306 (1 March 2017)

Welcome to week 306!  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.

(23 February 2017): “A.T.F. Filled Secret  Bank Account With Millions From Shadowy Cigarette Sales” (https://www.nytimes.com/2017/02/22/us/alcohol-tobacco-firearms-cigarettes-millions-secret-bank-account.html)

——–“Working from an office suite behind a Burger King in southern Virginia, operatives used a web of shadowy cigarette sales to funnel tens of millions of dollars into a secret bank account.  They weren’t known smugglers, but rather agents from the Bureau of Alcohol, Tobacco, Firearms and Explosives.  The operation, not authorized under Justice Department rules, gave agents an off-the-books way to finance undercover investigations and pay informants without the usual cumbersome paperwork and close oversight, according to court records and people close to the operation.  The secret account is at the heart of a federal racketeering lawsuit brought by a [Raleigh, North Carolina-based] collective of farmers who say they were swindled out of $24 million. . . . The scheme relied on phony shipments of snack food disguised as tobacco.  The agents were experts: Their job was to catch cigarette smugglers, so they knew exactly how it was done.”

********The Raleigh-based collective is the U.S. Tobacco Cooperative (http://www.usleaf.com/about/), which is “made up of about 700 tobacco farmers—from Virginia to Florida.”  As the article notes, “The basics of cigarette smuggling are simple.  Each state sets its tobacco taxes.  Buying cigarettes in low-tax states, like Virginia, and secretly selling them in higher-tax states, like New York, generates large profits.  More complicated schemes have shipped cigarettes to Indian reservations, where they are not taxed, they rerouted them for sale on the black market.”  As this article clearly illustrates, legal walls constructed around geographic areas frequently provide opportunities for smuggling.  Goods and services will tend to move toward the location of greatest value, whether the activity is legal or not.

(23 February 2017): “California Farmers Are Bulldozing Their Vineyards, As Appetite for Raisins Shrivels” [SR](https://www.wsj.com/articles/california-raisins-sing-the-blues-1487768402)

——–“California grapes fill America’s extra-large wine glasses, but 30 years ago they were most famous for spawning celebrity raisins.  Today, farmers in California’s Central Valley are ripping up tens of thousands of acres of vines, as Americans’ appetite for the dried fruit has waned.  Countries like Turkey and Iran have flooded the global raisin market with cheaper products.  Meanwhile, the increasingly upscale U.S. wine market is no longer as hot on the region’s grapes.”  In Selma, California, “a place that is called the world’s raising capital, growers are bulldozing vineyards and planting almonds and pistachios, which bring a higher return. . . . Many who can’t afford the reboot are choosing to sell off their land.  Today 165,000 acres in the Central Valley are planted in raisin grapes, down from a high of 280,000 in 2000.  Farmers pulled up 34,000 acres of vines between the 2015 and 2016 harvests, according to Allied Grape Growers.”

********Although this article hides behind a pay wall, there is a five-minute video that is accessible.  It features a spokesman for the raisin industry as well as a grape grower who is faced with ripping out his vines and replacing them with, perhaps, almond trees.  Here we see the impact of relative prices on land utilization.  I wonder if the recent lessening of drought conditions in California will affect the “rebooting” that is underway?

(25 February 2017): “Clean energy’s dirty secret: Wind and solar power are disrupting electricity systems” (http://www.economist.com/news/leaders/21717371-thats-no-reason-governments-stop-supporting-them-wind-and-solar-power-are-disrupting)

********This is one of the leaders for the week.  It is accompanied by the longer (but not long) briefing “Renewable energy: A world turned upside down” (http://www.economist.com/news/briefing/21717365-wind-and-solar-energy-are-disrupting-century-old-model-providing-electricity-what-will).  Both the leader and the briefing expand upon the challenges that the increasing use of (intermittent) renewable energy sources are creating for grids, energy markets, and energy market regulations that were devised for energy sources that were (are) more centralized and largely not intermittent.  Since renewable energy will be comprising an ever-growing part of the energy portfolio going forward, it is best that we figure out how to deal with them, through appropriate tweaking of the invisible forces.  No doubt changes in economic, legal and political, and social and historical factors will all be needed.

(25 February 2017): “The future of forever: A report from De Beer’s new diamond mine” (http://www.economist.com/news/international/21717369-production-worlds-most-valuable-gem-may-be-about-peak-report-de-beerss)

——–The world’s largest diamond company, De Beer’s, “marked the opening of its Gahccho Kué mine in September” in the Northwest Territories of Canada.  This is the “biggest new mine in the world in over a decade.  De Beers has no plans for another.”  Although De Beers remains the world’s biggest diamond producer by value, it now accounts “for only a third of global sales, down from 45% in 2007.”  In addition to additional competitors for natural diamonds, “It faces many uncertainties, from synthetic diamonds to changing relationships with polishers and cutters.”  Furthermore, “the source of the demand that drives sales—the link between diamonds and love—looks weaker than it used to.  But one forecast seems solid: there will be fewer new diamonds.  De Beers continues to seek new places to mind, but has slashed its exploration budget.  Another big find is unlikely.  The supply of new diamonds is expected to peak in the next few years, before beginning a slow decline.”

********This article provides a clear overview of the market for diamonds.  Of particular interest to me was its brief description of the role that advertising played in managing the demand for diamonds.  In 1938, as noted in the article, De Beers hired the New York-based advertising agency N.W. Ayer “to coax Americans to buy more rocks.  It dreamed up the notion that a diamond ring should be an essential display of love and status, its gift a rite of passage.  In the ensuing decades De Beers and its marketers penned slogans—memorably, ‘a diamond is forever’—and invented social rules, urging men to spend two months’ pay on a gift for their affianced.”  (I wasn’t aware of the two-months rule.  Here is a brief note about it: http://www.goodhousekeeping.com/life/money/a32609/two-months-salary-engagement-ring-rule-origin/.)

********The article provides a nice example of the role that advertising can play in creating a want.  In an introductory economics course, for example, one would typically distinguish between two aspects of advertising: information provision and persuasion.  Want creation (or expansion) would be an example of persuasive advertising at work.  That persuasive advertising would give rise to a greater demand for the product advertised.  When coupled with a company like the historic De Beers, which held a near-monopoly in production and distribution for many years, this could lead to significant and lasting profits.

********As another example of the significance of persuasive advertising, I am reminded of the book The Gunning of America: Business and the Making of American Gun Culture (https://www.amazon.com/Gunning-America-Business-American-Culture/dp/0465048951/), by Pamela Haag.  It focuses, but not exclusively, on the Winchester Repeating Arms Company, which was one of the first gun makers to make intentional and extensive use of interchangeable parts to make guns.  As its output increased, its founder Oliver Winchester became increasingly aware that the war-based demand for guns was highly variable and unreliable for the extensive and constant production of guns.  His answer was to set out to create a substantial consumer demand for guns.  It is this consumer demand that helped result in an “American gun culture” noted in the title of the book.  An interesting aspect of the book is its discussion of the life and house-building activities of daughter-in-law Sarah Winchester, which resulted in what is now known as the Winchester Mystery House (https://www.amazon.com/Captive-Labyrinth-Winchester-Heiress-Fortune/dp/0826219837/).

(28 February 2017): “Real Cork Is Fighting Back Against Screwcaps” (https://www.bloomberg.com/news/articles/2017-03-01/sunken-champagne-gives-amorim-armor-in-great-stopper-debate)

——–177 years ago, a ship sank in the Baltic Sea with 162 bottles of champagne.  When the bottles were salvaged, 79 bottles were still drinkable, a testimony to the quality seal provided by real cork stoppers.  This was good news to cork producers, which are primarily located in Portugal, as the traditional cork stopper has been losing market share to screw tops and synthetics in the wine closure market.  Screw tops and synthetics avoid the so-called “corked” taste of wines caused by contaminated corks.  Major cork producer Corticeira Amorim claims that it is the “first cork company to produce a taint-free natural cork stopper, a laborious process that requires all of the corks to be individually screened on the production line to eliminate the risk of contamination.  The new NDtech corks are currently used in icon and ultra-premium wines but the company’s goal is to scale up production in coming years to supply most of the wine industry.”

********So, even such an item as the cork wine stopper is subject to innovation.  The source of “cork taint” is the chemical Trichloroanisole (TCA).  Too much of it gives rise to a musty flavor, as noted by The Wine Institute (https://www.wineinstitute.org/initiatives/issuesandpolicy/tca).  You can learn more about the NDtech cork and how it protects wine from excessive TCA at: http://www.amorimcork.com/en/products/ndtech/.  I am amazed that “NDtech individually tests each wine cork for TCA.”  It does this “using unprecedented fast chromatography technology.”  The machine can “analyse each cork in seconds.”

May you have a good week!


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