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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].
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].
