194 (7 January 2015)

Welcome to week 194!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

(2 January 2015): “Good Times Run Out for Sand Producers” (http://www.wsj.com/articles/good-times-run-out-for-sand-producers-1420153520)

——–Oil-industry executives used to acting in response to price changes tend to use the catchphrase, “This isn’t our first rodeo.”  But for the producers of sand used in fracking, price gyrations, especially in the downward direction, are something new.  Prior to the expansion of fracking, “Sand companies’ biggest customers used to be golf courses and glass manufacturers, but the oil boom brought energy clients to their door and new roughly 60% of business is tied to fracking.”  With falling oil prices, “many fracking companies are retrenching—and that is bad news for sand producers.”

********In effect, as the market price of oil falls, some marginal oil producers that use fracking leave the market, resulting in a decreased demand for sand for fracking.  One point that I found interesting in the article involved the speed of response to market changes.  Doug Sheridan, an analyst for EnergyPoint Research, notes that sand companies ought to take their cue from oilfield service companies like Halliburton: “Sitting on your hands and waiting isn’t what the veterans do.”  That, I guess, is the benefit of having been to other rodeos.

********Later in the week there appeared the article “Falling Crude Prices Force Ethanol Makers to Take It on the Chin” [SR](http://www.wsj.com/articles/falling-crude-prices-force-ethanol-makers-to-take-it-on-the-chin-1420238100).  This might equally well have had the title “Good Times Run Out for Ethanol Producers” as it considers the impact that falling oil prices have had on the demand for ethanol and the profitability of ethanol production—they have both decreased.

********Still later in the week we had the news that “U.S. Steel Lays Off 756, Blaming Low Oil Prices” [SR](http://www.wsj.com/articles/u-s-steel-to-cut-jobs-amid-low-oil-prices-1420556069).  This might equally well have had the title “Good Times Run Out for Oil Country Tubular Goods.”  With a reduction in oil drilling due to lower oil prices, so there will be a reduction in the demand for pipes for oil.  Related stories are seemingly endless.

(2 January 2015): “In Belgium, Battle Builds Between Brewers and ‘Beer Architects’” (http://www.wsj.com/articles/in-belgium-battle-builds-between-1420153585)

——–[This is the A-Hed, quirky, article, which is a bit less quirky on this day.]  “A storm in a beer glass is raging in Belgium.  Traditional brewers are sour about ‘beer creators’—Internet-savvy startups who create recipes then employ other Belgian brewers to make the final product.”  Although “contract brewing” has long been practiced in the brewing industry, the rise of the so-called “beer architect” is something different in an industry that has tended to be very traditional in its recipes.  Sebastien Morvan gives voice to this difference when he says, “I want to come up with a new recipe every two weeks, not every 250 years.”

********The rise of the beer architect and contract brewing touches upon some important issues for craft brewing, including the degree of vertical integration.  Traditional craft brewers who control brewing from idea and all stages of brewing, perhaps including distribution, do not appreciate the “fake beer coming on the market.”

********You can view a seven-minute “How It’s Made” video on beer making at: https://www.youtube.com/watch?v=FttkHVBu2IA.  The video is definitely not about craft brewing, as a very large scale Canadian brewer is its basis, but it still provides a glimpse into the stages of beer is made and the role of technology.

(2 January 2015): “Unilever, P&G Try Tweaked Formulas, Higher Prices for Developing World” [SR](http://www.wsj.com/articles/unilever-p-g-try-tweaked-formulas-higher-prices-for-developing-world-1420161406)

——–“For decades, consumer-goods companies expanded in emerging economies through rock-bottom prices and small, affordable pack sizes. . . . But now, with the global economy sluggish and emerging-market sales growth waning for the first time in years, companies are employing a developed-world strategy with their poorest customers: Pack more features into basic products and raise their prices.”  This isn’t always easy.  Samir Singh, the vice president of personal care at Hindustan Unilever Ltd., notes: “Something like toothpaste or soap bars, you would think, where’s the premiumization there? . . . But there is a lot of scope in the future to develop these categories.”  The specific good does matter, however.  “Shampoos and deodorants sell better in  emerging markets than culturally tied foods such as peanut butter and pasta sauce.”  Furthermore, “Personal-care products also carry higher margins and are more receptive to innovations, such as new ingredients or larger pack sizes.”

********A nice example of the plasticity of product and its connection to price, revenue, and profit, and ultimately the invisible handshake, i.e., historical and social forces that affect human behavior.  I.e., if revenue growth is being limited by the number of units sold, transform the product so revenue growth continues.  As the article points out, however, there are cultural limits to the goods that can undergo these transformations.

(2 January 2015): “WNC combats decline of native ginseng” (http://www.citizen-times.com/story/news/local/2015/01/01/wnc-combats-decline-native-ginseng/21165445/)

——–Mark Norwood of Mars Hill University, in Mars Hill, North Carolina has a problem.  He has tried to incorporate ginseng into campus plantings but the plants “tend to disappear” due to their high market value; “Wild ginseng root was going for as much as $1,200 per dried pound last year, with much of the demand drive by Chinese and Korean markets, where ginseng has been valued for centuries for its medicinal properties.”  It is not only in campus plantings, however, where ginseng in disappearing.  Driven in part by reality TV shows such as “Appalachian Outlaws” and “Smoky Mountain Money,” a new breed of ginseng hunter has taken to countryside, people who tend to dig up all of the plants they can find rather than practices such as “taking every fifth plant so that you are not just going in and removing a whole stand” of plants, an approach that would tend to “self-regulate the harvest.”  As a result of less sustainable harvesting practices, “the amount of wild ginseng harvested in in North Carolina has dropped from nearly 12,800 pound [in 2007] to just under 7,900 in 2013” according to the N.C. Department of Agriculture.  At the same time that quantity is decreasing, so is the size of ginseng roots; customers typically prefer “older plants with the really nice, long, gnarly looking root systems.”

********The roles of price and information in harvest (supply) behavior are clearly exhibited in the article.  Chinese and Korean demand, at least in recent years, seems to be somewhat different.  Jim Corbin of the N.C. Department of Agriculture observes that “The market with ginseng in Western North Carolina has shifted slightly in the past few years. . . . We’re getting more of a Korean demand and they prefer green ginseng because they prepare it.  That has increased the desire for people to get out here and get the green material.”  In order to limit ginseng poaching, local authorities have developed a number of alternatives, most recently the use of root dye.

(3 January 2015): “Europe’s Empty Churches Go on Sale” [SR](http://www.wsj.com/articles/europes-empty-churches-go-on-sale-1420245359)

——–Across Western Europe, hundreds of churches are closing or at risk due to plunging memberships, posing a profound question, “What to do with once-holy now-empty buildings that increasingly mark the countryside from Britain to Denmark?”  In Arnhem, Netherlands the Roman Catholic Church has been turned into, at least temporarily, a skate hall.  There is even a “painting of Jesus holding a skateboard.”  Christianity, in particular, is in decline but “Orthodox Judaism . . . has held relatively steady.”  Islam, however, has been growing steadily “amid immigration from Muslim countries in Africa and the Middle East.”  The Muslim population in Europe grew from 4.1% of the population in Europe to 6% in 2010; it is estimated that the Muslim population will grow to 8% in 2030.  American Christians tend to be more religiously observant than those in Europe, but “religious researchers say the declining number of American churchgoers suggests the country could face the same problem in coming years.”

********Entwined in the article is a cultural shift that is characterized by the contested “secularization thesis” (http://en.wikipedia.org/wiki/Secularization).  Given the data above, it would seem that some forms of religious observation are more prone to it than others.  The problem of repurposing structures that are no longer wanted for their present purposes is ubiquitous, but it stands out in greater clarity here because they are churches.  Albert Reinstra, of Holland’s Cultural Heritage Agency, points toward this when he notes: “Every church [closing] is a debate.”

********While reading the article I had a vague recollection of another article about shopping malls that appeared in 2014.  Interestingly enough, on the next day The New York Times published this article: “The Economics (and Nostalgia) of Dead Malls” (http://www.nytimes.com/2015/01/04/business/the-economics-and-nostalgia-of-dead-malls.html).  Perhaps dead malls and empty churches have lessons that can be learned from one another, although the broad factors behind their emergence seem to be different: dead malls seem to have a lot to do with the “hollowing out” of the middle class, i.e., economic forces, whereas empty churches seem to have a lot to do with social and historical forces.  Both malls and churches face a profoundly uphill struggle to turn things around.  That is why repurposing of such properties is so important.

(3 January 2015): “Endangered Species: Young U.S. Entrepreneurs” [SR](http://www.wsj.com/articles/endangered-species-young-u-s-entrepreneurs-1420246116)

——–“The share of people under age 30 who own private businesses has reached a 24-year-low . . . Roughly 3.6% of households headed by adults younger than 30 owned stakes in private companies . . . [compared] with 10.6% in 1989” when the Federal Reserve “began collecting standard data on Americans’ incomes and net worth.”  These figures run counter to “the widely held stereotype of 20-somethings as entrepreneurial risk-takers.”  Possible explanations for this decline include: the larger capital requirements of fast-growing energy and health care businesses; the difficulty that younger workers have had in developing relevant skills and experiences; stiffer competition due to the Internet age; risk aversion; and the falling net worth of households under 30.  In relation to this last point, it is to be noted that “The average net worth of households under 30 has fallen 48% since 2007 to $44,354.”

******** This article provides much food for thought and whets my appetite for a more systematic and comprehensive empirical analysis of business ownership by those under 30.  It is  very surprising article given the huge upsurge of (academic) interest in entrepreneurship and the spread of majors and minors on entrepreneurship, which has been encouraged, among others, by the Ewing Marion Kauffman Foundation (http://www.kauffman.org/).  Related to the article is a recent Federal Reserve Bulletin on “Changes in U.S. Family Finances from 2010 to 2013” (http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf).

********In a somewhat related article, “Young Drive an Urban Rebound” [SR](http://www.wsj.com/articles/young-drive-an-urban-rebound-1420250736), it is noted that “American’s biggest cities have seen a resurgence as employers and residents show a growing preference to live and work in urban areas.”  This seems to be especially true of the young.  “Many experts believe it is a generational shift, in which the children of baby boomers—many of whom were raised in the suburbs—want to live differently than their parents, in walkable neighborhoods full of night life and restaurants.  Others say it is a temporary result of the hangover from the housing bust” and related economic dislocations.

(3 January 2015): “Cities Set to Take Minimum-Wage Stage” [SR](http://www.wsj.com/articles/cities-set-to-take-minimum-wage-stage-1420229294)

********An intriguing article that explores the likelihood of minimum-wage legislation during the next two years at the municipal, state, and federal levels.  It argues that with both houses of Congress having Republican majorities, there is little likelihood of federal minimum wage legislation during the next two years.  Given that there are no state elections during 2015, there is little likelihood that state legislation will take place either.  Consequently, if there is to be legislation during the next year it will have to be at the municipal level and there are many signs that such legislation will take place in some cities.  So, it would seem, there will be scores, perhaps hundreds or thousands, of limited-jurisdiction minimum wages rather than one, universal minimum wage for the U.S.  It is small wonder that some small businesses “may push back against the evolving patchwork of local and state laws through higher costs for consumers.”  What are the implications of localized minimum-wage setting for economic activity?  Will firms tend to be smaller and more local?

(3 January 2015): “The future of work: There’s an app for that” (http://www.economist.com/news/briefing/21637355-freelance-workers-available-moments-notice-will-reshape-nature-companies-and)

——–Uber has inspired a “large number of startups built around systems which match jobs with independent contractors on the fly, and thus supply labour and services on demand. . . . Using the now ubiquitous platform of the smartphone to deliver labour and services in a variety of new ways will challenge many of the fundamental assumptions of 20th-century capitalism, from the nature of the firm to the structure of careers.”  This “on-demand economy is in many ways a continuation of what has been called the ‘sharing economy’ exemplified by Airbnb.”

********Transaction costs and their diminution figure prominently in the article, which draws directly from (the late) Ronald Coase’s 1937 article “The Nature of the Firm,” a summary of which can be found at: http://en.wikipedia.org/wiki/The_Nature_of_the_Firm.  You can learn more about the on-demand economy in an article by Kevin Roose, “Does Silicon Valley Have a Contract-Worker Problem” (http://nymag.com/daily/intelligencer/2014/09/silicon-valleys-contract-worker-problem.html).  It seems like it is only a matter of time before someone writes a book “The On-Demand Economy.”  One book which has the expression in its title can be found at: http://www.amazon.com/Market-Driven-Supply-Chain-Revolutionary–Demand/dp/0814431631/.

(3 January 2015): “Lexington: Ranchers v bison-huggers” (http://www.amazon.com/Battle-Yellowstone-Environmental-Princeton-Sociology/dp/0691164347/)

——–“The most original political book of early 2015 is not formally about politics at all.  Instead ‘The Battle for Yellowstone’ by Justin Farrell, a young scholar at Yale University, ponders venomous rows that have shaken Yellowstone National Park in recent decades, and why they are so intractable.  The rows turn on such questions as wolf re-introduction, bison roaming-rights and snowmobile access to that lovely corner of the Rocky Mountains.”

********According to Amazon (http://www.amazon.com/Battle-Yellowstone-Environmental-Princeton-Sociology/dp/0691164347/), this book will be release on June 29, 2015.  What especially caught my attention is the statement that summarized the many conflicts covered: “In short, all sides purport to be weighing what is true and false, while really arguing about right and wrong.”  I suspect this book will find a lot of interest when it is issued.  One point from the book seems especially illustrative of an “economic approach” to many environmental problems and helps illustrate the facts vs. values comment above.  It goes: “As for anti-wolf types, when offered financial compensation for wolf-attacks on their livestock, some turn it down—suggesting that more than economics is at stake.”

********Justin Farrell is an assistant professor of sociology at the Yale School of Forestry & Environmental Studies.  You can learn more about him and his work at: http://justinfarrell.org/.

(4 January 2015): “Myanmar returns to What Sells: Heroin” (http://www.nytimes.com/2015/01/04/world/myanmar-returns-to-what-sells-heroin.html)

——–“A decade ago, Myanmar seemed on course to wipe out the opium fields and heroin jungle labs along its eastern border, the notorious Golden Triangle. . . . [But] Poppy cultivation in Myanmar has nearly tripled since 2006.”  Although the growth of opium poppies is illegal in Myanmar, farmers say they have few options.  It was “less than a decade ago that farmers took on opium as their main cash crop, abandoning cheroot tobacco, which is used for cigars.”  According to Tom Kramer, a researcher for the Transnational Institute of the Netherlands, “For many people in this country opium is not a problem, it’s the solution—a way for small-scale farmers to increase incomes to buy salt, rice, medicines and other essentials.”  At present, the United Nations is seeking to persuade farmers to plant coffee as an alternative.  Such “Crop substitution programs have failed numerous times before in Myanmar.”

********The article notes that Myanmar is “a distant second to Afghanistan in global production of opium, the key ingredient in heroin.  The United Nations estimates 550,000 acres in Afghanistan were dedicated to growing poppy last year, more than three times the area farmed in Myanmar.”  A seven-minute video accompanies the article.

********While we are on the subject of getting hooked, there is a review of sorts of the book Hooked: How to Build Habit-Forming Products in The Economist (http://www.amazon.com/Hooked-How-Build-Habit-Forming-Products/dp/1591847788/).  Written by technology writer Nir Eyal, the book provides “an overview of one of the most interesting battles in modern business: the intense competition to create new digital products that monopolise people’s attention.”  Central contributors to such endeavors are “behavior designers,” who draw upon the work of behaviorist B.F. Skinner and variable reward to encourage “hooked” consumption.  The very last sentence in the article was especially striking, referring as it does to “hooked” consumption: “And the trouble with insatiable desires is that the struggle to sate them leaves everyone as exhausted as they are unfulfilled.”

********Behavior designers seem to draw upon the broad literature of psychology and economics that is captured by the term ‘behavioral economics’.  One source of additional information is the Behavioural Design Lab (http://www.behaviouraldesignlab.org/), which is collaboration between Warwick Business School and the Design Council “bringing together experts in behavioural science and social design.”  You can learn more about the Lab’s work at: http://www.behaviouraldesignlab.org/wp-content/uploads/2014/02/Changing-behaviour-by-design.pdf.

(5 January 2015): “The Surprise in Your King Cake Might Be No Prize at All” (http://www.wsj.com/articles/the-surprise-in-your-king-cake-might-be-no-prize-at-all-1420414798)

——–[This is the A-Hed, quirky, article.]  In the weeks surrounding Epiphany, la galette des rois (king cake) is a French tradition.  Dating back to the Roman era, it was served “during Saturnalia, a Roman festival that saw masters play servants to their slaves.”  Traditionally, the cake has a favor of some sort baked into it and the person who finds it is “the king.”  In the U.S., however, favors are no longer baked into the cake due to legal concerns.  Another factor is unfamiliarity with the French cultural tradition.  As Julia Feydel, the U.S. manager for a French bakery group notes about a test it performed in 2012, “People were like, ‘What is this thing doing in my cake?’”  The FDA has traditionally forbidden nonedible items in confections, but it “has not taken any enforcement action or issued any regulatory requirements specific to king cakes.”

********The Larson family was in France and experienced la galette des rois firsthand in 1991.  It was great fun and a warm experience fondly remembered.

(7 January 2015): “What Rising Airline Fees Tell Us About the Cable Industry” (http://www.nytimes.com/2015/01/07/upshot/what-rising-airline-fees-tell-us-about-the-cable-industry.html)

——–“The day when people are no longer forced to pay for dozens of cable channels they never watch seems to be coming nearer.  But subscribers may want to be careful what they wish for.”  Monday’s unveiling by Dish Network of “a new web streaming service with a handful of cable channels . . . is the latest move toward a world in which people assemble a bundle of TV programming options piece by piece.”  The unbundling of cable services is akin to the unbundling of airline services that have taken place in recent years, where it is now commonplace for users to pay to check a bag, buy a drink, or eat a meal.  Some airlines require those who check in at the airport to pay an additional fee.  Although unbundling of air services given consumers more control “over their flying experience and greater power to pay only for the things they care about . . . the combined effect of all these supplemental charges is to make air travel a grinding process.”  The same may be the case for unbundled cable.  The result “will probably be little or no reduction in total fees, combined with the hassle of making constant decisions about what channels you really want and which you don’t.”

(7 January 2015): “Sheep Farmers Take Hit as Demand for Hides Falls” (http://www.wsj.com/articles/sheep-farmers-take-hit-as-demand-for-hides-falls-1420579981)

——–“Australian and New Zealand farmers are having a tough time selling lambskins as China’s tanneries face slowing demand for the products, particularly from Russia, and as Beijing cracks down on some chemical-intensive processing plants.  In Australia, lambskin prices were down by close to 85% last year.”  In New Zealand, sheep farmers are facing prices that have fallen 40%.

********Economic conditions in Russia, which have been adversely affected by economic sanctions applied by the West and plummeting oil prices, have contributed to bringing about these price declines.  The demand for leather shoes and furniture has fallen dramatically, thereby bringing about the falling demand for skins.


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