214 (27 May 2015)

Welcome to week 214!  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.

You can find a pdf of this issue, a cumulative pdf for issues 1-208, and a cumulative pdf for issues 209-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(22 May 2015): “Egg Prices Jump as Bird Flu Spreads” [SR](http://www.wsj.com/articles/bird-flu-outbreak-decimates-egg-laying-flocks-1432237046)

——–“The financial toll of the worst U.S. bird-flu outbreak in history is soaring, forcing some  poultry companies to suspend operations and boosting prices for eggs and turkeys as supplies tighten. . . . Avian influenza has resulted in the deaths or extermination of at least 38.9 million birds . . . Of that total, more than 32 million are egg-laying hens, accounting for about 10% of the U.S. egg-laying flock.”  Consequently, “The wholesale price of ‘breaker’ eggs—the kind sold in liquid form to restaurants like McDonald’s Corp., food-service supplied Sysco Corp. and packaged-food producers—nearly tripled in the past month to a record $2.03 a dozen on Thursday . . . U.S. prices for wholesale large shell eggs, those sold at the grocery store, have jumped 85% to $2.20 a dozen in the Midwest.”  With eggs, “the problem is greatly complicated by the way the American industry is concentrated in the hands of relatively few producers.”  According to Chad Gregory, president of trade group United Egg Producers, farms on average contain 1.5 million birds—“When the virus is confirmed in one hen house, birds in all of the other nearby houses typically have to be killed to prevent further spread.”  According to Brian Moscogiuri, who follows the egg market for Urner Barry, the price changes that have resulted in the egg industry are “completely unprecedented.”

********Urner Barry “has quoted [egg] industry prices for 150 years.”  You can learn more about it at: http://www.urnerbarry.com/.  One has to wonder if the epidemiological consequences of large-scale agriculture have been truly factored into the cost and pricing of many foods, in particular eggs.

(22 May 2015): “Murray Energy to Lay Off Around 1,800 Workers” [SR](http://www.wsj.com/articles/murray-energy-to-lay-off-around-1-400-workers-at-nine-locations-1432242012)

——–“Coal miner Murray Energy Corp. is set to announce layoffs of around 1,800 workers at nine locations on Friday . . . dealing another blow to the coal-mining industry in Appalachia.  The planned layoffs, which represents 20% of Murray’s workforce, will come mostly from mines in West Virginia and Ohio, a region already reeling from the impact of abundant natural gas and a global coal glut.”  Murray Energy has been buying many of the coal mines in the region, “taking on debt to do more than $4 billion of acquisitions despite the competition.  The company has been aiming to be the lowest-cost producer in the country to survive a lengthy downturn in coal prices that has pushed several companies into bankruptcy or the brink of it.”  In a recent interview with The Wall Street Journal, Robert Murray, the CEO of Murray Energy, said he hoped to be “the last man standing in the coal industry.”  At present, coal “fuels less than 40% of the country’s power, down from 49% in 2007.”

********I found it interesting to see Murray Energy purchasing more coal assets in a declining market.  Currently Murray is “the country’s third biggest coal producer.”  Will being the low-cost producer help at a time when coal prices “are permanently stuck below those of natural gas, which is suddenly plentiful and inexpensive thanks to shale drilling[?]”

(22 May 2015): “De Beers to Sell Diamond-Recovery Business in South Africa” [SR](http://www.wsj.com/articles/de-beers-to-sell-diamond-recovery-business-in-south-africa-1432231625)

——–“De Beers Group, one of the world’s two major diamond-mining companies, said Thursday that it intends to sell its Kimberley Mines Tailings asset, its last production operation in the central South African town where it launched the modern diamond-mining business in 1888.  The unit, which extracts diamonds from waste from old mines, still makes money but has become too small relative to De Beers’ roster of mega-diamond mines.”  As De Beers’ spokesman Tom Tweedy notes, the mine will “still be profitable in 10 years . . . But the scale better suits a smaller, lower-cost operator.”  Globally the largest diamond producer is Russia’s Alrosa, which produced 36.2 million carats last year; number two De Beers produced 32.6 million carats in the last year.

********A third consecutive article on bigness and its consequences.  In this case, it appears, a small unit in a very large company may result in that unit having higher costs than a small company.  Interestingly, The Economist also discusses size in relation to alliances, both economic and political in the column “Schumpeter: Managing partners” (http://www.economist.com/news/business/21651895-pressure-companies-form-alliances-rivals-growing-inexorably-managing-partners).  Factors leading to alliances include cost, technological change, cross-border ties, and consumer pressure.  Of course, alliances frequently go awry, so “Companies entering an alliance must learn low to trust each other—but also guard against being taken for a ride.”  In relation to this, “Businesspeople have much to learn from politicians and diplomats . . . Politicians have always lived in a world where the boundaries between friends and enemies are blurred.  They recognize that your closes ally can soon become your bitterest adversary. . . . Diplomats understand the importance of maintaining relations through thick and thin: whatever their underlying rivalries and occasional spats. . . . both politicians and diplomats realise that all alliances are marriages of convenience.  Lord Palmerston, a British prime minister, once said that Britain had no permanent allies or enemies, only permanent interests.  That is the view business leaders should take as they enter partnerships.”

(22 May 2015): “Foreign Fears Take Toll on African Tourism” (http://www.wsj.com/articles/foreign-fears-take-toll-on-african-tourism-1432247925)

——–“Safari companies, costal resorts and city hotels are reporting precipitous declines in business as spooked tourists cancel bookings—or don’t make them at all. . . . Key drivers of the declines are the fears of Ebola and terrorism, which have prompted tourists to cancel holidays in African countries not directly affected by either.”  Complicating matters is that “Many tourists book weekslong, often once-in-a-lifetime African safaris a year in advance.  That means that even as the Ebola epidemic has largely abated, bookings haven’t picked up.”

********In economic parlance, the fear of Ebola and the fear of terrorism are determinants of tourism demand.  Another factor entering in to that analysis is knowledge (or lack thereof) or assumptions about Africa.  As one Kenyan hotelier notes, “[Tourists] hear Africa and think of it as one country.”  The power of assumption and established neural pathways is prominently and convincingly illustrated in an eight-minute video entitled “The Backwards Brain Bicycle” (https://www.youtube.com/watch?v=MFzDaBzBlL0).  It shows the challenge of unlearning something already known.

(22 May 2015): “A Pinot Noir: Hunting the thieves behind a rash of six-figure wine heists” (http://www.bloomberg.com/graphics/2015-wine-detective-french-laundry-heist/)

——–Wine theft “is notoriously hard to investigate.  It’s often compared to an art heist, because once a bottle is stolen it usually makes its way through a series of black market dealers before winding up in somebody’s private collection, where it remains unseen for years.  But unlike art, if stolen wine does resurface, it’s difficult to prove what it is or where it came from.”  But there is Maureen Downey, who “trained as a sommelier before becoming a part-time wine fraud investigator.  For the past 10 years she has been on a one-woman crusade to ride the wine industry of counterfeit and stolen wine.  And there’s a lot of it out there.  The French newspaper Sue Ouest estimates that 20 percent of wine sold in the world is either fake or stolen.”  Although Wine Spectator puts the number at 5 percent, it is still significant.  As wine critic Robert Parker notes, “it’s pretty easy to make a good fake label and put it on a bottle of really cheap wine.”  While wine fraud is large, wine theft has been growing, especially for signature and pricey wines like Domaine de la Romanée-Conti (DRC) and California’s Napa Valley estate Screaming Eagle, wines that may run as much as $25,000 a bottle.  These wines are generally regarded as “stolen to order.”  For example, 63 bottles of DRC were recently stolen from Napa Valley’s French Laundry restaurant, a substantial part of a loss valued at $300,000.

********Maureen Downey has a highly-sensitive palate and a good eye for visual signs of fraud.  The article contains a three-minute video of some of the things she look for in her wine assessments.  It turns out that the wine stolen from the French Laundry ended up in a lawyer’s office is Greensboro, North Carolina.

(26 May 2015): “Big Banks Shut Border Branches in Effort to Avoid Dirty Money” [SR](http://www.wsj.com/articles/big-banks-shut-border-branches-in-effort-to-avoid-dirty-money-1432598865)

——–Businesses in Nogales, Arizona, a border town paired with a similarly-named city in Mexico, are finding it increasingly difficult to find banking services.  “In the past several months, J.P. Morgan, Bank of America Corp. and Citigroup Inc.-owned Banamex USA have shut a total of four branch . . . , almost halving the number in town owned by big U.S. banks.  Separately, hundreds of Chase and Wells Fargo & Co. customers, some of them second- and third-generation business owners, have had their bank accounts closed.”  The closings have come “amid a recent industrywide focus on money laundering.  Wall Street wants to avoid the huge fines that could result if financial firms are drawn into the flow of dirty money.”

********A discussion of the challenges of one business in Nogales, a seed company, is related at: http://blogs.wsj.com/moneybeat/2015/05/26/jumping-through-hoops-to-bank-on-the-border/.

(26 May 2015): “How Everyone Gets the ‘Sharing’ Economy Wrong” [SR](http://www.wsj.com/articles/how-everyone-gets-the-sharing-economy-wrong-1432495921)

——–The expansion of the so-called “sharing economy,” in which workers “are quite obviously neither employees nor freelancers” necessitates an examination of “something that has gotten far too little attention, called ‘dependent contractors.’ . . . This category doesn’t exist in current U.S. law, but it does exist in countries such as Germany, where dependent contractors get more protections that free-lancers but are still distinct from full-time employees.”

********The article draws attention to the significant regulatory risk that confronts Uber, Lyft, and similar companies, whether it be from the introduction of a new type of employment category or from class-action lawsuits.  At present, U.S. labor law recognizes employees and independent contractors.  Recognition of the employment category dependent contractor would, no doubt, have wide repercussions.  While searching for addition information on the term ‘dependent contractor’ I came upon the article “The Dependent Contractor?” (https://www.aseonline.org/ArticleDetailsPage/tabid/7442/ArticleID/1112/The-Dependent-Contractor.aspx).  I found it interesting that Daniel Pink identified the ‘contingent workforce’ as  matter of interest as early as 1997 and expanded upon it in his book Free Agent Nation in 2001 (http://www.amazon.com/Free-Agent-Nation-Working-Yourself/dp/0446678791/).  The term ‘contingent faculty’ is familiar to everyone in higher education.

May you have a good week!

Bruce

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