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)

Wednesday, July 16, 2014

I visited the "Shawshank Redemption" Prison this week and came away with this observation (why, yes, of course it involves economics)

I visited the prison that was used as the backdrop for the GREAT movie "Shawshank Redemption".  It is located in Mansfield, Ohio and is open to the public.  It is an unbelievable facility and if you are a fan or the movie (or prisons) it is a must see!

I am always looking for an economics lesson and by luck they had this pay stub for a prison guard from 1962.

His pay was $315.00 per month ($2,481.00 in 2014 dollars) or $157.50 every two weeks ($1,240.50 in 2014).

I assume he worked a 40 hour week which means he earned $1.97 per hour over 80 hours in the two week pay period.  As a comparison, in 2014 dollars that would be $15.52 per hour.

There is a new correctional facility right next to the old prison.  According to the median salary of a correctional officer at that facility is about $38,000. Using 2,000 as the number of hours worked in a given year (with 2 weeks vacation unpaid vacation--not likely) that works out to $19.00 per hour (this is wage and NOT other non-cash benefits which I am guessing are much better today than in 1962).

The salary of a prison guard today in Mansfield, Ohio has at least kept up with inflation ($19.00 versus the $15.52).

Not sure if Andy Dufrane or Old Red would appreciate that or not.

Friday, July 11, 2014

LeBron, Johnny and the Republican nominee walk into a bar in Cleveland....

After the Republican Convention in 2015, the Republican nominee, Johnny Manzeil and Lebron James walk into a bar in Cleveland.

Johnny gives the bartender his "money" sign with his hands.  He gets a beer.

LeBron tilts his head back and says "Sup".  He gets 5 beers.

The Republican nominee tells the bartender "I am going to cut your taxes and the taxes of all your customers. They will have more money to spend and you will have more to invest. You will sell more beer and have to open another bar or two.  Tax revenues to the Government will increase!"

The bartender looks at him and says "Dude, you have had enough. I will call you a cab".

Wednesday, June 25, 2014

Nice map showing the uneven job recovery in the US.

The New York Times has a lengthy article on the economic recovery from 2007 to 2013 with a focus on the post-recession state of the economy.

They had this map below showing the percentage change in jobs since 2007. High growth areas are in dark(er) GREEN.

This is a "flyover" economic recovery centered in the mid-section of the country (I inserted the rectangle to highlight the area).

I think the major media on both "coasts" miss the story.  They see overall employment numbers improving but don't see it in their own backyards so there must be something wrong.

Perhaps.  The recovery in jobs is definitely uneven.  What can we do, if anything?

Source: New York Times

Sunday, June 22, 2014

Hammer and nails. Cheese and Beer. Regulatory over-reach or Public Safety?

Recently in a speech at West Point President Obama used this phrase in referencing Iraq/US foreign policy:
"Just because we have the best hammer does not mean that every problem is a nail." 
It is a variation of the original version by Abraham Maslow:
"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."
 And this from Abraham Kaplan who formally classified the phrase as "The Law of the Instrument":
 "Give a small boy a hammer, and he will find that everything he encounters needs pounding."
Now that is out of the way, what does it have to do with this posting?

In the last couple of weeks I have read the following articles:

1.  Has The FDA Brought On A Cheese Apocalypse? Probably Not (NPR: The Salt).  The FDA proposed a rule to regulate the ageing of high quality cheese on wood boards, a process that has been used for 100's of years, because of a fear of listeria.  

"As for the cheese aging boards, "There's no question there's a risk," Acheson says, but the question is, how much. "I'm not aware of any evidence that the wooden boards on which cheese is aged led to listeria outbreaks," he says.
(Emphasis mine)---Is this a hammer in search of a nail?

2.  New FDA Regulation Could Cripple Ranchers, Beer Brewers (HuffPo). Beer Brewers, large and small, for 100's of years have been either giving away or selling cheap the spent beer grains to farmers to use as high quality animal feed. 

"Since the grains are used to brew beer, they have already been deemed safe for human consumption. But the FDA fears the lack of oversight from the time of brewing to the time the grains are fed to the animals could lead to contamination. 
The FDA did not comment on a request from The Huffington Post for reports of any illnesses related to the consumption of spent grains."
(emphasis mine)---Is this a hammer in search of a nail?

Read both articles and ask yourself:  Regulatory over-reach or pro-active governing in the name of public safety?

Are there any nails here that need hammering?

Friday, June 20, 2014

Chased something down a rabbit hole today.

Chased something down a rabbit hole today.

I tried to examine the budget of the Federal Highway Trust Fund and the Federal Highway Administration in general that uses the Federal gas tax money (primarily) and Income taxes to pay for the construction and/or repairs of Highways, By-ways, Roads and Bridges and on and on and on.  I came across this link that showed grants to a myriad of projects in every State.  You can look at the list yourself and ask if these are good uses of Federal tax dollars.

After spending a few minutes scrolling through the list examining the projects and looking at the various dollar amounts this came to mind:
If you watch your pennies today, you will have dollars tomorrow. If you squander your dollars today, you will have pennies tomorrow.
Not an original thought.  But one I used as I looked through the list.

What do you see?

Thursday, June 19, 2014

Ever wonder how farmers get paid for not planting crops? Here is my explanation as it pertains to the new farm bill. Enlightening...

I have been semi-immersing myself in learning about the new Farm Bill that was recently passed and signed into law that will dictate US farm policy for the next 5 years.

I even attended an online seminar sponsored by the US Dept of Agriculture whose target audience was farmers who wanted to learn more about the changes in the law.  It is complex and if you want to learn more yourself, please go HERE for all you can consume.

Here is an interesting tidbit I learned I cannot get my mind wrapped around.  Very strange, in my opinion.

Say I am a farmer and have 1000 acres of land suitable for growing Wheat or Soybeans.  Assume my planting history shows I use 500 acres for wheat and 500 acres for soybeans.

For the purposes of satisfying the requirements of the Farm Bill, this 50/50 allocation of acres is what I declare as my "Base Acres" for claiming subsidies or any other government program for which I may be entitled.  So far so good.

Now, suppose next year I KNOW the price of soybean per bushel is going to be high and the price of wheat per bushel is going to be low---very low.  So low, in fact, it will be lower than the legal PRICE FLOOR that was set in the Farm Bill.  According to the Farm Bill, if the market price is below the Price Floor set in by the Farm Bill I am entitled to a payment (or subsidy) equal to the difference between the two prices PER BUSHEL of the crop---in this case wheat.

Here is what I am going to do:  Not plant ANY wheat and plant 1,000 acres of soybeans. Yes, can do that even though I have declared a 50/50 split based on historical plantings

I am going to sell my 1,000 acre harvest of soybeans for the high market price.  GOOD FOR ME, RIGHT?

It gets better.

Subsidies are paid on declared BASE ACRES, not actual harvest of a crop.  Since 500 of my 1,000 acres are declared for wheat I can receive the subsidy for WHEAT on those 500 acres even though I grew NO WHEAT AT ALL.

So, based on average historical bushels of wheat per acre harvested, I will receive that number times the subsidy (the difference between the Price Floor and the actual market price for wheat at the time) times the number of acres.

If the subsidy is $1.00 and the average yield is 47 bushels per acre then that = $47.00 per acre. I have 500 base acres in wheat so $47.00 X 500 =  $23,500.  For growing no wheat.

I told you. Strange, right.

This is the way it was explained to me.  If I have any details wrong or there is more to the story let me know. Always open to revisions.

Note:  The average farm is much less than 1,000 acres and the subsidy payout is likely much LESS than $1.00 ( could be just pennies).  So both those numbers I used are, in most cases, over-stated.

Wednesday, June 18, 2014

How many football fields worth of corn did we use everyday last week to produce the surge in ethanol production? We're gonna need a bigger stadium...

Saw this and of course had to do some calculating.  You know how much hatin' I do on ethanol.

U.S. ethanol output surges to record high as gasoline costs rise (HT: Big Picture Agriculture)

U.S. ethanol production increased for the sixth week in a row to a record high, government data showed on Wednesday, as rising gasoline prices helped boost demand for the grain-based biofuel. 
Ethanol production surged 28,000 barrels per day, or about 3 percent, to an average of 972,000 bpd in the week ending June 13, according to the U.S. Energy Information Administration. Production surpassed the previous record of 963,000 bpd reached in the last week of 2011.
A "barrel" as a measure is 42 gallons. If production increased by 28,000 barrels that is 1,176,00 gallons of ethanol.

One bushel of corn (about 56 pounds) makes approx 2.8 gallons of ethanol.  It we divide 2.8 into 1,176,000 we get 420,000 bushels of corn needed for the extra DAILY production.

In 2013 the average yield on an acre of land used for growing corn was 158 bushels.

If we divide 420,000 by 158 we get 2,658 additional acres needed every day to support that "surge" in demand. Not the SAME 2,658 acres but additional 2,658 acres.

A football field is 1.33 acres.  Divide 2,658 by 1.33.

Last week we used the equivalent of 1,998 football fields for the extra 28,000 barrels of ethanol--EVERY.DAY.

Nice comparison of National GDP to Metropolitan Statistical Areas (MSA's). Terrific learning tool for students.

Here is another way to quantify the size of the US economy (From US via CityLab).

Economies are measured using Gross Domestic Product (GDP)---the monetary (dollar) value of the production of goods and services within the borders of a country in a given year.  That total dollar amount is derived from each the individual 50 states Gross State Product (GSP). In turn, each states GSP comes from the sum of production from all its cities, towns, villages, etc.

The Census Bureau divides the country up into "Metro Statistical Areas" or MSA's.  MSA's could be all contained within a state OR they could be the combining of the population areas of a multiple of states.  For economic and social purposes you could consider these MSA's separate and distinct from the areas around them because of their concentration of people, commercial and social activities.

To get an idea of the economic impact these MSA's have, this report compares their economic output with countries around the world.

For example, the MSA of the New York, NJ, Pennsylvania has a GMP of $1.335 trillion dollars.  If this MSA were its own country, it would rank as the 13th largest economy in the world (below Australia, above Spain).

Here are the Top 90. Go to the report to see the whole list and find your MSA or country and see how it ranks!

Tuesday, June 17, 2014

Having fun with the CPI. I show how you can read this report quickly and actually get something out of it!

Looking at a government report can be overwhelming.  SO MANY numbers and categories!  In this blog posting I would like to offer a simple way of breaking down a report and getting something useful out of it.

The latest measure of consumer prices is out today (June 17th, 2014).  While we have a relatively low level of over-all inflation, not all parts of the market basket that the government uses to measure prices necessarily reflect it. Some prices have increased, some decreased and some stayed the same.

Here is a simple exercise I do when this report comes out.

I look at the how prices have changed over the past year.  Below is the first page of the whole report and it starts with "Food", my favorite subject.  Focus on the highlighted column in YELLOW.  This shows how the price of food has changed, in percentage terms, over the past 12 months.

The first line shows that "All Items" as measured the CPI have increased 2.1% in the last 12 months.  Food as a category has increased 2.5%.  From this we can conclude the price of food as a category has increased slightly faster than all the other items in the CPI market basket.  Now we can dig deeper.

Food as a category has two components:  "Food at Home" and "Food away from Home".  I only screen shot "Food at Home" to use for this but you can find the other category in the whole report.

Food at Home has increased 2.7%.  This is 29% higher than prices over-all (2.1%).

Now the fun part.  Use 2.7% as your baseline and compare it to all the other "Food at Home" prices. If the percentage number you see is below 2.7% than that category has risen slower than all items of food at home OR it has actually decreased in over the past year (see negative numbers).

If the number is above 2.7% then the prices of that category of food at home have increased faster than the category as a whole.

What do you see?  What has increased faster than the average? Slower?  Actually decreased in price?  WHY????  So many opportunities to tie in basic econ principles with current events.

Have fun!

Monday, June 16, 2014

Having fun with data. The change in hospitals and hospital beds since 1975 perplexes me. Explain to me what is going on.

In 1975 there were 7,156 hospitals (Federal and Non-Federal--which would be State, Local and Private) in the US.  In 2011 there were 5,747.  A decrease of 20%.

In 1975 there were 1,465,828 hospital BEDS (Federal and Non-Federal).  In 2011 there were 924,333.  A decrease of 37%.

In 1975 the US population was 216,000,000  . In 2011 it was 311,000,000.  An INCREASE of 44%

If you look at the line that is highlighted in GOLD you see the number of beds at very small facilities have increases by 2,000 BUT at every other bed range there have been decreases.  Some small, some large decreases but decreases nonetheless.

Our population is greater.  Demographics have trended much older. There are FEWER hospitals and beds when the demand, it seems to me, is effectively much higher.

Did this surprise you? Did me. I am kinda at a loss to explain it.  Any ideas?

Source: Centers for Disease Control (CDC)

China Cuts "Required Reserve Ratio" to stimulate lending and Investment. What does that mean exactly?

One of the tools modern Central Banks around the world have to affect money supply, hence interest rates that money is saved or borrow at, is the "Required Reserve Ratio (RRR)".

To prevent banks from lending out (or otherwise use) all of a deposit made by a customer they are required to with-hold a certain  percentage of that deposit in an account with the Central Bank.  After they with-hold the required amount banks put the remaining balance in their "Excess Reserve" accounts from which they can make loans.
China’s largest banks are currently required to hold 20 per cent of deposits as reserves at the central bank, while medium-sized lenders must meet ratios of 18 per cent. Rural banks and other small lenders are subject to a rate of 16.5 per cent or less. (Source: Financial Times)
Simple example: I make a $100.00 cash deposit in my bank. If the RRR is 20% then the bank puts $20.00 of that in their Required Reserve account and $80.00 in Excess Reserves.  The bank may loan up to $80.00 to a borrower.

At least that is the story that is told.  For now, we will go with it since it is a BIG part of the AP Macroeconomics curriculum.

You can see the constraint on lending in this scenario is the RRR.  If the RRR is LOWERED than banks are required to with-hold LESS of a deposit and the Excess Reserves to be loaned out are HIGHER. Banks tend to make more loans.  More loans are made to businesses for projects and/or capital equipment purchases. Economy boosted. Key vocab term for AP--"Expansionary or Loose Monetary Policy" designed to stimulate Aggregate Demand ("Investment" (I) in C+I+G +N):
Zhang Zhiwei, China economist at Nomura, described the move as “significant”. By his calculations, the new cut will inject about Rmb95bn ($15bn) back into the banking system. When added to other measures, such as the April cut, Beijing will have added Rmb545bn of fresh liquidity into the economy by the end of this month, equivalent to a 50 basis point cut to reserve requirements for all banks.
China has taken a fresh step to boost flagging growth by cutting the amount of cash reserves some lenders must hold at the central bank in a bid to boost lending to small businesses and the rural economy. 
The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers.(Source: Financial Times)
 At least that is the story that is told. For now, we will go with it since...