241 (2 December 2015)

Welcome to week 241!  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 an Internet title search.

(27 November 2015): “Palm Oil Facing ‘Powerful Cocktail’ of El Nino, Fuel Demand” (http://www.bloomberg.com/news/articles/2015-11-27/palm-oil-seen-facing-powerful-cocktail-of-el-nino-fuel-demand)

——–Palm oil is the “most consumed cooking oil found in everything from candy to instant noodles.”  Its price has “jumped 26 percent from a six-year low in August after drought and smog hurt plantations in Southeast Asia.  At the same time Indonesia is raising the amount of palm blended with diesel to 20 percent from 15 percent.  That’s boosted futures as prices of other farm commodities slump.”  According to Dorab Mistry, director of Godrej International Ltd., “El Nino and the Indonesian biodiesel mandate are a powerful cocktail that has the potential to drive prices in 2016.”  The current El Niño is expected to “rank among the three strongest since 1950.”  In 1998 output “fell 5.5 percent in Malaysia and 7.2 percent in Indonesia . . . Production slid 5.1 percent in Malaysia in 1983.”  Together, Indonesia and Malaysia “supply about 86 percent of the world’s palm oil.”

********A clear example of one of the many effects of El Niño on world commodity markets.  Much more about the past, and likely future, effects of El Niño can be found with a Google Scholar search (https://scholar.google.com/).  The search terms “El Nino markets” yielded many possibilities.  Here are two books with noting.  First, Mike Davis, Late Victorian Holocausts: El Niño Famines and the Making of the Third World (http://www.amazon.com/Late-Victorian-Holocausts-Famines-Making/dp/1859843824/).  Second, Stanley A. Changnon, ed., El Niño, 1997-1998: The Climate Event of the Century (http://www.amazon.com/Late-Victorian-Holocausts-Famines-Making/dp/1859843824/).  The first book seems to be a well-developed narrative, whereas the second is a collection aimed at various aspects of the 1997-98 El Niño and its consequences over a fourteen-month period.  No doubt these books focus on the supply-side effects of El Niño.  I wonder if there are demand-side effects, too?

********One day later I happened to see this: “The weird ways the weather makes you buy things you didn’t plan to” (https://www.washingtonpost.com/news/wonk/wp/2015/11/25/the-hidden-ways-weather-determines-what-you-buy/).  The reporter, Ana Swanson, makes some valuable points about how weather forecasts are being used by a variety of businesses to target ads and product offerings.  She notes: “These days, many businesses are tracking minute changes in the weather as a way to figure out what customers want—from hair products and quilting supplies to McRibs and insurance—often before they even know they want them.”  One item that caught my attention was the effective of weather on processing loan applications.  Evidently loan applications can be processed more quickly “on rainy days than clear, sunny ones.”  That being the case, companies processing loan applications “might want to set up their headquarters in places with more miserable weather, or save more difficult work for particularly dismal days.”  No doubt there is an optimal mix on miserable and lovely weather.  Although, as Swanson observes, some of the effects of weather may seem obvious, it is interesting to see them born out in data.  It appears, for example, that the sales of convertibles and four-wheel-drive vehicles are closely related.  The nice weather that makes a convertible more attractive also makes a four-wheel-drive less attractive.

(28 November 2015): “Taxing sugary drinks: Stopping slurping” (http://www.economist.com/news/finance-and-economics/21679259-taxes-fizzy-drinks-seem-work-intended-stopping-slurping)

——–“Around the world, governments and beverage makers are locked in battle over taxes on sugary drinks. . . . Governments are adopting the taxes in the hope of trimming bulging waistlines and slowing the rise in diabetes, which cost taxpayers vast sums in spending on health care.”  Although the beverage industry “argues that it is not the government’s business to decide what people should eat and drink” it does seem that taxes on sugary drinks do affect consumer behavior.  In Mexico, where such taxes are in place, “FEMSA, Coca-Cola’s Mexican bottler, blamed declining sales in 2014 of the price jump that followed the introduction of the tax.” In addition, academic studies have shown that sales of soft drinks fell after the tax was put in place.  One thing that has been learned, however, is that although “taxes on sugary drinks are working as intended, it also indicates that bad design can undermine much of the benefit.”

********The article notes three factors to consider.  First, the tax must be “sufficiently” high to impact consumption.  Second, the ability of consumers to shop elsewhere must be considered.  Third, “Taxes also work better if they distinguish between different degrees of sugariness.”  In Hungary, which has a tax that consider not only sugariness, but also salt and fat, “40% of manufacturers had adjusted their recipes accordingly.”  Presumably, a tax which has public health as a goal, would act to change the behavior of consumers and producers.

********Closely related to the story above is the new book by Marion Nestle, Soda Politics: Taking on Big Soda (and Winning).  The book is reviewed in The Economist (http://www.economist.com/news/books-and-arts/21679168-how-wage-war-against-big-soda-popped) and you can learn still more about it at: http://www.amazon.com/Soda-Politics-Taking-Big-Winning/dp/0190263431/.  Nestle’s book Food Politics (2002) “remains a bible for those who bewail the power of food companies.”  There is a revised and expanded 10th Anniversary Edition available at: http://www.amazon.com/Food-Politics-Influences-Nutrition-California/dp/0520275969/.

(30 November 2015): “Bakery Puts Public Good in Its Recipe for Success”[SR](http://www.wsj.com/articles/bakery-puts-public-good-in-its-recipe-for-success-1448848982)

——–The Greyston Bakery of Yonkers, New York was founded in 1982 by Buddhist monk Bernie Glassman.  The Bakery “hires applicants in the order in which they walk in the door, no questions asked.  The workers tend to be those who are chronically underemployed, particularly those who have been incarcerated.”  The Bakery has 90 employees, 75 of whom “joined through the open hiring process.  All prospective employees are put on a wait list, which is now about six months long.  About 40% of prospective employees make it through a 10-month apprentice program.  For those who don’t stay, the main reason is they don’t show up on time.”  Mike Brady, the CEO of the Bakery, notes that “the process is less inefficient than it sounds . . . because the bakery has none of the traditional costs associated with hiring, like interviewing, drug tests and background checks.”  During the last year, the Bakery had sales of $13.4 million.  It produces “35,000 pounds of brownies a day.  Of these, the bakery sells 80% to Unilever, for mixing into Ben & Jerry’s ice cream, and 20% to Whole Foods Market Inc. and other customers.”

——–The Bakery is a benefit corporation under New York state law.  “All profits not reinvested in the bakery go to the Greyston Foundation, which provides child care, housing, community gardens and other social services to Yonkers residents and the bakery’s employees.”  Currently, Brady is “working to create what he calls the Center for Social Enterprise and Alternative Hiring, through which he hopes to turn the bakery’s local impact into a national one.”

********You can learn more about open hiring at Greyston Bakery at: http://greyston.com/the-bakery-open-hiring/.  Bernie Glassman is a Zen Buddhist—you can learn more about him at: https://en.wikipedia.org/wiki/Tetsugen_Bernard_Glassman.  Perhaps his best known book is Instructions for the Cook: A Zen Master’s Lessons in Living a Life That Matters (http://www.amazon.com/Instructions-Cook-Masters-Lessons-Matters/dp/1611800684/).  I found the open hiring practice of Greyston Bakery to be interesting and applicable more broadly.  It appears, though, that this practice does not apply to all of its positions.

********Also related to baking is an earlier story “Bread Is Broken” (http://www.nytimes.com/2015/11/01/magazine/bread-is-broken.html).  It relates the work of Stephen Jones, who has a Ph.D. in genetics from the University of California, Davis, to move bread baking from industrial production based upon standardized flour to something that is more artisanal largely by developing types of wheat that embrace a sense of terroir, much like fine wines.  The article points out some of the challenges he and his Bread Lab face at it scales up production for customers like Chipotle.  You can learn more about the Bread Lab at: http://thebreadlab.wsu.edu/.

(1 December 2015): “Why the U.S. Pays More Than Other Countries for Drugs” [SR](http://www.wsj.com/articles/why-the-u-s-pays-more-than-other-countries-for-drugs-1448939481)

——–“Drug prices in the U.S. are shrouded in mystery, obscured by confidential rebates, multiple middlemen and the strict guarding of trade secrets.  But for certain drugs—those paid for by Medicare Part B—prices are public.  By stacking theses against pricing in three foreign health systems, as discovered in nonpublic and public data, The Wall Street Journal was able to pinpoint international drug-cost differences and what lies behind them.  What it found, in the case of Norway, was that U.S. prices were higher for 93% of 40 top branded drugs available in both countries in the third quarter.  Similar patterns appeared when U.S. prices were compared with those in England and Canada’s Ontario province.  Throughout the developed world, branded prescription drugs are generally cheaper than in the U.S. . . . The reasons the U.S. pays more are rooted in philosophical and practical differences in the way its health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.”  In Norway and many other developed countries, “The state-run health systems . . . drive hard bargains with drug companies: setting price caps, demanding proof new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost. . . . Medicare, the largest single U.S. payer for prescription drugs, is by law unable to negotiate pricing.”

********One point made in the article about the use of cost-effectiveness in Norway caught my attention.  There, if a drug is found not to be cost effective, it is not uncommon for a drug company to lower its price so that the drug in question will qualify for use by the health system.  A consequence of the pricing of drugs in the U.S. is that “Americans fund much of the global drug industry’s earnings, and its efforts to find new medicines.”

(1 December 2015): “A grim bargain: Once a weakness, low-skilled workers who get paid little have become the Deep South’s strength” (http://www.washingtonpost.com/sf/business/2015/12/01/a-grim-bargain/)

********A case study, of sorts, of one town’s experience with tax-incentive based corporate recruitment, in this instance a copper tube company from Xinxiang, China.  As it turned out, the expected wages of residents exceeded those actually received.  All this is consistent with the word ‘strength’ in the title of the article, i.e., the strength is the existence of very low wages.  As the article notes, “Though many states recruit businesses with tax incentives, states in the Deep South pioneered the practice and remain aggressive users of the tool, pitching not just tax breaks but low costs and anemic union participation.”  Coincidentally, The Pew Charitable Trusts just released a report of “Reducing Budget Risks: Using data and design to make state tax incentives more predictable.”  You can learn more about the 23-page report, and gain access to a download of it, at: http://www.pewtrusts.org/en/research-and-analysis/reports/2015/12/reducing-budget-risks.

(2 December 2015): “How Big Food Is Using Natural Flavors to Win Consumer Favor” (http://www.wsj.com/articles/how-big-food-is-using-natural-flavors-to-win-consumer-favor-1448989427)

——–Researchers at the Golden Valley, Minnesota labs of General Mills are working to respond to changing American tastes away from “artificial flavorings, dyes, and preservatives” and toward “food with ingredients that they can find in their own pantries.  The phenomenon has roiled the food industry in recent years are reconstructing recipes, especially of packaged-food items, isn’t a piece of cake.  It requires consumer food companies to find acceptable alternatives and to manage any side effects, from higher costs to unintended changes to taste or texture that could risk alienating loyal consumers.  The new environment is frustrating for some in the food industry after decades of technological advances to make packaged food cheaper, longer lasting and more flavorful.”

********Economists routinely use the notion of an isoquant to indicate the possibilities of producing the same quantity of some product with different resource combinations.  The article points out that such different resource combinations are not at all easy to arrive at.  In particular, it discusses how artificial food colors, like Red 40, Yellow 6, or Blue 1, are arrived at by using various fruits and vegetables.  Then there are the issues of taste, shelf life, and cost.  You can find a definition of isoquant at: http://economicsconcepts.com/isoquants.htm.

May you have a good week!

Bruce

 

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