Supply Chains and Monopolistic Power
It’s Called Stealing – What Big Retailers and Meat Packers are Doing to Cattlemen
Kind of surprised by the shock and awe of the media over monopolistic power exerted on and by Supply Chains. They can be monopolistic and abusive because they are efficient.
Just a rambling conversation
“Protests have always been a part of America and this one at the Malheur National Wildlife Refuge appears to be no different. Although the exhibited violence and the taking of a life at Malheur did not have to occur. It has also played a part in other protests.”
In this case it was not necessary and it achieved no good results.
These were the words I used to start “Why the Refuge Protestors May Have Been Right.” Quite a few people took issue with my 2016 commentary on the take over of the Malheur National Wildlife Refuge.
Mother Jones pointed out the obvious,
“the ranchers who supply the United States with beef operate under razor-thin, often negative profit margins.
It’s not hard to see why rancher’s grazing rights are an issue. Ranchers’ struggle for profitability gives them strong incentive to expand their operations to increase overall volume and gain economies of scale.”
Here we are again . . . talking about similar issues due to a pandemic rather than an economic shutdown, empty shelves in grocery stores, increasing prices for energy, labor, etc., supply chain capacity overtaxed, and food prices especially high. And small agricultural farmers and cattle ranchers still have the same issues.
A 2011 paper by the US Department of Agriculture found that the average cost per cow for small (20-49 head) operations exceeded $1,600, while for large ranches (500 or more head), the average cost stood at less than $400.
That is old information.
I do not have more current information. I am sure the ratio today is still about the same or worse.
Now the commentary I wrote, to which many took issue with was in 2016. Mother Jones was the same year and I used their article. Going back further, Wall Street was busy blowing themselves up in 2008/9. Housing lost value and many were invested in mortgages which were greater than the value of the homes.
As a Purchasing Manager NA in 2009, I was chasing semiconductors due to; no demand ratcheting up to increased demand, production just starting up again at the chip manufacturers, and paying increased prices and freight charges for allocated parts. Automotive companies did not maintain their orders so the chip manufacturers shut down till new orders were placed. It took about a year for things to settle back to normal after the orders they needed tomorrow were actually filled. Chip manufacturers made money and the public paid for iy in prices.
With over whelming, placed orders 10, 12, 16 and 20 weeks out for these chips, the manufacturers made more money. And increased lead times do nothing for improving manufacturing throughput. I had to explain such to many salesmen. It will not increase capacity. The chip manufacturers knew this. It was game and their profits soared.
Accepting orders beyond lead time while at capacity is futile also. Only increased capacity improves throughput. A manufacturer could add new capacity or reactive old and less efficient capacity to improve throughput.
Doing the latter is smart. Goldratt discussed this in his book “The Goal.” I consulted and worked in this field of endeavor. Companies selling capacity constrained components are cleaning up.
Nothing new here.
Over at the Washington Monthly where Paul Glastris just recently closed down the comments section for the nobodies and the riff-raff who were there just to disrupt. What was an excellent place to pick up a good on-topic conversation disintegrated.. Try to quote something from Angry Bear or tell an experience and you were in moderation.
Paul is the editor in chief who has been cleaning house in an attempt to save the Washington Monthly. Paul has also recently discovered monopolies are controlling business in manufacturing chips, ocean transportation, containers, unloading, meat packing and processing, oil processing, etc. He is right in that the consolidation of businesses into monopolies has given them enough power to control the supply chain and weaponize it. Just dribble out enough to keep them interested.
This is old news. It has happened other times.
And it did not happen overnight. Semiconductors were a big issue in 2008 and 2009 with the Japanese telling the VP of Chrysler to allocate some of their Chip allocation to us for Chrysler product. I had seen the availability of piston rings decrease as demand increased in 1980 due to over selling capacity. Their solution was to lengthen lead time which does nothing. For chips there always was overseas fabrication of them while wafer growth was somewhere else.
Bring Back to the US the Overseas Production . . .
If you do not want to pay overhead in the US, you move production to countries where there is less Overhead. Overhead is everything besides Direct Labor and Materials. However, overseas manufacturing will add 4 weeks of ocean and rail to get parts to Detroit. You own the inventory as soon as it is onboard China.
Squawking about inventory shortages and higher costs after we went overseas to manufacture to avoid US Overhead and get cheap prices seems kind of silly. Pre-pandemic, few were talking about bringing manufacturing back to the US.
Taiwan has the largest chip manufacturing facility. They want US protection from China. We should be talking to them.
Paul Glastris treats monopolistic powers driving the supply chain issues as something new. It is not and has been going on for decades. He just never noticed it as it was not a big concern just like the concentration of news outlets. We had cheap parts and little Overhead.
Barry C. Lynn’s, “Cornered: The New Monopoly Capitalism and the Economics of Destruction,” has about it the feel of a secret history. It arises directly from the old antitrust tradition, and it presents us with an amazing catalogue of present-day monopolies, oligopolies and economic combinations.”
Well It is not so recent anymore having gone public in 2010. In 2006, Barry Lynn wrote” a 2006 essay in Harper’s Magazine in which he described the power Wal-Mart exerted over its suppliers and encouraged Americans to use antitrust law ‘to break Wal-Mart into pieces.'” This is old news regurgitated to sell news.
Paul Kennedy’s “The Rise and Fall of The Great Powers” gives examples of monopolistic powers going back centuries.
The control of a supply chain is nothing new and nothing to be surprised about as it has been occurring. It would not have sold magazine one if the Covid Pandemic had not happened and exposed how supply chain can be used to exert monopolistic power and weaponize.
Some More Reading
“U.S. Food Prices Are Up. Are the Food Corporations to Blame for Taking Advantage?,” Time, Claire Kalloway, January 2022
“The Oregon Militia Is Picking the Wrong Beef With the Feds,” Mother Jones, Tom Philpott, January 2016
“Obama’s Game of Chicken,” Washington Monthly, Lina Khan, November 2012
“The World Turned Upside Down: Lina Khan’s FTC Fights for Domestic Cattle Ranchers,” BIG newsletter, Matt Stoller, July 1, 2021
“A New Age of Monopolies,” WSJ, Thomas Frank, March 2010
I worked for a steel company. Pricing was to market, no matter what our cost of production was. The big guys set the prices. It was that way since before I was born. Literally.
Which is why I look to or for cost(s) first and then pricing. How else can you judge what is legitimate or not? Healthcare is another issue where the prices far exceed costs and R&D.
It really was a cliche. Cost cutting meant eliminated the industrial engineers who monitored production costs, long before I was hired. One of my last jobs was to update the calculation model and cost each product. No one was surprised that some products lost money. What was surprising was how few products actually were profitable. While they were trying to close down the really unprofitable lines, we kept getting more and more orders for products that hadn’t sold that well before and were very unprofitable. It seems that the engineering people were doing sales work to keep their lines open. Losing money on every sale, but they were going to make it up in volume. If I hadn’t seen it I would have thought it was out of the Onion.
I also worked for the company that bought their assets and reopened the plant. They too would sell at a loss but they did it knowingly to keep our best customers from having to go elsewhere for some of their material, and it was very rare.
I still find it hard to believe that the office peons had more common sense and concern for the company than executive row.
It would have been nice if every product made in a factory was profitable. If it covers fixed costs, it is justifiable as you can remedy variable costs as you explained in your first sentence or cover the unprofitable product with profitable product. I cost modeled plastic, metal, and rubber components. I was good enough at such to where the buyers at Chrysler, etc. would call me too to discuss price and cost.
I preferred to concentrate on inventory and lead times, both of which were exaggerated to levels not needed when considering throughput. It is there “Just In Case.”
I would also throw in https://www.thefinancials.com/charts/i007015z.jpg and then juxtapose that to https://fred.stlouisfed.org/series/APU0000703112. The inversion happens around September of last year at the price per 100 goes into a head dive as the price per ground beef spikes. It has somewhat begun to recover but only recently. If you take note of the current news cycle: https://www.reuters.com/markets/commodities/us-meat-production-slows-omicron-hits-staff-inspectors-2022-01-10/ it is about to get worse again.
This is basically prepping us for the next bump in meat prices as the demand is not waning but the supply is taking a bit of a hit due to workers calling out sick. The cattle ranchers, on the other hand, are having to background the entries into the feedlots as the feedlots stall, waiting for the intake to start up again at normal levels. This causes the feedlot operators to expend additional silage to feed additional head of cattle they hadn’t planned on holding. Cargill itself has feedlot pens, and if you have been to the Pandhandle of Texas, you’ve smelt it.
Wouldn’t hurt any of us to eat a little less meat. My first two summer jobs, 1969/70, were riding fence on an Eastern Oregon cattle ranch, I learned how to read reading Louis L’Amour … cattle ranching has always been more myth than money-making.
Bureau of Land Management still builds the best fences.
Reading through Jane’s comment notwithstanding the Onion caveat I was struck by a post I came across yesterday at Business Insider about a now declassified secret CIA manual for conducting secret sabotage.
I followed your link. Interesting commentary. Just like waste resource and funds doing the unneeded. In 69, I was gone doing Uncle Sams work protecting you from the communist horde. Looks like you had an interesting beginnings. Some of the older BLM fences are still around after umpteen years. I was not too impressed with the fences at Grand Canyon and especially in Winter and the paths around the canyon were snow covered and also icy. They were low enough and you could go right over.
I drove my group to kill plant work orders or move them out if the inventory was not needed. This was during the early eighties as we slipped into a bad recession. I was told by the Controller, our efforts kept the Fluid Power Division profitable 9 of 13 months, breakeven 3 more months, and the division lost money 1 month. And then as a thank you, they laid me off (two weeks of pay after 4+ years) and moved a guy from sales into my position so he could learn. I also implemented MRP II there and the distribution system.
It was the first time the department had authority based on facts or numbers
My next summer “job” …
I’ve been over the mountain and down the river