Wednesday, 29 January 2014

Economics for hamsters

This cute little animation is doing the interweb rounds (again - he's a few years old now!). Baby hamsters double in size every week until puberty, but if they kept doing that they’d end up consuming everything the whole world produces. In nature, there are limits to growth. So why do most economists think economic growth can continue forever, and ever, and ever? 

So intones the voice-over, encouraging the vilification of economists. Well here are a few responses from an environmentally minded economist.

First, economics is a diverse profession, not a cult. Check out the membership of the Club of Rome and you’ll find quite a few economists. Or dip into some of the economic research on limits to growth, like these papers by Nicolas Kaldor and Nancy Stokey. Just please don't kid yourself that constraints are a foreign concept to economists. 

Second, composition matters. The economy is not a single thing (like an ever-growing hamster) but a complex web of interactions many of which are neither measured nor priced. Nature is like this too, and in fact there are strong connections between economics and evolutionary biology. Yes, this stuff shows us economists learning from those biologists rather than the other way around, but let's not pretend there is no learning going on.

Third, what are you going to do about it? Orthodox economics already points towards the most (only?) effective policy response to environmental and resource constraints, which is to price them properly. Put another way, assume that the hamster is correct and economic growth has to slow or stop. How, practically, can/should that outcome be forced?

Fourth, some things that cause measured economic growth also ease environmental constraints. Biological farming for example is more profitable and better for the environment. Some renewable energy developments are in the same category. And there would be much more of this kind of thing if the advice of economists to price environmental and resource constraints (#3) was more widely accepted. 

[Update 31/1] Not all things in nature have this hamster property. Trees, it seems, keep right on growing fast.

Tuesday, 28 January 2014

Defining the meat sector problem

The Feds have taken an important step towards a more open-ended debate with their meat sector options paper. For a newbie like me, there is a lot of really interesting background, and while I would argue with many of the options, that is perhaps the whole point and benefit of the paper.

Before we start though, could I ask a stupid question? What is the problem we are trying to solve?

It’s obvious that the processors are hurting, but why exactly? The processors are just intermediaries between farmers and the final markets, so what exactly is stopping them from managing that role efficiently?

The Feds and others point to bad situations in the markets used by processors, on both the input and output sides.

·         Procurement competition drives up the price of inputs (stock); and
·         Something ill-defined screws them over when they sell the meat.

It seems that these two markets hold the key to solving our problems, because they control the fortunes of processors, and processors are actually the problem.

This is why procurement competition is bad: it is bad for processors. It’s certainly not bad for farmers. We are the ones holding the whip in this situation. That is why I struggle to understand reports that cite “procurement tension” as a problem.

Let us have that debate please. Farmers currently have market power over processors. Why should we give that up? While this seems a very fair question, there is also a risk that it might have been distracting us from the main opportunity, which lies in the foreign markets we serve.

Unless we (NZ) can develop a workable plan for getting more value from our customers, then all of these reform debates are doomed. We will just be squabbling over how to divide a given sized pie between farmers and processors, which is a recipe for years of bitterness and hatred.

So let us focus for a moment on the upside potential and ask: what is the barrier to it?

There seems to be a view that the output markets could be much more valuable if we had direct marketing links as close to the final consumer as possible. That sounds very plausible indeed to this economist.

If this, or something like it, is a genuine possibility, then figuring out a way to grab it seems like a strong contender for the #1 problem facing the sector.

It is notable that these high value final customers we are after want something that NZ meat farmers are not supplying: a steady flow of product.

The chilled product category is worth a good deal more than frozen meat, but obviously it requires a year-round supply. Constant product flow would also be a big help to processors because they could adjust their factory scale and keep plants operating all year.

The highly seasonal flow of animals off farms stands in very stark contrast to what our preferred customers want. The chart shows what we all know: this is (currently) a seasonal business.

NZ monthly meat & cattle slaughter numbers (Source: MPI)

Is this the opportunity for the industry? If those seasonal profiles could be flattened out and if everything was then exported as chilled product, the red meat sector “pie” might be much larger.

For this to actually be a good idea, the extra revenue will need to be enough to buy steady stream of animals from farmers. We don’t all need to supply animals every month though. Different farmers could specialise in supplying animals at different times of the year.

One thing is clear though: processors will need to offer contracts that pay enough for farmers to get this flat supply profile lined up. A different type of procurement is needed, focused on forward contracts rather than what the Feds call the “Sunday night auction”. But it is no less competitive, because farmers still have lots of options and processors still need to fill their plants.

In summary, it seems to me that the “meat industry” problem is really the processors’ problem and the solution is in their hands. They need access to higher value markets, and they probably also need a smooth flow of product from farmers. Procurement competition isn’t going away any time soon and processors should be designing forward contracts that are attractive to farmers. 

[This was a repost from today's edition of the Straight Furrow]

Monday, 27 January 2014

Quality of life counterfactuals

I've been off the air for a bit because my dad is nearing the end of his days. He will certainly never again play No8 for Canterbury or ford the Rakaia up near the glacier and then walk over the Whitcombe Pass. In fact, a week ago he appeared to be "actively dying" (which is apparently a thing) so there has been a clan gathering this last week.

Medical intervention and quality of life become big issues at such times, and paternal responsibilities are
reversed. Basically, whanau end up making plug-pulling decisions, so their quality-of-life perceptions get a fair bit of weight.

The counterfactual (what would happen without action x?) is critical to weighing these things up, but the facts can easily obscure our understanding of the counterfactual.

We naturally compare the patient to person they previously were, and relative to that counterfactual my dad's physical and cognitive capabilities are much reduced. That's a pretty low hurdle though. Most people over 70 would be in or near that category, and many of them are fine, so "diminished capability" probably isn't the best way to think about this.

I think the right question is whether he wants to keep going or not. In our case, that's not entirely clear because communications are not flash. But its still the right question.

Saturday, 18 January 2014

Three things I learned this week

1. Not all NZ meat companies are in trouble. ANZCO foods is doing fine, and co-incidentally seems to be playing the strategy I discussed on Monday

2. Its wrong to treat voters by throwing them a big party, but its OK to oblige a few really rich voters later on.

3. Australia has surged to the top of the international table for mobile broadband penetration, with a score of 117% while NZ chugs along in the pack around 80%.

Wednesday, 15 January 2014

Trojans at the terminal

The cost structure of PayWave cards hit the mainstream news yesterday. Its a good piece but there is also a fascinating story about business models in here.

PayWave is Visa's version of what is known in the trade as "contactless" technology. MasterCard calls it PayPass and uses the All Blacks to advertise it. Contactless functionality can be linked to either a debit or a
credit account and the new scheme (i.e. Visa or MasterCard) debit cards all have it installed.

NZ is a challenging market for Visa and MasterCard because we have a stunningly efficient and very widely used EFTPOS system. This system was genuinely world leading. It is the reason NZ is the most intensive user of electronic payments in the world. The EFTPOS system is owned and operated jointly by the banks and was developed with the aim of saving them money. It does that in two ways: by reducing cash handling at bank branches, and by inducing people to leave cash in call accounts that pay little or no interest.

Because of EFTPOS, the big card schemes have been mainly limited to supplying credit cards here, even though they also make good money supplying debit cards in most other countries. What to do?

Answer: break down resistance using the old Trojan ploy. That needs to happen on three different fronts (this is a platform business). To keep the merchants happy, it was agreed to charge no fees when scheme debit cards are used like an EFTPOS card (i.e. swiping the card through a terminal at the merchants place). What about getting the banks on-side in a situation where there are no merchant fees available? The details are secret but basically a deep-pocketed card scheme can fairly readily find ways to make a banker happy about issuing its cards.

All good so far. Now to get cards into the hands of consumers. This has been a pretty easy sell: would you like to keep your crusty old EFTPOS card or take one of these cool new scheme debit cards that is accepted everywhere and you can use online, for only $10/year? At this point, getting on for half of the population has said yes.

But the card schemes still aren't getting fees from these new cards. There are two ways around this. One is to wait until EFTPOS is marginalised a bit more and then start imposing merchant fees on debit cards. That might still happen, but in the meantime, technology has come to the rescue in the form of contactless cards. By providing a bit of extra functionality, the barrier to merchants paying fees falls a bit. All the better if new terminals are contactless-enabled by default, as they are.

Its all very clever stuff, but the merchants are obviously not happy, and with good reason given the level of fees being charged on what was previously an EFTPOS transaction. This is only heading in one direction though, as more and more people say yes to that cool new scheme debit card and consign their EFTPOS cards to the rubbish bin.

One final point. There is no official oversight of this stuff in NZ. There are three organisations that might be thought responsible: Payments New Zealand, the Commerce Commission and the Reserve Bank. They all think its someone else's job. That's kind of true except for the Reserve Bank which in my view is ducking its statutory responsibilities, but that's another story.

Monday, 13 January 2014

Sunday night meat markets

The Feds' meat options paper (pdf), released on Friday, offers plenty of helpful discussion of industry problems and outlines some possible directions for reform. But I'm still very puzzled.

As I've said before, it's the processors that are really hurting in this sector. Farmers hold the whip hand because there is excess processing capacity. The Feds agree, pointing to the "Sunday night auction" where farmers call around to get the best stock price for the week.

You might think that farmers' advocates would be keen on this state of affairs, but wrong, totally. Procurement competition is most definitely a Bad Thing, for some reason.

Industry insiders must know that reason, because procurement competition (farmers having market power) is commonly cited as a problem. The rest of us are guessing.

The underlying economics looks like this.

  • everyone (potentially) gains if the marketers can tap some higher value markets
    • but those markets require a steady stream of product
  • processors would also prefer a steady stream of product
    • better capital utilisation
  • but unfortunately farmers are geared towards seasonal production that depends on uncertain weather/climate patterns

When the industry leaders say they hate procurement competition, I think perhaps it's really the absence of term contracted supply they hate, rather than the Sunday night market as such.

The Sunday night auction is a kind of spot market, though it sounds pretty informal. It serves a useful function and seems to have arisen spontaneously, which suggests that its enhancing efficiency. My inclination would be to enhance it rather than chastise farmers for using it.

But that's irrelevant to the main issue, which is persuading farmers to supply a nominated number of animals in a nominated week. That looks like a purely commercial challenge to me. Design a contract that pays farmers enough to get committed supply at a nominated time, which of course means paying more than farmers expect to earn on the spot market. Line up the buy and sell contracts and you're away.

So again, I'm really struggling to see how this is the farmers' problem. Yes, the hoped for solution will involve different behaviour, at least by some farmers (contract rather than spot supply). But why isn't it the processors that should be responsible for designing and offering these new contracts? And perhaps most critically: what's stopping them from writing those contracts now?

Wednesday, 8 January 2014

Reading the GM tea leaves

It is starting to look as though the GMO industry, having been armed to the teeth by a lax regulatory regime in the USA, may have shot itself in the foot. If so, some firms are heading for a very painful lesson on the dangers of having your wishes granted.

First a brief background. The GMO industry is headquartered in the USA where the regulatory framework is largely voluntary. This hands-off regime can be traced back to 1984 and it reverses what was previously a very cautious approach. It is based on the view that there is nothing special about the process of GM (despite the outputs being patentable) so one should just look at the product. 

Shimoda(pdf) reports key features of the US regime. Developers voluntarily "consult" with the FDA, design their own safety studies and are allowed to keep them secret. The FDA does not approve the safety of GM crops, does not have mandatory testing protocols for the safety assessment of GM derived food, and does not require long-term safety testing. 

What could possibly go wrong with this terrific spur to innovation? Three things, according to Shimoda, who as an active investor should know. In no particular order they are
  1. Complexity. It turns out that genetics is much more complicated than was realised 15-20 years ago. The great hopes of drought resistance and more nitrogen efficient plants are basically pipe-dreams at this point. Worse, getting beyond simple stuff like herbicide resistance is now recognised as carrying a significant risk of unintended consequences.
  2. Nature. If you keep spraying weeds with Roundup they become resistant to it, so you need a lot more Roundup which makes farmers start wondering why they are playing this silly game. Oh, and your crop doesn't grow so well either, because Roundup is nowhere near as benign as we have been led to believe.
  3. Preferences. As the ongoing calls for transparency over food contents grow louder, the GM industry finds itself defending the indefensible, which makes it look defensive, which makes consumers wonder what they're hiding, etc, etc. 
That's a killer list when you think about it: there are quite serious problems with the technology itself, and with both the supply and demand sides of the final markets for the output.

Shimoda argues that the industry needs to take a good hard look at itself, become much more transparent and honest with consumers, and try to work with nature. The whole slide pack is worth reading - its a major wake-up call from a deeply embedded insider. 

With this view in mind, the recent HardTalk interviews with Syngenta CEO Mike Mack (pt1, pt2) are very interesting. Mack starts by downplaying Syngenta's GM business, noting they do lots of other stuff as well. He also admits that that GMO crops lead to increased herbicide use, and says he could live with GMO labelling laws. The only time he gets really excited is when defending a class of insecticide he sells. 

To my eyes, its quite believable that Mack has heard the wake up call. In fact, his very presence on that show could be seen as an attempt to tackle problem #3, the tricky task of changing consumer preferences. 

Anyway, these issues will no doubt get more difficult over time rather than less, but its interesting to get a bit of a look at how the insiders see things.

Tuesday, 7 January 2014

It might be working

It has been a great season for dairying around our way, so there must be a good chance that the weather is the full explanation. But while some farmers are still short of grass, for the first time in 5 seasons we are growing cow food like crazy, including large amounts of clover. This is just one year after starting our new fertiliser system. So we are starting to think we might be on the right track.

Just a quick bit of background. We were new to dairying 5 years ago but have been interested in natural farming forever. We started out doing everything "by the book" as relayed to us by farm advisors and fertiliser company reps. Suspicions arose early (eg no lime was recommended) and we started educating ourselves. Our current system borrows from lots of sources. We shop around for supplies rather than "work with" any fert company rep. Details below.

Monday, 6 January 2014

Leaving money on the table

A theme emerged while hanging around with SME-runners over summer. Some customers need re-education, or sacking.
  • The one who is always asking for a discount
  • The one useless or cunning enough to only show up with super-urgent problems
  • The possibly likeable customer who is so demanding you could never profitably serve her
Whether its conscious or not, these people are really a pain because they leave little or nothing "on the table". The counter-party ends up feeling screwed over and wishing they'd never engaged in the first place.

This kind of penny-pinching might seem like shrewd business practice, but its really nothing of the sort. It displays a mean spirited attitude that ends up biting back, even if the fools don't ever realise it. These people tend to be untrusting, because they expect others to be selfish like them. And if you never trust anyone, you have a massive cost burden with all your monitoring and checking up.

So here's a thought for 2014: leave a bit on the table for others, and avoid those who don't.