Onions — a data point on exports

I’ve been looking at horticultural crops and their export opportunities. It can be a fickle business. You work hard to develop a specific market, and overnight the rules can change or a new competitor comes in. Tastes and preferences are different around the world and change over time, so fruit varieties that sell well this year in Europe might not be suitable in five years or in Asian countries.

Horticulture in New Zealand is an export industry. Wine, onions, potatoes, apples, cherries, etc. — they sell some on the domestic market but lots overseas. Mainly, we aren’t big players on international markets — not like dairy — so there is lots of room to grab niche markets but also the danger of being squashed.

Being an export industry, horticulture is affected by the exchange rate. I was looking at onion exports and thought they looked a bit like the inverse of the exchange rate. Here’s the graph:

The correlation coefficient between the two series is -0.54, which is reasonably strong. Yes correlation is not causation and no I haven’t run any statistical tests and yes it’s a short data series. But, at first blush it does suggest that the high exchange rate is hindering this export industry.

As the title suggests, I’m just offering this as a data point. When we talk about the impacts of exchange rates and the OCR and Auckland housing and manufacturing, this is the sort of thing going on out there in the economy.

 

A parable about trade

7.20 am, in a mall in Christchurch.

I’m sitting at a cafe, the first customer of the day. So first, in fact, that they aren’t even ready to serve me.

I watch the mall stores get ready. The butcher, the baker, the sushi-maker. Not exactly ‘Il est cinq heures, Paris s’eveille’, but not without its charms.

The barista shooshes up a couple of coffees and takes them to the butcher. It occurs to me — not every shop has a coffee maker. It sounds trivial, but it tells us something. Why don’t they? Coffee making is not hard, the technology is widely available.

This is a great example of specialisation. Espresso makers cost a bit, and getting more coffees per machine is good. Baristas get a technique going, learning to make coffees better and faster. The butcher could, of course, make coffee and chop meat. But he can do better focusing on just the one.

Next, the barista comes out of the butcher’s shop, and she’s carrying a couple of packages of meat. It doesn’t look like meat for the cafe, but something to take home. There we go — trade. Her coffee for his meat. At a ratio mutually agreed. Because they trade, they can specialise. She doesn’t have to butcher her own meat. It isn’t so much ‘taking in each other’s washing’, it’s more exchanging washing for baking.

The mall is its own economy, small producers trading amongst themselves. So, sales to mall customers are like exports from Mall-land. It becomes clear what trade can provide.

Why do we go to the mall?

• to benefit from specialisation — just like the butcher and the barista
• to get stuff we can’t get elsewhere – stuff we can’t make ourselves regardless of how hard we try
• to get different stuff — yeah, I could have coffee at home, but coffee out is a change.

International trade isn’t any different in principle. We get stuff we can’t produce here — rare minerals, tropical fruits. We can also focus on doing some things well — milk powder, merino wool. And we can have more diversity — climb each other’s mountains, ford each other’s streams.

It works for the barista and butcher, and it can work for all of us.

Markets in Easter candy

Easter is almost upon us, reminding me of my early lessons in endowments, preferences, and Pareto optimisation. I’m talking, of course, about trading Easter candy.

Now, parents have an impossible task. They can either give every child exactly the same endowment of candy (jelly beans, chocolate eggs, marshmallow chicks, etc.), or they can attempt to equalise the satisfaction of the children by matching endowments to known preferences.

I come from a big family. Easter morning, our baskets of candy would be waiting for us, delivered overnight by the Easter bunny. In a small family, it is possible to spend more time giving each child what they want. In a big family, everybody just needs to get in line and accept what they get.

So, we all had pretty much the same baskets. As a result, once the chocolate bunnies were eaten, we were each left with candy we didn’t particularly like. There was scope for Pareto improvement — each one of us could be better off and no one worse off by engaging in free trade. I was the only one who liked black jelly beans, so that was my ace in the hole. I was pretty much the monopsony buyer of black jelly beans. On the other hand, I don’t particularly care for marshmallow chicks, so I was happy to get rid of them. Also, as an older child, I had a bit of an advantage over my less experienced siblings.

Of course, candy is candy, even if it isn’t the best. Each piece still has a minimum sugar value. This sugar value functioned as a reserve price in the barter process.

What did I learn from all this?

• heterogeneity of preferences can be a strong driver of trade
• failures in initial endowments can be corrected through open markets
• information is powerful — use it to your advantage
• the trade price is indeterminate, so try to find your partner’s reserve price.

When I say that trades were Pareto improving, that’s a technical term. It doesn’t mean there weren’t arguments and even tears. But that’s all part of the information discovery process, right? And, as much as everyone was better off, I have to admit that I might have been a bit betterer off. What can I say? That’s what big brothers do.