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>I have no illusions that companies will immediately lower their prices the moment their input costs start dropping, not after weathering decades of pressure fr

by slg 5y ago

>I have no illusions that companies will immediately lower their prices the moment their input costs start dropping, not after weathering decades of pressure from buyers to race to the bottom. They are going to cling to these gains for as long as possible, which is going to influence downstream prices for years to come. In fact there is evidence of this basically already happening as some industries like meat packers[1] are raising prices well above their increase in costs because "inflation" is a great scapegoat to raise prices and increase profits. Let this serve as a reminder that costs don't dictate prices in our economy, market forces dictate prices. All costs represent is a long term minimum price. The only way decreasing costs will yield decreasing prices is if there is adequate competition giving consumers an alternative to overpriced products. [1] - https://www.reuters.com/business/meat-packers-profit-margins-jumped-300-during-pandemic-white-house-economics-2021-12-10/ https://www.reuters.com/business/meat-packers-profit-margins...

partiallypro 5y ago
Tbf some of this is White House fluff to cover themselves politically. I have family in the beef industry and meat packing is backlogged heavily. Wait times are insane unless you're a big player. So it's no wonder profits would jump when the whole industry is log jammed. Some producers are actually running at a loss and waiting on contract renewals. So the idea that this is all about greed is nonsense.
- slg 5y ago
  >Wait times are insane unless you're a big player. And there is the point you are missing from my original comment. As I said, you need competition for prices to stay connected to costs. The big players control something like 80-90% of the market. They have the power to monopolize the supply pushing out the smaller players while simultaneously raising prices. How else would a backlog lead to increased profits if the backlog wasn't used as an excuse to raise prices beyond the increased costs?
  - partiallypro 5y ago
    I don't understand what you mean. If you are log jammed, you try to raise your prices to both defer non-essential customers and to expand your production capacity. That has nothing to do with monopolization. If you had 2000 companies all competing the price would not be flat, because that "competition" doesn't neccessarily mean there is more capacity. The packing companies are overwhelmed and are having a hard time finding workers. Do you expect them to just run at no profit or not price adjust based on the new demand surge? If you are backlogged that means you already have business that is not processed which feeds into your short term profits anyhow. It's no wonder you have increased profits when you already have a backlog of business and you've had to increase prices for the demand surge.
    - deleted 5y ago
      [deleted]
    - slg 5y ago
      It depends on the cause of the logjam. For example, you are blaming it here on them "having a hard time finding workers." That is a cost increase not a capacity decrease. Labor is simply more expensive. Costs increasing shouldn't lead to an outsized increase in both prices and profits as it is a voluntary decrease in production because they don't want to pay higher costs. With more competition, there would likely be someone who would accept that increased cost and lower margins as a way to increase market share. If the cause of the logjam is truly a capacity issue like shortages at suppliers, the market reaction you are expecting would happen upstream. It would be the suppliers that are increasing prices and seeing record profits.
      - nostrademons 5y ago
        It happens at multiple levels, and there's probably a bit of a delay between the supplier facing bottlenecks and the downstream price increases, but not as much as you might expense. I have an acquaintance that runs a box factory. Their prices are way, way up this year (> 50%) despite their production and profits also hitting records. Their costs went way up as well, and their price increases are roughly proportional to their cost increases (hence cost, profit, and price all went up by similar amounts). Their cost increases are non-uniform across inputs, but paper, glue, transportation, etc. all went up by roughly similar amounts (30-100% annually). This is game theory. My acquaintance can look at his input costs and assume that all of his competitors are facing the same input costs. Hence, he raises his prices by a proportionate amount as soon as he sees the new costs, figuring that all of his competitors will run the same mental model. The new input costs serve as a Schelling Point for competitors to collude without any actual communication between them. As long as someone doesn't actively defect, the new price stands, and then it becomes the input for the next tier of suppliers (wholesalers, generally) to set prices.
ksec 5y ago
While you could use that as argument in most commodity market. In reality is Tyson / IBP couldn't even full-fill demands from International market, and there are plenty of buyers around the world willing to paid. And buyers ( traders ) also bet on stocks which only further adds fuel to the current price. Just like toilet paper and chip shortage. From a market and supply chain perspective most commodities aren't that different. I guess if you are in commodity market trading now it would be fun. Edit: partiallypro's comment below is correct. And especially in beef industry where they have a long lead time. Poultry price dont fluctuate that much due to the fast turn over.

by slg 5y ago

partiallypro 5y ago

Tbf some of this is White House fluff to cover themselves politically. I have family in the beef industry and meat packing is backlogged heavily. Wait times are insane unless you're a big player. So it's no wonder profits would jump when the whole industry is log jammed. Some producers are actually running at a loss and waiting on contract renewals. So the idea that this is all about greed is nonsense.

slg 5y ago
>Wait times are insane unless you're a big player. And there is the point you are missing from my original comment. As I said, you need competition for prices to stay connected to costs. The big players control something like 80-90% of the market. They have the power to monopolize the supply pushing out the smaller players while simultaneously raising prices. How else would a backlog lead to increased profits if the backlog wasn't used as an excuse to raise prices beyond the increased costs?
- partiallypro 5y ago
  I don't understand what you mean. If you are log jammed, you try to raise your prices to both defer non-essential customers and to expand your production capacity. That has nothing to do with monopolization. If you had 2000 companies all competing the price would not be flat, because that "competition" doesn't neccessarily mean there is more capacity. The packing companies are overwhelmed and are having a hard time finding workers. Do you expect them to just run at no profit or not price adjust based on the new demand surge? If you are backlogged that means you already have business that is not processed which feeds into your short term profits anyhow. It's no wonder you have increased profits when you already have a backlog of business and you've had to increase prices for the demand surge.
  - deleted 5y ago
    [deleted]
  - slg 5y ago
    It depends on the cause of the logjam. For example, you are blaming it here on them "having a hard time finding workers." That is a cost increase not a capacity decrease. Labor is simply more expensive. Costs increasing shouldn't lead to an outsized increase in both prices and profits as it is a voluntary decrease in production because they don't want to pay higher costs. With more competition, there would likely be someone who would accept that increased cost and lower margins as a way to increase market share. If the cause of the logjam is truly a capacity issue like shortages at suppliers, the market reaction you are expecting would happen upstream. It would be the suppliers that are increasing prices and seeing record profits.
    - nostrademons 5y ago
      It happens at multiple levels, and there's probably a bit of a delay between the supplier facing bottlenecks and the downstream price increases, but not as much as you might expense. I have an acquaintance that runs a box factory. Their prices are way, way up this year (> 50%) despite their production and profits also hitting records. Their costs went way up as well, and their price increases are roughly proportional to their cost increases (hence cost, profit, and price all went up by similar amounts). Their cost increases are non-uniform across inputs, but paper, glue, transportation, etc. all went up by roughly similar amounts (30-100% annually). This is game theory. My acquaintance can look at his input costs and assume that all of his competitors are facing the same input costs. Hence, he raises his prices by a proportionate amount as soon as he sees the new costs, figuring that all of his competitors will run the same mental model. The new input costs serve as a Schelling Point for competitors to collude without any actual communication between them. As long as someone doesn't actively defect, the new price stands, and then it becomes the input for the next tier of suppliers (wholesalers, generally) to set prices.

ksec 5y ago

While you could use that as argument in most commodity market. In reality is Tyson / IBP couldn't even full-fill demands from International market, and there are plenty of buyers around the world willing to paid. And buyers ( traders ) also bet on stocks which only further adds fuel to the current price. Just like toilet paper and chip shortage. From a market and supply chain perspective most commodities aren't that different. I guess if you are in commodity market trading now it would be fun. Edit: partiallypro's comment below is correct. And especially in beef industry where they have a long lead time. Poultry price dont fluctuate that much due to the fast turn over.