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This guy makes too much sense

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Taken from Rapid City Journal

By John Tsitrian, Journal columnist
It was a little disconcerting to watch North Dakota's Democratic U.S. Sen. Byron Dorgan call for a windfall profit tax on oil companies a couple of weeks ago, because those of us with memories long enough to remember the 1970s can recall that those taxes did little or nothing to change the price of crude oil and its refined products and only stymied the development of new production infrastructure to the extent that few, if any, refineries have been built in this country since then.

More ridiculous to me is the notion that just because the price of a commodity suddenly increases, those who are involved in its production and distribution should be punished because they happen to make money off the phenomenon - which I think is what the essence of capitalism and its attendant risk/reward apparatus is all about.

What made Dorgan's tirade even more ironic is the fact that a non-energy commodity from his own home state - along with South Dakota - has seen a price rise almost paralleling oil, yet no one is clamoring for a windfall tax on that product. And just what is this product that I'm talking about? None other than the centerpiece of the agricultural economy in the Northern Plains: cattle.

I took down long-term price charts from the Chicago Mercantile Exchange and the New York Mercantile Exchange last week and found that feeder cattle prices have about doubled since 1996, which is close to matching the price of unleaded gasoline, which as of last week have slightly more than doubled since '96.

Although the cost of inputs to ranchers has probably kept their profit margins at levels that are much less eye popping than the results that oil companies have experienced in recent quarters, the fact is that the ranching community in this part of the country, based on what I know from my years of brokering and feeding cattle, is probably making the best money in a generation.

So do we get mad at these people, even though beef prices to consumers have risen to unheard of levels in recent years? Of course not.

For one thing, during a lot of those years in the dim, dark '90s, ranchers were barely getting by, so the recent surge in prices has got to be welcome and well-earned.

Interestingly, that parallels the fortunes of the big oil producers, whose profits were skimpy a decade ago and whose patient shareholders are getting returns that still don't justify the long waiting period for this run-up. As of last Wednesday, for example, ExxonMobil shares were up a little over 10 percent from where they were trading five years ago. People who've owned the stock since the '96-'97 period have seen a gain of around 30 percent, somewhat more with dividends. For the most part, they could have achieved the same results with long-term U.S. Treasury obligations.

To me, that sounds awfully close to what ranchers have been experiencing with their cattle holdings during the last decade. The fact that ranchers and oil producers have suddenly caught a break and gotten some serious returns for all their investment and trouble isn't cause for punishing them with a "windfall" profit tax. It's cause for cheer that this country and its economic system allows for speculators and investors to grind it out and be around when they hit the mother lode.

For one thing, it encourages others to do the same. Who'd want to raise cattle or push oil if there weren't the chance to hit the jackpot once in a while?

For another, it gives these operations some free cash flow to reward their investors and plow back into the business. It also encourages new technologies to produce even more of a commodity that's making a lot of money.

Consider the results of Suncor, the Canadian company that is producing oil from sand in Alberta. Its stock price has surged about 500 percent in the past few years because the higher price of oil has made that type of production - which is now approaching 200,000 barrels a day - profitable. If this company suddenly had to pay a substantial new tax on its profits, how likely is it to keep producing the stuff that the market has made so valuable?

And if our area ranchers were suddenly hit with a special tax just because 500-pound steers are now fetching a buck-fifty a pound compared to the 75 or 80 cents they were getting a decade ago, how fair would that be?

As an oil-industry shareholder I can only say ... gee, I wish I also owned some cattle.

And as long as I'm being wistful, may I suggest that as an alternative to windfall profit taxes we just tax windy politicians instead? Now that would be a way to bring the federal deficit under control, and pronto.

John Tsitrian is a Rapid City businessman, writer and commentator. Write to [email protected]
 

Econ101

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Sounds good and John Stossel had a little something to say on this also. Do we want a lassie faire economy? Ask California if they would re-do thier deregulation of the energy market.

The fact is that the energy companies took advantage of percieved supply and demand problems and took us to the bank. If there were real supply and demand problems, their margins would not have fluctuated so high as to give them so much in profits. By taking advantage of natural tragedies, they took a little out of all of our pockets.

There could be some execeptions to this view. If the profits were recieved off of deposits of oil that they owned and they were not holding supply back, and not on higher margins, they may not have been as bad as my first paragraph suggests. Oil that was sold at the time to meet the short supply might have been higher in price due to the short supply of oil. That is a normal market mechanism. If oil companies manipulated the supply or the percieved supply just to charge more, then there is a case for market manipulation and a reason for restitution. There are distinctions that the author did not look at in his conclusions. You normally think of oil companies as margin companies, just like packers. If packers manipulated the price of cattle to cause higher prices, then there could be potential for some kind of restitution.

As far as the cattle market goes, the cattle owners may be like the oil companies that owned the oil. They did not make the oil go up based on an illusion or manipulation on their part. They are reacting to normal supply and demand of their product. There could (and was) a case against the packers for causing this lower supply of cattle through lower prices in a market manipulation scheme. Pickett proved it. It is called an artificial slide down the supply curve.
 
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You touched on so many subjects, I don' know where to start.

First off, last I heard no one is forced to buy a gallon of gas, or a pound of beef. So we look at the world from different ends of the barrel I guess. I really can't picture how one could expect to force a company to put out supply if they chose not to, in a free market society. Do the oil companies not plow their profits back into exploration, and efficiencies? An example I can think of is people that bitch about Walmart taking over the world, but then don't give credit to Walmart for the savings they recieve in lower prices. I don't like high priced gasoline myself, as it adds big time to our ranching costs, but I have yet to see the government improve many situations with their meddling.

On the cattle end of things, would you say that if my neighbor sold me his bred cows for 1000 dollars on a Monday, and the local sale barn sold them for 1300 Tuesday, same breed and type of livestock, that he should be able to sue me for the 300 dollar difference? Or do you only differenciate on scale of operation?
 

Econ101

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the real jake said:
You touched on so many subjects, I don' know where to start.

First off, last I heard no one is forced to buy a gallon of gas, or a pound of beef. So we look at the world from different ends of the barrel I guess. I really can't picture how one could expect to force a company to put out supply if they chose not to, in a free market society. Do the oil companies not plow their profits back into exploration, and efficiencies? An example I can think of is people that bitch about Walmart taking over the world, but then don't give credit to Walmart for the savings they recieve in lower prices. I don't like high priced gasoline myself, as it adds big time to our ranching costs, but I have yet to see the government improve many situations with their meddling.

On the cattle end of things, would you say that if my neighbor sold me his bred cows for 1000 dollars on a Monday, and the local sale barn sold them for 1300 Tuesday, same breed and type of livestock, that he should be able to sue me for the 300 dollar difference? Or do you only differenciate on scale of operation?

What would you pay for a pint of water if you were in the stadium in New Orleans? Should it go to the highest bidder? What if someone had 3 million pints behind closed doors, knew it was the only source, and told everyone that there was only 8 left, let the bidding begin? Would you sell your oldest kid's gene sequence for money? (might mean he could not have kids in the buyer's contract)

If your neighbor sold you those cows and knew he could go to the action instead, then he made his decision on his offering. If you were the only one who could sell them at the auction and every one knew it and knew that you were going to make $300 off of each head and resented you for it, you could put it on your resume' for a management position at Tyson.
 

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Econ just when I think you've about BS'ed yourself out you top it.

3 million pints of water and say there are only 8. He might get a pretty high dollar the first time but as soon as he is selling another batch he would be lynched.

To equate what Tyson is able to do to that lame scenario should embarrass you. Buyers of wholesale beef know roughly what is available, as packers know roughly what cattle are close to slaughter, as feeders know roughly what is available for feeders, as producers have the ability to know what is roughly being offered for calves.

Besides the information out there for anyone who wants to know, there are more than 1 seller with stockpiles. Those stocks must move in a short period of time or they spoil and become worthless.

Oil has the ability to store, in the ground or in tanks. But, it has to move before any cashflow takes place for a company. In Alberta right now, the highest profit on fuel is happening at retail. Some stations are selling diesel for $1 a litre when they are paying $0.76 a litre. In the same areas buyers can pay anywhere from the $0.72 with a cardlock to $0.90 at other retail stations to a high of $1.06 I saw at one. Those that have lots of money and don't care just pay what the sign says they don't do a comparison. Is that somehow the fault of the refinery? The retailer?

With beef some shop around looking for the best deal at retail. Some pay less buying halves, some pay more buying organic, some just buy whatever they want no matter what the price. To blame anyone for different spending habit is plain stupid. It is a fact of life and people are free to choose how they shop, as long as they can afford it.
 

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I believe the authors comparision, of gas with cattle, was a little flawed. He states the price of cattle has doubled since 1996. The price of gas went up more than a dollar overnight! We had higher supplies at the time than when the price was much less the year before. Was this simply taking advantage of the disasters as the price rose over a 1$ overnight?
I don't think Econs water comparison was that far off as many overcharged for that during the disaster also, when they found larger supplies being stored. These are not optional or replaceable things. The author is comparing neccesities to replaceable or optional choices.
I am not drawing a conclusion on tying the hands of big oil, I just don't like the comparison of gas to cattle. I am still shaking my head on that one! LOL!
 

Jason

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Fedup, the comparison of gas and cattle wasn't meant to be exact, just the similar rise in commodity price.

There was some gouging in hurricane areas, and I hope there are repercussions for those who tried to take advantage of it. Some charges have been laid when retail prices exceeded a certian value relative to wholesale.

The comparison is valid about cattle being worth more than before. Should a rancher be penalized because he was holding his cowherd at high numbers waiting for this price spike to sell out?

Fuel always gets attention because so many see the price changes on the signs. No one has to buy at those prices, at least not much. Hurricane warnings were given early while the price was lower and people could have evacuated. Not listening to a warning was/is a person's choice. There are consequences to life and the descisions we make.
 

fedup2

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Jason:"Fuel always gets attention because so many see the price changes on the signs. No one has to buy at those prices, at least not much. Hurricane warnings were given early while the price was lower and people could have evacuated. Not listening to a warning was/is a person's choice. There are consequences to life and the descisions we make."

Yes the warnings were givin when the price of gas was lower, but I don't see how this relates to the topic? I live in a state that borders Canada. (ND) We have a refinery less than 100 miles from me. Why did my prices go up over a 1$ in two days because of something happening hundreds of miles away?

As far as no one has to buy at these prices??? How would you get to work?
How would you plant your crops, cut your hay, etc? There are differences between what is considered optional and neccesities! If I tripled your electricity, heating bills, fuel, etc. would you just do without them? Hook the mule up? No Jason, I don't agree. That sounds more like dreaming than reality to me. It could be done, but who is going to live that way again?
 
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As is normally the case, these posts head off on a tangent from what the origional intention was. I agree with the author that it would be un American to tax the heck out of a company just because the situation gave them a temporary windfall.

Would it be any different than for our government to say that any rancher that sold his/her calves for over 800 dollars per head, that they had to give a percentage of their profits for needy people to buy beef? That is what some in our government are proposing that the big oil companies do. They want them to help low income families with their heating bills.

That was what I got from this article.

And I didn't agree with some of the earlier posters examples either.
 

fedup2

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You make some good points TRJake. Maybe this has to do more with ethics than anything else. During the 9/11 disaster, I believe big oil froze prices so no one could take advantage of it. Many felt the same thing should have been done here. As far as the comparison to beef, I believe that if this disaster had been near you, and you found people starving, as a rancher you would have donated a beef. Not tripled the price of it.
But, its great that you have a choice.
 

Econ101

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Jason said:
Econ just when I think you've about BS'ed yourself out you top it.

3 million pints of water and say there are only 8. He might get a pretty high dollar the first time but as soon as he is selling another batch he would be lynched.

To equate what Tyson is able to do to that lame scenario should embarrass you. Buyers of wholesale beef know roughly what is available, as packers know roughly what cattle are close to slaughter, as feeders know roughly what is available for feeders, as producers have the ability to know what is roughly being offered for calves.

Besides the information out there for anyone who wants to know, there are more than 1 seller with stockpiles. Those stocks must move in a short period of time or they spoil and become worthless.

Oil has the ability to store, in the ground or in tanks. But, it has to move before any cashflow takes place for a company. In Alberta right now, the highest profit on fuel is happening at retail. Some stations are selling diesel for $1 a litre when they are paying $0.76 a litre. In the same areas buyers can pay anywhere from the $0.72 with a cardlock to $0.90 at other retail stations to a high of $1.06 I saw at one. Those that have lots of money and don't care just pay what the sign says they don't do a comparison. Is that somehow the fault of the refinery? The retailer?

With beef some shop around looking for the best deal at retail. Some pay less buying halves, some pay more buying organic, some just buy whatever they want no matter what the price. To blame anyone for different spending habit is plain stupid. It is a fact of life and people are free to choose how they shop, as long as they can afford it.

Jason, that lynching thing you mentioned has happened more than you know. My relative in Tn has told me that a man working in the plant was so abused that he came in the plant and tried to shoot his managers. He got off two shots before he was talked down and arrested. Another farmer in Tn reportedly pulled a gun on Tyson after they destroyed some of his property after he asked them not to. He lost his farm.

In Bryan, Tx, a grower was cheated out of the value of his farm by Sanderson Farms and went into the office with two guns. He made the plant manager call his wife and apologize to her. He then shot and killed the plant manager and another manager and then shot himself in the head and killed himself. Lynchings are happening, you just are not hearing about them.

There are may other stories I could tell you that are really happening today in these food industries. There was no avenue for justice for him or these other people.

On your example of beef, you are correct in pointing out the perishability of the beef. This correlates nicely with the perishability of the human body. If those people did not have water, they were going to lose it all, and some of them did. They would pay anything they had for that water. The elasticity of demand has everything to do with the substitutes, time, and need. All of them are part of the function.

SH lost his case of "paying lesss as needs are met" when it was revealed that the packers were still paying more in the captive supply markets than the cash markets when they already had more supply than they needed.

I will give you another example that has this time function of demand in it. There is a resturaunt up in Amarillo that has a huge steak meal for sale (someone might know how big the steak is and can post it). If you eat the whole meal in less than a certain amount of time, you can have the whole meal free. Most people end up paying for the whole meal. Elasticity is the % change in one variable in relation to the % change in another variable. In the water example and in the steak example, the demand for water was a function of time more than anything else. You could not eat another bite of the steak to save yourself the cost of buying the whole meal. Conversely in water, you would pay a huge price to not die of thirst. In both of these instances time was a critical element to the elasticity of the demand curve. It was almost straight up and down with limits (how much you could eat or drink at one time) of the demand defined by time.

In both of these instances, the demand curve over time is very much more elastic than the demand curve over a short period of time. This is true of almost all commodities and goods. In the Hillary Clinton trades, the trades Hillary made had to be closely correlated with the trades Tyson made in time in order to make money on the trades. Time was a critical element. Incidentally, I think these were cattle trades, correct me if I am wrong.

In all of these cases, including oil, no one made anyone buy the product being sold. Some people did take advantage of the demand in the short run time period. That is called price gouging. If the products were available and there was an artificial perception that there was a shortage, then some people could take advantage of the short term inelastic quality of the demand curve. The higher profits of the oil companies was an indication of this. Inelastic means that the demand curve does not change the same percentage amount as the percent change in price.

The trick in the cattle market was the elasticity of demand in the short run and market participants being able to come up with a good guess as to what route would be more profitable for them. As long as Tyson had enough captive supply, or inventory, they could drive the cash price down by discriminating against it for the same quality items. Cattle sellers had to guess what was the case. If they guessed going to captive supplies and enough of them did it, Tyson could then drive down the price for the next week as the cash market would be sufficiently thinner. This could continue to happen. Your perishability argument does come in also. Tyson argued that there was more value in the select (I still think the select term instead of good has a sales story behind it) beef and therefore had a reason to pay the cash markets less since it had "over ripe" cattle in it. This argument might hold up if they could show in their formula pricing that they actually paid less for the same fat cattle in formula pricing as they were in the cash market. Tyson refused to provide this information and GIPSA did not make it manditory reporting.

Jason, if you really want to know more about the elasticity of oil, the elasticity of supply, and price, you might find a book on the Texas Railroad Commission as it was their primary job to make sure the oil fields in Texas did not go through the boom bust cycle and there was price stability. OPec tries to do the same thing. The former head of the Texas Railroad Commision is now one of the people down in Texas that runs the Texas Observer named Jim Hightower. A book on that might be more digestable to you on these issues than a microeconomics textbook. READ, READ, READ!!!!
 

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