June 19, 2017

19/06/2017: The accordion, the contrarian and the robot

by Christophe Pelletier


Although change happens all the time, in some areas human nature demonstrates great constancy

 
Christophe Pelletier

One of these areas is how Pavlovian we react to market fluctuations. Agriculture knows many cycles, most of which are as much the result of human nature as the mechanics of economics.

In the time of high commodity prices that preceded and followed the Great Recession of 2008, one of the main questions I was asked about the future of agriculture was to give predictions about prices and profitability of agriculture. This is a tricky exercise if there is any.

So many factors can influence both supply and demand that it is unrealistic to believe someone could predict with certainty future prices. Price predictions would only be meaningful by predicting costs at the same time.

Despite the difficulty, many economists venture in the exercise. The levels of accuracy are disappointing. Past research on economists’ and gurus’ predictions has shown accuracy levels of 47 percent on average.
 

In other words, tossing a coin would statistically be more accurate by a margin of three percent. When “predicting” the future, it is more useful to focus on patterns rather than trying to miraculously try to pull the right numbers. Human nature is rather predictable.

When prices and profitability are good, suppliers want to produce more, because they expect the result to be even higher profits. It is intuitive, and it would work fine only if the competitors did not follow the same thinking.

Unfortunately, they do and the result is an increase in supplies. As it takes two to have a supplier-customer relationship, the flip coin of the high price medal is that buyers are less warm to buy more of what increase their costs. I like to compare value chains to an accordion.

There is only so much money that flows between the two ends of the entire chain, and all the links must share that money. One end is the consumer market and depending on prices, consumers switch foods when prices reach a pain threshold.

Since the amount of money entering value chains actually come from the consumer end, consumer resistance limits the elasticity of the entire chain. Thus, depending on the relative supply and demand between the individual links of the chain, some see their profitability expand while others see it shrink.


Read the full article, HERE.
 

The Global Miller
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which is published by Perendale Publishers Limited.


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