Repercussions on Raising Prices for Commodities.

January 19, 2007

 

O son of man! If thine eyes be turned towards mercy, forsake the things that profit thee, and cleave unto that which will profit mankind. And if thine eyes be turned towards justice, choose thou for thy neighbor that which thou choosest for thyself.

 

Bahá’u’lláh

We have been learning how the power of the market affects supply and demand. We have also see how Fair Trade may be utilized to raise the price of a commodity, like coffee or chocolate. But what happen when the price of a commodity rises naturally because demand raises? Since the price of oil has been in all times high, the ethanol is now being using as an alternative to produce fuel. Ethanol happens to come from yellow corn, which also may be used for human consumption. The pressure over the demand of ethanol has made the price of corn raise:

Supply and Demand IV

This should be good news. The ecologists should be happy because a renewable, less pollutant material is being used to fuel cars. Fair traders advocates should be happy because corn farmers have now increased their income.

But that is an incomplete point of view from the westerns.

In Mexico, Corn is used to made tortillas. Tortillas are not a simple food sold in fast food restaurants; it’s a basic food and part of that country’s culture. According to the National Institute of Nutrition, 40% of the poorest families get 50% of their calories from tortillas. Tortillas are basically mashed corn, no other ingredient but water is used. Last year, the price of a kilogram of tortillas was 60 cents (USD), then it was raised to 80 cents, but in January the Mexican Government announced that no further subsidies could be given to the tortilla, and the price for a kilogram was set at $1.60. In a country where the minimum wage lays between $6.00 and $8.00 a day this is nothing more that a national tragedy.

Thousands of families are being affected by the raise of the price of corn and tortillas. Then, chickens eat corn, so the price has been raised for eggs and poultry. Now the food in Mexico is more expensive than in last November.

Economic law dictates that the higher price of corn will be an incentive to corn production, but the Mexican capacity of cultivate more corn is limited and close to its edge, so they need to import more corn from the United States, where corn farms are hardly owned by small farmers but huge multinationals using pesticides and genetically modified corn, which is forbidben in Mexico.

Some producers thus have been beneficiated by the high price of corn, but the vast majority of Mexicans now will have to work more to have food in their table.

An unthought consequence of higher prices on commodities!

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Why to Appeal to Economics and not to Good Heart

January 16, 2007

We have always known that heedless self-interest was bad morals;
we now know that it is bad economics.
Franklin D. Roosevelt

I saw Serenity the other day, a Sci-Fi movie where there is a Galactic Empire (where do I heard that before?) called The Alliance, and a bunch of outcasted rebels discovered a video which proves that, in its efforts to keep people calmed, the government’s scientifics have developed a gas that either make you calm, so calm that you leave yourself to die, or so violent that you deform yourself and go thought the galaxy eating mortals. Our heroes try to reach a broadcasting post where they hope to deliver a message, only to find that one of the government’s minions is waiting for them. After a fierce, guts-all-over-the-place battle, the minion watches the video and is quickly converted to the rebel’s side, letting them broadcast the message and joining the revolution. At the end we understand that the government has been seriously weaken by the diffusion of the message and public’s opinion now has shifted in favor of our heroes.

The sad part is that in reality, such a scenario will never happen. The majority of people just don’t care enough to actually fight for something they may believe. All America went to war against Iraq because they had weapons of mass destruction and because former President Saddam Hussein was linked on people’s minds to the attacks of the World Trade Centre and Pentagon. When it was obvious that everything was a lie and Bush Jr. just wanted to finished what Bush daddy was incapable to do, Where were the protest, the demonstration against the war? Are people now convinced that the war was unnecessary? Are we going to see George W. Bush judged for crimes against humanity, which already cost 3,000 American and 20,000 Iraqies lives? Not in our life.

When it was obvious that the CIA assassinated Salvador Allende in Chile, was Pinochet removed from the power and judged for its crimes? No.

In the same manner, if you ask people if fair trade is good they will answer yes, but when you try to make them pay more, they likely will run to the next Wal-Mart to profit on the low prices.

Dr. Ken Peattie, from Cardiff School of Business, made an excellent study about the green consumer. In previous posts I have shown how fair traders rely upon the green consumer a lot, and in the goodness of the heart of people. While is nice to think that consumers are going to buy green products by the sake of environment and social issues, the wide majority will not. It doesn’t matter how much you broadcast the message. It is not a question of people not caring. It’s a question of people not caring enough.

I am not cynical about the situation; while I hope that more people get involved in social matters, the only way to make fair trade and other similar initiatives successful will be using common sense and basic economic law. When it will make economic sense to do what is right, the rest will be done by addition. Ethel Barrymore stated that we must learn day by day, year by year to broaden your horizon. The more things you love, the more you are interested in, the more you enjoy, the more you are indignant about, the more you have left when anything happens. While we wait to people to be more enlighted, let’s work for justice following common sense and economic tradition.

UPDATE: Jorge has posted a comment that will cast more light on this subject


Introduction to Fair Trade

December 8, 2006

It hit me very early on that something was terribly wrong, that I would see silos full of food and supermarkets full of food, and kids starving. … In Fair Trade, we see ourselves as this infinitesimal part of the world economy. But somebody’s got to come up with an alternative model that says children eating is No. 1.
Medea Benjamin, co-founder, Global Exchange

The Second International Fair Trade Colloquium held on June 2006 at the UQÀM in Montréal posed the following questions:

· How can Fair Trade remain an alternative that distinguishes itself from conventional trade without bearing the risk of remaining marginal?

· What are the advantages, the risks and the conditions of success for fair trade certification?

· Is it possible to preserve the movement’s values while increasing market access? For example: what are the consequences of distributing Fair Trade products in supermarkets?

· How do Fair Trade initiatives distinguish themselves from other commercial enterprises that have socially responsible and sustainable policies?

· What influence has Fair Trade had on the institutional context and practices of traditional business enterprises?

· Does Fair Trade improve the living conditions of producers?

· Does it contribute to sustainable development?

· What is Fair Trade? What should it be?

Paul Rice believes that companies will find that Fair Trade is good for business; and they will grow fair trade product lines out of self-interest, rather than pity for the growers[1]. I will propose that since the current focus is to sell and to buy fair trade products as an act of conscience, it is still the pity for the growers that impulse the movement.

Some of the 25 million farmers, with less than 25 acres, depend on coffee for their livelihood. Coffee is 24% of total exports from Honduras in 2000, 43% from Uganda and 54% from Ethiopia[2]. The price of competition is driving a lot of people out, in Central America, an estimate of 200,000 permanent workers and 400,000 seasonal workers have lost their jobs. In the other hand, coffee employment have rise in Vietnam from 300,000 to four and five million today[3].

Fair trade coffee claims now only 1% of US retail market, while in Europe, where the movement have existed longer, the amount is 5%.[4]


[1] Paul Rice profile, http://www.transfairusa.org, retrieved on May, 2006.

[2] Oxfam, p. 8.

[3] European Coffee Federation, “ECF Comments on Oxfam ‘Make Trade Fair’ Campaign,” pamphlet, p. 2.

[4] Brink Lindsey, “Grounds for Complaint?”, Adam Smith Institute, 2004, p. 7


Stakeholder Analysis

November 10, 2006

As you see yourself, see others as well; only then will you become a partner in heaven

Bhagat Kabir

When you are performing an economic transaction they are usually two players involved, the seller and you, the buyer. These two players are, though, not the only ones involved. You have the producer of the good or service you are buying, the organization it comes from, the bank that may be involved in the economic transfer, et cetera. A stakeholder analysis is a tool that uncovers all the entities involved in that transaction, and it is very useful to understand the chain value that is necessary for making the product or service available to you.

In my last post, I mentioned that Wal-Mart is dumb-folding at least three stakeholders in order to offer a lower price: The store employee that is being paid minimum wage and has no a full time position; the producer that is forced to serve Wal-Mart with lower-than-usual prices, to deliver directly to the racks and to keep inventory. It is also profiting in the low wages of the people who manufacture or produce the good; remember the Buy American campaign? Now Wal-Mart is the larger commercial partner of China. Competitors are other stakeholders hurt by Wal-Mart trawling tactics, often put to sleep after several months of mammoth operation by the super retailer.

A common stakeholder analysis includes, at least:

  • Producers
  • Retailers/transnationals/brokers
  • Consumers
  • Competitors
  • Government
  • Workers
  • Environment

A more deep analysis will also reveal:

  • NGOs and other community organizations
  • Schools
  • Community

These are the actors involved in every transaction you made. Think of them when buying the next product that may be gentle with your wallet but hurt the trees on the park where you children play.


The True Cost of Production

November 3, 2006

 

Designing your product for monetization first, and people second will probably leave you with neither.
Tara Hunt

Let’s go back to the supply’s graphic. We mention earlier that there is a minimum price that the producer will ask in order to start offering the article or service that will cover the costs and yield a profit and a maximum quantity the seller can offers due to installed capacity and other variants:

sdpic4.jpg

The start point here is how the seller calculates the minimum price. By seller I mean the industry as a whole and also a particular seller, this is just an example on how prices are set.

For any given product, you have two different costs: fixed and variable. The former is the cost that exists even if you don’t produce anything: rent, electricity, cost of equipment you need et cetera; the latter is the aggregate cost of producing an article or product: cost of seeds, raw material, variable labour, et cetera. Often these costs may blur, like management salary, or the cost of a marketing campaign, the important thing is that these are the common two divisions of cost that accountants and financial managers know well.

For producers, labour (including management wages) and raw materials are usually the main cost they use on calculations. When you go to Wal-Mart and buy a cheap product, you should know that the product is cheap because Wal-Mart has either a low cost on raw materials (lower quality materials) and also a lower cost on labour (part time employees that don’t receive benefits and work for minimum wage), so Wal-Mart is able to offer you a low cost at expenses of other stakeholders’ benefit.

Stakeholder is defined as an entity that is affected by a process. In any productive chain, usually you have as stakeholders: The Corporation, the government, the customer, the worker and the environment. I will next post a more deep analysis on stakeholders, but for now is important to know that all these entities are affected by any productive chain.

So, how is the price set then for a given product?

P= fixed cost + variable cost + possible profit

For retailers, like Wal-Mart:

P= Lowest possible fixed cost + lowest possible variable cost + maximum possible profit

For retailers like Ten Thousand Villages:

P= fair fixed cost + fair variable cost + fair profit

The last question should be then, what is a fair cost? Francisco Van Der Hoff, in the Congress of Humanity and Social Science at York University (Toronto) stated that the cost of producing any product is composed of three elements:

· True cost of production. This means not only the cost of the raw material, but also the land, salary of workers, and opportunity cost of growing a product instead of another.

· Social cost: The impact and repercussions for the worker and his or hers surroundings like education for children and hazardous working conditions.

· Environmental cost: The cost of soil degradation, fertilizer poured in the land and hazard to the ecosystem, et cetera.

So, next time, think twice before buying a cheap product that may be done at the expense on somebody else’s quality of life.


Green Supply, Green Demand

October 19, 2006

Non Sequitur

<>We continue now with my analysis on the green consumer, because we look after creating a market for green, social conscious products. It is imperative that we understand that, in the demand-supply equation, the most important part is the demand.If you have a town of 300 people and all have two eggs for breakfast, then the demand is 600 eggs daily. If you have then 1,200 hens producing 1,200 eggs each day, there is no way you can accommodate the extra 600 without great effort. Even if you reduce the price by half, people is used to eat two eggs per day and that is it. This is why companies spend so much in marketing, because no matter how big is the supply, if the demand only accomodates some of the products, the rest are not going to be allocated.

Marketing then can be used to push products like Coke or Nike, which are things we really don’t need. Marketing cannot create needs, but it use the ones that we already have to try to sell products that we don’t really need. Marie Sherlock has written an stupendous book, Living simple with Children, denouncing such practices.

But Marketing can also be used to promote social conscious and green products, as I proposed in my last post. But we have to be very careful of not overstate the power of the green consumer. People tend to say whatever in polls and then behave in a different way; we can ask Would you buy a product that protects the environment? and almost everybody will say yes, the same way they will say yes to Would you renounce Satan and his allies? but that doesn’t mean they are ready to come with the extra cash needed to buy a given product.

K. Peattie (2000) proposed that even green consumers are unwilling to pay a premium on products[1]. Elkington and Hailes (1998) divided the green consumers in several ways[2]:

  1. A consumer that may rush away from products with strongly negative socio-environmental impact.
  2. Consumers that only react when a big hazard takes place, like an oil spill or massive extinction.
  3. A vast group that only use the environment as a “tie-break” between brands when all their requirements are met.
  4. “Ultragreen” segment that consistently discriminate in favour of the environment.

According to Peattie, the results of trying to tie any social, economical or demographic factor to green consumers have proved inconclusive. No correlation between sex, age, level of education or other factor used by market analyst has result in finding a key element that discern a green consumer[3]. Drucker even estates that all consumers are green consumers because when faced with a choice of identical products but one is environmentally friendly and the other no, the public will opt for the first one[4].


More studies on consumer behaviour conclude that the consumer concern about the environment must be overstated since there are not changes in the actual consumer behaviour[5]. Studies from academics and market research has shown that high levels of consciousness are not necessarily reflected in changes of purchasing behaviour[6]


There is a limited market for politically motivated purchasers that will be willing to pay a premium. The same is true for organic products or shade-grown coffee. Only a few percentage (that is very variable from country to country but not surpass 5%[7]) will buy a product because they agree on how it’s made or the worker’s labour conditions; the majority of consumers will buy a product on the basis of the price and the quality –how it tastes, how it looks-[8]

So, the smart socialist must find different ways. We will look at them .
NOTE

If some of you are wondering what happened to the lady that was evicted from the manulife centre, she is now at Bloor and Bay selling Outragous newspaper (a $2 piece of paper that the homeless sell), the only thing a homeless can sell in this city.


[1] Ken Peattie, “Golden Goose or Wild Goose? The Hunt for the Green Consumer”, Business Strategy and the Environment, Cardiff Business School, January 2000, p 193.

[2] Elkington and Hailes, “The Green Consumer Guide”, Victor Gollancz, London, 1988

[3] Ken Peattie, “Golden Goose or Wild Goose? The Hunt for the Green Consumer”, Business Strategy and the Environment, Cardiff Business School, January 2000, pp 189-190

[4] P. Drucker, “The Shame of Marketing”, Marketing Communications, Aug 1960.

[5] Eugene, 1992; Gillespie, 1992, Wong et al, 1996.

[6] Ken Peattie, “Golden Goose or Wild Goose? The Hunt for the Green Consumer”, Business Strategy and the Environment, Cardiff Business School, January 2000, p 191.

[7] Brink Lindsey, “Grounds for Complaint?”, Adam Smith Institute, 2004, p 6.

[8] Ibidem.


Economic Law and the Green Consumer

October 11, 2006

Socialism collapsed because it did not allow prices to tell the economic truth. Capitalism may collapse because it does not allow prices to tell the ecological truth.
Oystein Dahle, former Vice President, Exxon, Norway

The leftist with brain knows that, for having success in the quest of a more equal world, is wise to use the economic law instead of trying to go against it. The rightist with hearth knows that he can still make a wad of cash while making the world a fairer place. Both can use the simple supply and demand law that we have been talking about.

Let’s have a given supply and demand curve for a product:

Supply and Demand

As we saw before, P1 is the current price that triggers demand for Q1 articles. The red square is the total revenue for the sale of the product.

They are some goods that are produced under strict quality controls, not only for the product itself, but also for the working conditions of the workers. The manufacturer/producer complies with environmental concerns, pays well for the job and allow the workers to share the wealth and benefits that the production carries.

Products that have less impact on the environment and follow social standards are desirable, but they are offered at a higher price than their counterparts. The organic products require more attention and are produced in smaller quantities. The fair trade products manufactures pay more to the workers that harvest or produce them and offer better working conditions. The premium can be as high as 200%, so it is hard to compete with the regular products.

So, for two bars of soap, we may have one that is biodegradable and other that is not. The former is $2.00 and the latter $1.00. Which one do you thing the vast marjory of consumers will choose, if the rest of the attributes are equal? The price difference will move most consumers to chose the non-biodegradable because cost half. That is simple and that is the way the world is. We need to find ways to sell the first bar! Enter Economic theory and marketing.

For encouraging people to buy the biodegradable bar soap we have several ways to go, first, we denominate it. We need to make clear that this bar is better than the other one because they may last the same and clean the same, but one is going to pollute the water and the other won’t. That is why Marketers created denomination such as organic, biodegradable, fair trade et cetera. The leftist with brains knows that Marketing can be a tool for promote over consumption but also for promote smart consumption.

So we need to map our target consumers, and studying marketing and sustainability, we find that there is a group called green consumers; the people that are willing to acquire a product that is better for the environment or that pursue social justice for that mere fact. They may not be interested in the cleaning properties or how long does the bar of soap last, but they are interested in the product because it is biodegradable.

There are 4 types of green consumers according on their activism and the willingess to pay more:

Inactive, who only would buy a green or social product if the price and properties are the same that the non-denominational ones.

Latent Greens, who are willing to pay more for the product if the properties (clean power and durability in our example) are the same than the others.

Green Activists, that may not be able or willing to pay more, or to travel the distance to the specialist store where the offer the product, but try to promote the product and try to buy it any time they can, when the budget and the opportunity allow them.

Green Consumer, who no matter what, will only buy the green product.

According to David Wheeler, the green consumers are distributed somehow like this:

Green Consumer

So, by branding our product and certifying it as organic or fair trade, we are pushing the demand for it in the green market, and the effect is, when pushing demand, that we can charge a higher price and still sell more.

Supply and Demand IV
That is using economic law and marketing for social causes! Next time, more on green consumers.