch processed cocoa when pressed.
Alkalized liquor becomes darker, develops a more robust chocolate
flavor, and stays in suspension longer in liquids such as milk.

Chocolate Making: To make chocolate, cocoa liquor is mixed with
cocoa butter, sugar, and sometimes milk. The mixture is poured into
conches—large agitators that stir and smooth the mixture under heat.
Generally, the longer chocolate is conched, the smoother it will be.
Conching can last from a few hours to three full days. After conching,
the liquid chocolate may be shipped in tanks or tempered and poured
into block molds for sale to confectioners, dairies, or bakers.

Wednesday, July 23, 2014

Substitute versus Substitution Effect. Only one word difference but the difference is BIG.

One of the more difficult things to teach to students is the difference between a Substitute (good or service) and the Substitution Effect that the Substitute good or service has on demand for the good that is subject to substitution.  Got that?  

Here is a terrific article on the rise in beef prices and its impact on the market for chicken.  Below I created some slides that hopefully will make the distinction between the two key micro-economic concepts more clear.  Use as you like!  Let me know if you see any errors or how I can refine any aspect.  Thanks.

Beef prices hit wallets, boost poultry's appeal (HT: Big Picture Agriculture)

There's no beef about it, prices for red meat are surging and demand for chicken is benefiting. 
Chicken's versatile appeal and its perception as a good source of protein that's better for you than red meat are also driving sales, RBC Capital Markets' David Palmer said in a phone interview. 
"Chicken is really hot right now, and poultry is viewed as a source of protein that's relatively less inflationary," Palmer said.

Nice article: A simple technology allows farmers to become Price Makers, not Price Takers

In AP Microeconomics we have a unit on the market structure "Perfect Competition".  One of the main characteristics of a firm that operates in this market is the firm is a "Price Taker"---they are too small to demand a particular price in the market and by themselves their quantity supplied is not enough to influence the price either.  They must take the market price offered to them and reconcile it their cost of production.

In an effort to try to get a higher price OR to wait and see if a higher price is in the offering at a later date, some farmers store their grains in giant silos.  If you travel the back roads of the mid-West this is a pretty common sight.

These large, physical structures are limited in their capacity and expensive to build and maintain on the supply side, and expensive to rent on the demand side.

A new-ish advancement in portable storage is about to become more popular and noticeable in rural areas. It is a much less expensive way to store harvested grains AND if enough additional farmers employ this technique it may allow farmers to gain pricing power and become a "Price Maker" instead of a "Price Taker".

Creative Destruction---it is a wonderful thing!

U.S. grain farmers resort to giant storage bags to avoid cheap sales (HT: Big Picture Agriculture)

As U.S. farmers turn in record grain crops this autumn, many will have a powerful new tool - giant sausage-shaped storage bags - to help them avoid the lowest prices in years and gain more control over trade with giants such as Cargill Inc.
Demand has surged this summer for the white polyethylene bags the length of a football field and the equipment required to fill them, according to manufacturers and wholesalers. 
They allow farmers to store millions of bushels of corn and soybeans at a fraction the cost of conventional silos and far more efficiently than leaving grain in the open air. 
The bags, which are about 300-foot (91-m) long and 10 feet in diameter, are common on the Argentine Pampas but until recently a rare sight in the U.S. Midwest, where the expansion of big elevators and 50-foot high silos has generally kept pace with ever-expanding crops. 
But with many bins still overflowing with last year's crop in the world's top grain grower, farmers are snapping up these systems as a practical necessity ahead of bumper harvests, and as a safeguard against another winter of railroad delays.
They may also be a sign that farmers will not be rushed into dumping their harvests quickly. Prices for corn to be harvested in autumn have tumbled as much as 18 percent so far this year, leaving growers hoping for a rebound.  (Click HERE to read more)
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