Tag: economics

Protect us from ourselves

I got this email today, from a colleague.

“Joe Smith started the day early having set his alarm clock ( MADE IN JAPAN ) for 6am . While his coffeepot ( MADE IN CHINA ) was perking, he shaved with his electric razor (MADE IN HONG KONG ). He put on a dress shirt ( MADE IN SRI LANKA ), designer jeans ( MADE IN SINGAPORE ) and tennis shoes ( MADE IN KOREA ). After cooking his breakfast in his new electric skillet ( MADE IN INDIA ) he sat down with his calculator ( MADE IN MEXICO ) to see how much he could spend today. After setting his watch ( MADE IN TAIWAN ) to the radio (MADE IN INDIA ) he got in his car ( MADE IN GERMANY ) filled it with Petrol from Saudi Arabiaand continued his search for a good paying Australian JOB At the end of yet another discouraging and fruitless day checking his Computer (MADE In MALAYSIA ), Joe decide to relax for a while.. He put on his sandals ( MADE IN BRAZIL ) poured himself a glass of wine (MADE IN FRANCE.! ) and turned on his TV ( MADE IN INDONESIA ), and then wondered why he can’t find a good paying job in … Australia….. “

Is it just me or is protectionism so hot right now? “Buy local” campaigns are the new economic black. I think A Current Affair is running a story (or they have already run it) encouraging their legion’s of viewers to buy Australian made. It’s odd. And pretty stupid. In fact I think it’s just clever marketing and a nice, easy PR campaign to boot. Who’s not going to cover a story about keeping locals in jobs. It seems the first thing advertisers do in a recession is call for protectionism – buy local campaigns etc…

Magnetic Island is in the midst of a protectionism row at the moment after a local operator missed out on a tender to a Sydney based comments. This operator’s comments to the local paper that these fly by night Sydney operators would “be crucified” if they tried setting up on the island no doubt does our region a world of good as we try to attract investment and tourists. Here’s a message to you new businesses from the businesses on Magnetic Island… “die or we’ll kill you”. Nice.

The campaign to reverse the Townsville City Council’s incredibly above board tender decision took on new legs over the weekend with a protest group carting around signs that said “Beach Hire is un-Australian” and “local jobs for locals”… Apparently coming from Sydney is un-Australian now. Basically this guy thought the job was his by right – and barely even scraped together a tender (and submitted it after the closing date). He lost. That’s life. Move on.

I like to preface these pretty broad posts by saying “I’m no economist but” so here’s the standard disclaimer. I’m no economist but in the face of a global financial crisis it doesn’t make sense to be acting in the national not global interest – because to me, the bigger problem for Australian jobs is the rapidly collapsing resource sector. A collapse fuelled by slowing demand from overseas. That’s right. We export this stuff. So we need other countries to be in a financial position to buy our stuff.

This is why I think the fact most of the stimulus package being spent on things produced overseas is a good thing. Sure, buying local is good. But buying foreign made is ok. And why should we value employment in our prosperous country with better than adequate social security over jobs in other countries with non-existant unemployment payments?

I’ve had a few conversations with a few people who “don’t want the money from K-Rudd” on principle. That’s fine. Give it to me. I’ll spend it wisely.

These conversations go along these lines:

1. We should be helping big business that’s how to fix the economy
2. We should be investing in infrastructure that’s how to help the economy – we need to be ready for the next resources boom…
3. This money is only going to keep retail employees in jobs – and most of it will go overseas to China.
4. It’s a big debt that we can’t afford to pay now – and it will be a burden on future generations.

From my very, very laymans meta-analysis of the current economic situation the downturn in Chinese production fueled by the lack of demand for their products seems to me to be a pretty prime factor in our resource prices tanking.

Pouring money into Chinese manufacturers is a good thing because not only will it give us access to technology as they develop it to suit demand, it will also stimulate demand for our resources – there won’t be another resource boom if other countries don’t want to grow and develop.

Sure, we could have a locally driven resource boom. But then the Greens would get angry that we’re chopping down trees to pave paradise for multi-storey car parking.

The debt thing is an issue – but once we’ve decided to spend money saving the economy rather than letting it tank completely and picking up the pieces the solution is going to require spending money, and governments are really the only entities in a position to borrow.

So here’s the response I sent to my colleague… some of the points are a stretch – but I wish sometimes people would think a little bit past the obvious “that money’s going to support a Chinese person not an Australian person” bias.

“Joe Smith started the day early having set his alarm clock ( MADE IN JAPAN – using Nickel from Townsville) for 6am . While his coffeepot ( MADE IN CHINA (using aluminium mined in Australia) – (with coffee grown on the Atherton Tablelands ) was perking, he shaved with his electric razor (MADE IN HONG KONG ) (using technology developed in Australian universities). He put on a dress shirt ( MADE IN SRI LANKA – using cotton grown in Australia ), designer jeans ( MADE IN SINGAPORE – also using Australian cotton) and tennis shoes ( MADE IN KOREA using Australian leather ). After cooking his breakfast in his new electric skillet ( MADE IN INDIA from Australian steel ) he sat down with his calculator ( MADE IN MEXICO using components made from Australian resources ) to see how much he could spend today (based on Australian research). After setting his watch ( MADE IN TAIWAN using Australian components and sold to him by an Australian salesman ) to the radio (MADE IN INDIA and installed, repaired and serviced by Australian technicians ) he got in his car ( MADE IN GERMANY – sold in Australia by a local dealer who employs local mechanics – unless the locals are so lazy that he has to bring in workers from overseas ) filled it with Petrol from Saudi Arabia (shipped to Australia by an Australian company, transported by Australian truck drivers) and continued his search for a good paying Australian JOB (he wasn’t looking hard enough) At the end of yet another discouraging and fruitless day checking his Computer (MADE In MALAYSIA ), Joe decide to relax for a while.. He put on his sandals ( MADE IN BRAZIL – That is unAustralian – he should have been wearing pluggers) poured himself a glass of wine (MADE IN FRANCE.! – again, there’s plenty of good Australian wine) and turned on his TV ( MADE IN INDONESIA filled with Australian content), and then wondered why he can’t find a good paying job in … Australia….. probably because nobody wants to buy our resources anymore because we’ve stopped buying stuff, or he’s too lazy to do anything he considers “menial” or beneath him…”

April 6, 2009

Stimulus rains on cats and dogs

Apparently “literally hundreds” of cats and dogs will be receiving stimulus money inherited from pensioners who’ve died since filing their last returns. If these pensioners bequeathed their estates to their feline or canine companions and a tax return was filed the animals get the one off payment.

Joe Hockey is jumping up and down crying fowl (because chickens don’t often get these sorts of rights)… he thinks it’s a waste of money.

But really, the stimulus is only effective if the recipients spend the money. I don’t know if cats and dogs are renowned savers, and I would have thought pet stores needed the stimulus money as much as everyone else. If they go out of business where are desparate pensioners going to get their food from?

Frankly I think the money that went to pensioners overseas was more concerning – but I don’t really see how complaining that the Government is pumping money into the economy (via our pockets) is going to score any political points at all.

March 18, 2009

Coffee and the global financial crisis

 500 billion cups of coffee are consumed globally every year. It’s big business. And you thought I’d chosen such a niche topic to keep writing about. 

The coffee industry is facing problems though. The tough economic climate means people are cutting back on expensive coffee, and even drinking instant. Partly thanks to Starbucks’ new instant product. Via. Which gives me one of those involuntary shudders.

This discussion – particularly the impact of the economic climate on coffee purchasing – was the topic of a recent post from Hungry Magazine. 

“VIA™ also focused me on what’s not happening at the local level. If you recall, I mentioned I just drank French pressed whole bean grocery store bought Starbucks. Up until a few months ago I was an exclusive Intelligentsia and Metropolis coffee drinker. But with the economy tugging at me and 12 oz of locally roasted beans costing $11.99 or so, I started experimenting with the $8.99 and $6.99 options available at the grocery store. I was convinced I’d probably end up where I started from, but I needed to see what was out there.”

The post drew some interesting comments from the CEO and bean buyer from Intelligentsia Coffee – arguably the pinnacle of the “specialty coffee” movement.

One of the economic problems facing the coffee industry is best expressed by these two maps. The countries producing coffee are very different to the countries buying it. Picture one represents coffee producers, picture two coffee drinkers. 

Here are the pick of the comments from Intelligentsia buyer Geoff Watts. 

“Your average coffee farmer today is making less money per pound of sold coffee than his grandparents did, in real (unadjusted) dollars, despite drastically higher living costs and production costs.”

Meanwhile, the mainstream first-world consumer has held stubbornly to the idea that coffee is a cheap luxury, that the $1.00 bottomless mug is somehow a right or a deserved privilege.

It is this very attitude that will continue to ensure that the modern smallholder coffee farmer has little hope of escaping a life of extreme poverty.

Cheap coffee (and by “cheap” I mean low cost, which typically equates to low quality) is one of the many forces shackling the developing world and suppressing opportunity for advancement for a huge chunk of the planet’s population who depend on coffee to make a living.

I would argue that even downright crappy coffee ought to carry a higher price tag than it currently does, especially considering the higher production costs that most farmers face today.”

February 28, 2009

More stimulating discussion

“By contrast, new converts to Keynesianism, such as Rudd and Barack Obama, believe in a positive multiplier. They believe extra government spending, like handouts to those most likely to spend it, creates new income on top of the governmental spend, as the unemployed are put to work.

This process is brilliantly satirised by Norman Lindsay’s magic pudding, which freely recreates itself the more that is eaten. The magic pudding perfectly captures the unmet promises of Australian politicians.”

UNSW Professor of Finance Peter Swan in the SMH.

I probably tend to think this policy is a bad idea. But I want to have my cake and eat it too. How’s that for a mixed metaphor.

I would like the government to give me $950. It’s only fair after they taxed me to give all that money to other people.

But I think it’s a bad idea for them to give other people money. I suspect a large amount will be whacked into paying off debt or savings accounts. Which is a positive cultural turn.

Treasury secretary Ken Henry says the stimulus will work – and interest rates will still need to be lowered. At least I think that’s what I heard on the Today Show this morning. If we weren’t planning to become students again at some point in the future now would be a great time to buy. Although I think there’s more hurt for home prices to come.

February 6, 2009

Cafe economics

Hands up if you’ve ever thought “opening a cafe would be fun”. This little article was just about enough for me to put my hand down to that question. Here’s a failed cafe owner elaborating on the costs of pursuing your cafe dream. 

“A place that seats 25 will have to employ at least two people for every shift: someone to work the front and someone for the kitchen (assuming you find a guy who will both uncomplainingly wash dishes and reliably whip up pretty crepes; if you’ve found that guy, you’re already in better shape than most NYC restaurateurs. You’re also, most likely, already in trouble with immigration services). Budgeting $15 for the payroll for every hour your charming cafe is open (let’s say 10 hours a day) relieves you of $4,500 a month. That gives you another $4,500 a month for rent and $6,300 to stock up on product. It also means that to come up with the total needed $18K of revenue per month, you will need to sell that product at an average of a 300 percent markup.”

“Coffee was a different story—thanks to the trail blazed by Starbucks, the world of coffee retail is now a rogue’s playground of jaw-dropping markups. An espresso that required about 18 cents worth of beans (and we used very good beans) was sold for $2.50 with nary an eyebrow raised on either side of the counter. A dab of milk froth or a splash of hot water transformed the drink into a macchiato or an Americano, respectively, and raised the price to $3. The house brew too cold to be sold for $1 a cup was chilled further and reborn at $2.50 a cup as iced coffee, a drink whose appeal I do not even pretend to grasp.”

“But how much of it could we sell? Discarding food as a self-canceling expense at best, the coffee needed to account for all of our profit. We needed to sell roughly $500 of it a day. This kind of money is only achievable through solid foot traffic, but, of course, our cafe was too cozy and charming to pop in for a cup to go. The average coffee-to-stay customer nursed his mocha (i.e., his $5 ticket) for upward of 30 minutes. Don’t get me started on people with laptops.”

It seems the real cost was almost to the couple’s marriage – which the writer said was saved by a “well timed bankruptcy.

February 6, 2009

Mind your own beeswax

Tim suggested I write about a link between candles and climate change. I can do better than that.

Every year, at around this time, climate change hippies call on us to cut down on carbon consumption by switching off our lights. Unfortunately, this is largely counter productive. As it encourages the use of candles. Everybody knows candles are only to be used for the following reasons:

a) Electrical emergencies
b) birthday cakes
c) romantic dinners
d) to light fuses of things you’re going to blow up
e) religious ceremonies if you’re a Catholic or High Anglican.

Any other reason, say aesthetics, or salving your crushed eco-conscience is right out. Earth Hour is a PR stunt. It doesn’t actually do anything. I don’t know Jennifer Mahoney – I don’t know what her qualifications are. But she’s a primary source whose findings match nicely with the objectives of this post – so I’ll share these quotes from her less than objective site and a post on earth hour.

“[the first] Earth Hour was held during a time of peak electrical load, so any electricity generation displaced would be peak load, probably running on natural gas. Such generation produces about 500 grams of CO2 for every kilowatt-hour.”

Whoops.

“So turning a 100 watt light bulb off for an hour saves 50 grams of CO2, or 13 grams of carbon. A candle is mostly carbon by weight, and candle wax is only moderately less dense than water at room temperature. This means that burning just 5 cm of a typical 2 cm diameter candle will produce more CO2 than running the 100 watt light bulb for an hour. If the light that was turned off is fluorescent, then even less candle can be burned if there’s to be a net reduction in CO2.”

Double whoops. Candles are not only moderately effeminate – they’re also bad for the environment.

I’ve written a little about Colony Collapse Disorder and the impending doom of the US Ice Cream industry.

 Climate Change is killing bees. All over the world Queen bees are left to their own devices. They can’t save themselves. The finely balanced eco-system is on the brink of decay. Seriously.

 Colony Collapse Disorder could well be climate change’s most significant impact. You think the global financial crisis that was caused by the sub prime mortgage collapse is a bad thing? That collapse has nothing on colony collapse. Do you have any idea the staggering number of US products made with honey as an ingredient? Millions. Literally. Ok, I made that up. But there’d be a lot. Whole product lines will have to close down. Hokey Pokey Ice-cream… popular breakfast cereals… not to mention honey jumbles… this is a big deal.

But you know what else is under threat. We’ve covered the economy, the world’s bee population, the breakfasts of champions… but wait, there’s more. Candles. Genuine beeswax candles will be a thing of the past. And WE’RE BURNING THEM. Well not me. I wouldn’t (except for the aforementioned acceptable reasons). I’m straight. I’m not a candle kind of guy. But YOU are burning them. You know who you are. And not only are you killing the environment – you’re adding to the relative scarcity of wax products and driving up prices.

If bees die out wax will become a much sought after commodity. Prices will skyrocket. How then will Maddam Tussauds produce their ecclectic range of affordable wax based entertainment? You are burning the chances of future British Royals to bee(sic) immortalised in wax. What would Kate Middleton say? Other than “stop burning those candles”. Heathen.

So what should we be doing with candles you ask? Since we can only light them on particular occasions for specific reasons. Good question. Bank them. Wait for the stupidity of others to create a candle currency – a trade in what will soon be earth’s most valuable commodity. Victoria Beckham will thank you when Maddam Tussauds are able to incorporate her new hair extensions into her waxy self. 

Wax banks could be hives of activity. Alternatively you could put your candles in a cupboard and mind your own beeswax. Still you don’t want to be court in a bee sting – or in some honey pot of wax corruption so perhaps it’s just best for you to steer clear of candles altogether. Leave them to misguided hippies and go about your daily business.

January 31, 2009

Milking the debate

My ongoing investigation into milk prices continues. My research reveals a shocking fact. Milk costs about the same to produce per litre as petrol – and yet we still pay significantly more at the Servo.

To begin my research on the matter I first contacted Ben, my economics consultant, who said the following:

“It probably costs more to produce/transport (I’m no milkologist, so i don’t know about this for sure), at any particular time there is only a certain supply of milk, so it is open to general market forces, you demand less milk than petrol, so the marginal utility you gain at 1 litre of milk is vastly lower than that of petrol.

Really, they are totally different items. People who think that comparing the price of milk to petrol will reveal some holy grail of pricing failure are retards.”

Not content to be left in the retard basket I pursued the issue with expanded economic factors…

If scarcity is a factor though surely the ease in which milk can be created as opposed to fuel should make the supply side of the equation the larger side and lower the price – also the fact that milk has a much shorter shelf life should keep the price low because retailers can’t afford to hang on to it? Shouldn’t it? Milk is expensive – it’s about $2 a litre if you buy it from a servo – and around $1.25 from a Supermarket – it can’t cost that much to produce – all you need is a cow and some grass – I assume too, that a cow, being an appreciating asset (as long as it’s getting fatter) has a net cost of zero to the farmer.

It can’t possibly cost more to squeeze a cow’s nipple than to extract crude oil from the ground and refine it into petrol. Isn’t part of the deal with oil pricing that there’s a central pricing body who make the call based on available supply, future supply and market conditions? Surely milk has an almost infinite future supply and ample current supply, and pretty consistent, steady demand. Unless there’s a sudden spike in demand for milk products like ice cream and milkshakes… There shouldn’t be any inefficiencies in its production created by fluctuations in the market and it shouldn’t cost more than petrol.

Its carbon footprint is an issue because Cows produce methane so I guess emissions trading will also impact on milk pricing.

Ben says I have it all wrong:

“Cows apparently cost a lot to upkeep. Cows also are relatively labour intensive per litre. Milk requires handling up to health and saftety standards, specific packaging, refrigeration. sure, pumping oil out of the ground is expensive, but they can pull out a million litres with only a few personnel and throw it in a ship and take it places. Sure it has to be refined, but i wouldn’t be surprised if fuel refinement is about on par costwise with milk refinement, if not cheaper.”

Not content to let my research die at a secondary source – I decided to pursue details from the primary producers. I found the following:

“Milk prices paid to farmers are determined on the basis of milkfat, protein and volume:

Payment = milk fat ($/kg) + protein ($/kg) – volume charge (c/L)”

According to the current figures Milk farmers receive about 44c per litre of milk – and $5.80 per kilo of Milk solids (milk fat and protein). I’m not sure why the volume charge is subtracted… but that’s a separate issue. Milk it seems costs 44c per transaction in the initial purchasing stage. It must then be processed, bottled, and distributed to the retailer.

Milk prices, assuming you haven’t visited that link above, are set to rise this year due to the following factors:

“The Australian Bureau of Agriculture and Resource Economics (ABARE) expects that milk prices will continue to rise through to 2008-09 (Outlook Conference, 2007):

  • High prices in recent years have been driven by constraints to growth in the three main exporters (EU, NZ & Aust.) at a time of rising global demand
  • The current drought in Australia will limit total production in 2006-07 and 2007-08
  • Poor seasonal conditions have also been evident in New Zealand
  • There has been heat and drought in the EU, and CAP reforms have reduced incentives to produce milk
  • On the other hand increased supplies are expected from emerging exporters such as Argentina and the Ukraine, while China’s dairy production (mainly for domestic consumption) continues to rise”

This UK site estimates average cost per litre of milk at about 13.7 pence per litre – that’s not taking into account the milk solid production.

Costs of production of milk are actually decreasing. And the average Tasmanian cow (which I assume is similar to the average Australian cow) produces 386kg of milk solids – and each cow produces about $1,488 worth of milk and milk solids while costing $1,196 to maintain (on a 250 cow farm).

So, that’s all quite long winded – but basically the farmer is selling the milk at 44c per litre – and being looked after in the process. The extra 80 cents (at least) is being added by the retailers and others. The government currently levies 11c per litre – but that’s all set to change. Good to see the Rudd Government doing something about this issue.

The whole debate (in my mind) centres on whether the production costs of milk and petrol are comparible – I am assuming that the transport/bottling/refining costs are within the ballpark of each other – refrigeration should be cancelled out by the distance fuel is transported etc…

So these guys put the average price of production of a litre of fuel at 25-50c. Another UK site suggests the cost of producing fuel accounts for about 32% of the total cost per litre. The cost of production of a litre of milk accounts for about 35% of the total price based on the regular retail price of $1.25 per litre. So it’s Servos that sell milk for $2 a litre or more that are really jacking up the price – and for this they should be held accountable. The figures don’t lie. Milk is where the Service Stations are guilty of price gouging.

Unfortunately I promised Paul I’d only make interesting posts after he added me to his RSS reader. I lied.

November 18, 2008