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Posts Tagged ‘Monopoly

“Before the monopoly should be permitted, there must be reason to believe it will do some good – for society, and not just for monopoly holders”*…

From the ever-illuminating Matt Stoller (@matthewstoller), eagle-eyed sentinel against exploitative monopolies…

I write a lot about big tech, but today’s issue is about something so basic and fundamental we literally don’t think about it. Salt. Salt mining is one of humanities’ oldest industries, with wars fought over this commodity. Cities like Venice monopolized the salt trade in the middle ages for geopolitical reasons, and the British tried to block colonists from access to salt during the American Revolution to prevent their ability to preserve food. 

Today salt is still used in everything from chemicals to food preservation. Its main use is deicing our roads, because salt from mines across North America, and shipped in from overseas, makes it possible to drive in all sorts of weather. Salt saves lives, stops car accidents, and makes our economy run. 

And in the U.S. and Canada, salt mining is being monopolized, as we speak…

In the winter, when it’s really cold and snowy, what Americans need is not a competitive semiconductor industry or better app stores. They need salt. And not the kind of salt that flavors our food, but the kind that melts snow and ice. If we don’t have salt, no one can drive, because salt is what keeps our roads manageable. Without salt, trucks can’t deliver supplies, people can’t get to stores or work, and the economy comes to a standstill. 

And people die. A lot of them.

Every year, over 1300 people die in car accidents due to snowy, slushy, or icy pavement, with another 117,000 injured. Snowy weather is also a huge waste of time and money, costing roughly $500M a day, and 544 million vehicle-hours a year of delay. Road salt doesn’t eliminate this problem entirely, but it comes close, reducing collisions by up to 88% and injuries by 85%. Studies show that deicing salt pays for itself within the first 25 minutes after it is spread. Roughly 40% of domestic salt, produced largely from mining, is used not for food or chemicals, but for deicing. It’s a major expense for cities and states, and commercial customers like shopping malls. And because weather leads to demand spikes, and America tends to operate in just-in-time style inventory models instead of managing risk by storing surpluses of critical commodities, there are often shortages of road salt precisely when everyone needs it most.

And that’s why I paid attention when ex-convict and junk bond king Michael Milken’s alleged private equity firm, Stone Canyon, bought two major salt producers over the last year. Early in 2020, Stone Canyon acquired Kissner, a producer of deicing salt, private label consumer salt, and salt-related chemicals. Then, nine months later, Stone Canyon bought Morton’s Salt, the largest producer in the world, for $3.2 billion, and it is now awaiting antitrust approval. Kissner is itself a roll-up of the salt industry, having bought Central Salt and Lion Salt and turned itself from a small Ontario-based regional distributor of ice melt into one of the giants of the industry. So Stone Canyon is overseeing a roll-up of roll-ups.

This series of mergers should terrify cities across the upper Midwest, who have to buy salt in unpredictable spot markets and often deal with shortages when the weather gets bad. Minnesota, for instance, bought roughly 1.5 million tons of salt for the 2020 season. Salt is a regional business, it’s just not economical to move extremely bulky road salt over land more than 150 miles, so while port cities can get salt from abroad in ocean vessels, and salt can be barged up the Mississippi river, much of the upper Midwest and Canada has to buy local. (It doesn’t help that America’s rail system is monopolized.)…

The salt industry is an oligopoly, and the number of suppliers to Governments in regions of the Great Lakes markets will shrink from 4 to 3 and in some geographies from 3 suppliers to 2. There are two consequences of this consolidation of salt production. The first is that prices will go up, and municipal budgets will be stretched. 

Salt is sold in blind bidding processes. Governments put out tender offers, and then suppliers bid. When bidding, suppliers will set prices by considering the supply levels among competitors. If there are only two competitors in a market and one of them has committed their salt production for the year, then the remaining one is a monopolist who can just set the price. This is particularly true for a bunch of Midwestern states, like Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota.

But the much more serious problem is that of shortages. The industry manages demand spikes from weather not by having spare production capacity or lots of storage, but by overpromising salt deliveries. The rule of thumb is that one out of every five years will see a mild winter with few sales, three out of five will be snowy but normal, and one out of five will involve extreme weather and much higher demand. Of course, rules of thumb have gone out of the window now that there’s more extreme weather, which means demand drops and spikes will be more common. 

One of the best ways of winning market share is to bid low, and then if demand is high, to simply not deliver to Commercial customers (Landscapers that service residential and commercial customers are almost always shafted first, meaning driveways and sidewalks go unsalted.) There are penalties in contracts for doing this to government customers, but when the snow hits, it doesn’t matter and the producers often pay the penalties if they are even enforced by the government entities. All customers need the salt when it snows, and a contract dispute doesn’t get in the way. 

It’s quite possible, and indeed likely, that shortages will worsen. Without competition, it will be much harder to go to a different supplier, because there won’t be any other suppliers. And private equity takeovers in general are operational nightmares, which means that it’s likely Kissner and Morton will have problems with production and distribution purely because mergers tend not to work out. 

There’s one final piece of the problem. Because private equity firms have too much money and not enough acquisition targets, prices for mid-market industrial companies are really high. So Stone Canyon almost certainly overpaid for both Kissner and Morton’s. To justify its investment, Stone Canyon is going to have to cut costs and reduce capital spending, which will harm production, because salt mining needs a lot of investment. Then it will likely have to raise prices. In other words, if the merger goes through, the financial pressure of paying such rich prices for salt firms will force significant price hikes, and potentially shortages in the market… 

A private-equity salt roll-up suggests that we’re in for shortages and price spikes: “How a Salt Monopoly Could Spike Car Accidents in the Midwest,” eminently worth reading in full.

For other reasons to be paying attention to salt: “How America got addicted to road salt — and why it’s become a problem.”

* Lawrence Lessig

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As we study saline substitutions, we might recall that it was on this date in 37 CE, following the death of Tiberius, that the Roman Senate annulled Tiberius’ will and confirmed Caligula, his grandnephew, the third Roman emperor.  (Tiberius had willed that the reign should be shared by his nephew [and adopted son] Germanicus and Germanicus’ son, Caligula.)

While he has been remembered as the poster boy for profligacy, Caligula (“Little Boots”) is generally agreed to have been a temperate ruler through the first six months of his reign.  His excesses after that– cruelty, extravagance, sexual perversity– are “known” to us via sources increasingly called into question.

Still, historians agree that Caligula did work hard to increase the unconstrained personal power of the emperor at the expense of the countervailing Principate; and he oversaw the construction of notoriously luxurious dwellings for himself.  In 41 CE, members of the Roman Senate and of Caligula’s household attempted a coup to restore the Republic.  They enlisted the Praetorian Guard, who killed Caligula– the first Roman Emperor to be assassinated (Julius Caesar was assassinated, but was Dictator, not Emperor).  In the event, the Praetorians thwarted the Republican dream by appointing (and supporting) Caligula’s uncle Claudius the next Emperor.

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“All I know about music is that not many people ever really hear it”*…

In the early 1950s, James Baldwin moved to a Swiss village in the Alps with two Bessie Smith records and a typewriter under his arm. It was there that he finished his first novel, Go Tell It on the Mountain (1953), which he largely attributes to Smith’s bluesy intonations: “It was Bessie Smith, through her tone and her cadence, who helped me to dig back to the way I myself must have spoken…and to remember the things I had heard and seen and felt. I had buried them very deep,” Baldwin wrote in an essay.

For the eminent American novelist and essayist, music was generative, unearthing inspiration that may otherwise remain concealed. Ikechúkwú Onyewuenyi, a curator at the Hammer Museum in Los Angeles, hopes to rouse a new generation of writers with “Chez Baldwin,” a 478-track, 32-hour-long Spotify playlist based on Baldwin’s vinyl record collection.

“The playlist is a balm of sorts when one is writing,” Onyewuenyi told Hyperallergic. “Baldwin referred to his office as a ‘torture chamber.’ We’ve all encountered those moments of writers’ block, where the process of putting pen to paper feels like bloodletting. That process of torture for Baldwin was negotiated with these records.”…

Listening to the Joy in James Baldwin’s Record Collection“: “Chez Baldwin,” a 32-hour-long Spotify playlist based on Baldwin’s vinyl record collection.

* “All I know about music is that not many people ever really hear it. And even then, on the rare occasions when something opens within, and the music enters, what we mainly hear, or hear corroborated, are personal, private, vanishing evocations. But the man who creates the music is hearing something else, is dealing with the roar rising from the void and imposing order on it as it hits the air. What is evoked in him, then, is of another order, more terrible because it has no words, and triumphant, too, for that same reason. And his triumph, when he triumphs, is ours.” – James Baldwin

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As we listen, we might recall that it was on this date in 1575 that Queen Elizabeth granted choral composer Thomas Tallis and his student William Byrd a 21-year monopoly for polyphonic music and a patent to print and publish “set songe or songes in parts,” one of the first arrangements of its kind in England. Tallis had exclusive rights to print any music in any language, and he and Byrd had sole use of the paper used in printing music.

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“The great packing machine ground on remorselessly, without thinking of green fields; and the men and women and children who were part of it never saw any green thing, not even a flower”*…

 

beef

 

Cheap beef and a thriving centralised meatpacking industry were the consequence of emerging technologies such as the railroad and refrigeration coupled with the business acumen of a set of honest and hard-working men like… Philip Danforth Armour. According to critics, however, a capitalist cabal was exploiting technological change and government corruption to bankrupt traditional butchers, sell diseased meat and impoverish the worker.

Ultimately, both views were correct. The national market for fresh beef was the culmination of a technological revolution, but it was also the result of collusion and predatory pricing. The industrial slaughterhouse was a triumph of human ingenuity as well as a site of brutal labour exploitation. Industrial beef production, with all its troubling costs and undeniable benefits, reflected seemingly contradictory realities.

Beef production would also help drive far-reaching changes in US agriculture. Fresh-fruit distribution began with the rise of the meatpackers’ refrigerator cars, which they rented to fruit and vegetable growers. Production of wheat, perhaps the US’s greatest food crop, bore the meatpackers’ mark. In order to manage animal feed costs, Armour & Co and Swift & Co invested heavily in wheat futures and controlled some of the country’s largest grain elevators. In the early 20th century, an Armour & Co promotional map announced that “the greatness of the United States is founded on agriculture”, and depicted the agricultural products of each US state, many of which moved through Armour facilities.

Beef was a paradigmatic industry for the rise of modern industrial agriculture, or agribusiness. As much as a story of science or technology, modern agriculture is a compromise between the unpredictability of nature and the rationality of capital. This was a lurching, violent process that saw meatpackers displace the risks of blizzards, drought, disease and overproduction on to cattle ranchers. Today’s agricultural system works similarly. In poultry, processors like Perdue and Tyson use an elaborate system of contracts and required equipment and feed purchases to maximise their own profits while displacing risk on to contract farmers. This is true with crop production as well. As with 19th-century meatpacking, relatively small actors conduct the actual growing and production, while companies like Monsanto and Cargill control agricultural inputs and market access.

The transformations that remade beef production between the end of the American civil war in 1865 and the passage of the Federal Meat Inspection Act in 1906 stretched from the Great Plains to the kitchen table. Before the civil war, cattle raising was largely regional, and in most cases, the people who managed cattle out west were the same people who owned them. Then, in the 1870s and 80s, improved transport, bloody victories over the Plains Indians, and the American west’s integration into global capital markets sparked a ranching boom. Meanwhile, Chicago meatpackers pioneered centralised food processing. Using an innovative system of refrigerator cars and distribution centres, they began to distribute fresh beef nationwide. Millions of cattle were soon passing through Chicago’s slaughterhouses each year. By 1890, the Big Four meatpacking companies – Armour & Co, Swift & Co, Morris & Co and the GH Hammond Co – directly or indirectly controlled the majority of the nation’s beef and pork…

Exploitation and predatory pricing drove the transformation of the US meat industry – and created the model for modern agribusiness: “The price of plenty: how beef changed America.”

* Upton Sinclair, The Jungle

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As we muse on meat, we might recall that it was on this date in 1637 (or nearabouts, as closely as scholars can say) that Cardinal Richelieu introduced the first table knives (knives with rounded edges)–reputedly to cure dinner guests of the unsavory habit of picking their teeth with the knife-points of the daggers that were, until then, used to cut meat at the table (though some suspect that Richelieu was acting in self-preservation).  Indeed, years later, in 1669, King Louis XIV followed suit, forbidding pointed knives at his table; indeed, he extended the prohibition, banning pointed knives in the street in an attempt to reduce violence.

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Written by LW

May 14, 2019 at 1:01 am

“A buyer with disproportionate power”*…

 

Chickens are seen at a poultry farm at Hartbeesfontein, a settlement near Klerksdorp, in the North West province

Imagine the farm that raised the chicken that produced the meat that sits in your sandwich: a few workers, thousands of birds, tens of thousands of pounds of white and dark meat, work that starts before dawn and ends after dusk, uncertain revenue, slim profits. There are thousands of these small farms in the United States, and they benefit from millions of dollars of taxpayer support each year.

Chicken is America’s favorite protein, after all. Family farms are one of its most prized institutions. And farming is tough business. According to one estimate, a new, hangar-like chicken house costs something like $300,000 to build, and more to maintain and upgrade. “A farmer has to invest over $1 million just to get set up—a lot of debt to carry when you’re paid on average between 5 cents and 6 cents per pound of chicken produced,” Sally Lee of the Rural Advancement Foundation International-USA has found. Even when a chicken-growing operation is established, financial success is far from a sure thing. Given those realities—and given the American love for and support of the family farm—generous taxpayer subsidies seem not just sensible, but vital.

But a government report released this spring calls into question whether all those family chicken farms are really family chicken farms, and whether those taxpayer dollars might be better spent elsewhere. The Small Business Administration’s inspector general looked at poultry growers, and found that many of them are tied-and-bound contractors—so controlled by their agreements with giant food corporations that they no longer act like independent entities. Why offer them taxpayer support meant for the little guy?…

What your chicken dinner says about wage stagnation, income inequality, and economic sclerosis in the United States: “The Rise of the Zombie Small Businesses.”

For a consideration of the effects of corporate concentration on wages: “More and more companies have monopoly power over workers’ wages. That’s killing the economy.”

* Monopsony: 1) (economics) A market situation in which there is only one buyer for a product; also, such a buyer. [from 1930s] 2) (economics) A buyer with disproportionate power.  -Wiktionary

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As we cogitate on (real) competition, we might recall that it was on this date in 1947 that fabled computer scientist Grace Hopper (see here and here), then a programmer at Harvard’s Harvard’s Mark II Aiken Relay computer, found and documented the first computer “bug”– an insect that had lodged in the works.  The incident is recorded in Hopper’s logbook alongside the offending moth, taped to the logbook page: “15:45 Relay #70 Panel F (moth) in relay. First actual case of bug being found.”

This anecdote has led to Hopper being pretty widely credited with coining the term “bug” (and ultimately “de-bug”) in its technological usage… but the term actually dates back at least to Thomas Edison…

bug

Grace Hoppers log entry

 

Written by LW

September 9, 2018 at 1:01 am

“if we’re measuring the wrong thing, we’re going to do the wrong thing”*…

 

Money and markets have been around for thousands of years. Yet as central as currency has been to so many civilizations, people in societies as different as ancient Greece, imperial China, medieval Europe, and colonial America did not measure residents’ well-being in terms of monetary earnings or economic output.

In the mid-19th century, the United States—and to a lesser extent other industrializing nations such as England and Germany—departed from this historical pattern. It was then that American businesspeople and policymakers started to measure progress in dollar amounts, tabulating social welfare based on people’s capacity to generate income. This fundamental shift, in time, transformed the way Americans appraised not only investments and businesses but also their communities, their environment, and even themselves.

Today, well-being may seem hard to quantify in a nonmonetary way, but indeed other metrics—from incarceration rates to life expectancy—have held sway in the course of the country’s history. The turn away from these statistics, and toward financial ones, means that rather than considering how economic developments could meet Americans’ needs, the default stance—in policy, business, and everyday life—is to assess whether individuals are meeting the exigencies of the economy…

Eli Cook explains how America pioneered a way of thinking that puts human well-being in economic terms: “How Money Became the Measure of Everything.”

* “GDP is not a good measure of economic performance; it’s not a good measure of well-being.  What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.”    – Joseph Stiglitz

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As we muse on metrics, we might spare a thought for Henry George; he died on this date in 1897.  A writer, politician and political economist, George is best remembered for Progress and Poverty, published in 1879, which treats inequality and the cyclic nature of industrialized economies, and proposes the use of a land value tax (AKA a “single tax” on real estate) as a remedy– an economic philosophy known as Georgism, the main tenet of which is that, while individuals should own what they create, everything found in nature, most importantly the value of land, belongs equally to all mankind.

George’s ideas were widely-discussed in his time and into the early 20th century, and admired by thinkers like Alfred Russel Wallace, Jose Marti, and William Jennings Bryan; Franklin D. Roosevelt sang his praises, as did George Bernard Shaw.  But with the rise of neoclassical economics, George’s star began to recede.  Still, more modern thinkers like Albert Einstein and martin Luther King were fans.

In a sequence that mimicked George’s arc of influence, it was George’s work that inspired Elizabeth Magie to create The Landlord’s Game in 1904 to demonstrate his theories; ironically, it was Magie’s board game that became in the 1930s (as recently noted here and here) the basis for Monopoly.

In 1977, Joseph Stiglitz showed that under certain conditions, spending by the government on public goods will increase aggregate land rents/returns by the same amount. Stiglitz’s findings were dubbed “the Henry George Theorem,” as they illustrate a situation in which Henry George’s “single tax” is not only efficient, it is the only tax necessary to finance public expenditures.

Henry George

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Written by LW

October 29, 2017 at 1:01 am

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