Milk prices on the up – supply and demand

With the start of the academic year in New Zealand the first week of teaching usually looks at the price mechanism and scarcity. A good example in the NZ economy is the reasoning behind the payout that Fonterra pays its farmers that supply them with milk. Fonterra is a monopsony (they have approximately 81% share of the NZ dairy market) in that it is one buyer and many sellers (the farmers) – the farmers look to Fonterra to get them the best price in the Global Dairy market. Fonterra has indicated that the price for the current 2021/2022 season is going to be between $8.90 to $9.50/kgMS.

The mid-point is $9.20/kg and at that level it will be paying out New Zealand suppliers $13.8 bln – see graph below. Ultimately the price of the Fonterra payout is determined by supply and demand on the Global Dairy Trade auction – see below.

Why have prices increased?

Supply – there has been weak production in New Zealand and overseas with poor weather with challenging growing conditions and higher feed costs. Fonterra lowered its forecast on the amount of milk collected by 1.6% – 1,525 million kgMS in 2020/21 to 1,500 million kgMS in 2021/22. A lower production outlook for Europe and North America has increased the forecast milk price.

Demand – demand globally remains strong with North Asian buyers securing over 50% of the total volume sold in the recent Global Dairy Auction. According to the OECD the world per capita consumption of fresh dairy products is projected to increase by 1.0% p.a. over the coming decade, slightly faster than over the past ten years, driven by higher per-capita income growth. Today total dairy consumption in Africa, South East Asian countries, and the Middle East and North Africa is expected to grow faster than production, leading to an increase in dairy imports. As liquid milk is more expensive to trade, this additional demand growth is expected to be met with milk powders, where water is added for final consumption or further processing.

How does the GDT work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

Sunday Bazaar in Karachi

BazaarMany thanks to past student Shelalé Mazari for an article in The Express Tribune on the Sunday Bazaar – one of the largest thrift markets in Karachi. Essentially a flea market there is a section know as Lunda which is home to some of the most convincing new, used and defected designer items from across the world – Louis Vuitton, Prada, Coach, Gucci, Michael Kors etc. There are four main sections: new and used bags, new and used shoes, cheat perfumes and cosmetics, and hair appliances. To give you an idea of prices: LV bag is between $1,200 – $4,000 normally but in the market it sold for Rs1,200($20).

The bags are from China but they appear authentic: some inner pockets even carry the brand envelopes and cards found in originals. Stall holders said that they get these bags from containers that come into port from America, China, and France. Some private dealers do the initial sorting and take the best of the lot before others are allowed to even look at it.

The stagnant global economy

Tyler Cowen, author and of the blog Marginal Revolution, recently suggested that the world economy needs the transformation that was apparent in the postwar boom – the industrialisations of inventions. He refers to it as:

The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.
He suggests that productivity advances are occuring but are in the form of:
1. laying off workers
2. moving their production to countries where the cost structure of producton is much more advantageous.

It is imperative that innovation is exploited as it is the driver of economic growth. According to Will Hutton in the Observer the technologies that once created a significant number of jobs are not now prevalent in society. The growth of some industrialised countries has been disguised by the credit boom starting with the Big Bang in 1986 – a huge number of jobs were created in the financial services sector.

The phrase Big Bang, used in reference to the sudden deregulation of financial markets. The day the London Stock Exchange’s rules changed, 27 October 1986, was dubbed “Big Bang Day” because of the increase in market activity.

However job growth in this area cannot be maintained and this is apparent with the amount of debt that a lot of countries are now carrying. The world has embraced the free market and the consensus has been that governments fail and markets succeed. Nevertheless future growth of the world economy will be determined by innovation and invention, something that is too important to be totally left in the hands of the market.

America’s 21st century replacement for Standard Oil, General Motors and IBM

A hat tip to colleague David Parr for this super piece from ‘Madison’ magazine. In the 20th Century Amercian business was symbolised by the likes of Standard Oil, General Motors and IBM. But in the 21st Century it is Apple that has flown the “Stars & Stripes” in the business world by making imaginative and productive products for its clientele. These products have subsequently improved their own effectiveness in everything they do whether in business or leisure.

Apple is a classy product and as a Mac user I would tend to agree with John Roach (Madison magazine) that Apple has shown immense creativity and originality in its products. The driver behind the comapny as you know is Steve Jobs and I do recall an interview with John Sculley (former Apple GM) when Steve Jobs lured him from his role as GM of Pepsi. Typical Jobs rhetoric summed up Sculley’s lack of ambition at the time.

“Do you want to sell sugar-water for the rest of your life or do want to come with me and change the world?” Sculley gulped (not on his pepsi) with the ambiton and drive of Jobs and subsequently went on to work for Apple.

One would think that Apple is the best Amercian Capitalism has to offer. Unfortunately America cannot compete in the production possibilities of China but it is not productivity that will save the US economy but innovation and willingness to challenge the boundaries. Apple has these attributes. Click here to see the full article

Freakanomics lecture by Steven Levitt

This was a lecture given at the TED conference in 2004 by Steven Levitt of the University of Chicago (one of the authors of Freakanomics). He gives an inside look into the economics of a drug selling gang. If you have read Freakanomics you will recall the material that he discussed in the book. However Levitt is quite witty in his presentation and produces some very interesting statistics. Worth listening to.

Price of beer in Berlin bar

In the back of the Berliner Republik bar on the banks of the river Spree, Matt, Otto and Christian’s eyes are fixed on a screen in front of them. The names and prices of 18 German draught beers flash up, bright green on a black background, and change every few seconds, according to who has ordered what.

It’s a pub game for the modern age, based on supply and demand. The trick is to buy the beer cheaply and then give yourself a pat on the back when demand pushes the price up.

“It gives a bit of a risqué edge to ordering,” says Otto, a graphic designer. “But it also makes you feel strangely vulnerable.”

Click here to read the rest of the article from the Guardian Newspaper