One Potato , Two Potatoes , Three Potatoes – Oh those raw materials
How hard can it be to make potato chips? Buy the potatoes, stick them in the fryer, bag them up, throw them into a box ,stick them on a truck and deliver them to the store.
However, as you may suspect by now, this essay is intended to teach you how e real world of business works. .
We will look one of the most basic raw materials that go into making a potato chip. Potatoes. And through potatoes we can see what really happens in the world of business.
When you make any food product, it is hard to predict what your costs of raw materials will be. If you make a watch, you can pretty much predict how much it will cost you to buy each component for that watch. And those components do not vary from year to year.
But look at potato chips. They depend on potatoes ( okay, I know that is obvious, but bear with me) and a whole range of things can happen to the potato supply ranging from diseases to laws to bad luck. And that makes it hard to predict each year how much potatoes will cost you.
Oh – those variable costs!
To toss out an economic term, potatoes represent “variable costs”, costs which change from year to year, as opposed to fixed costs, which stay “fixed” every year. A fixed cost might be the mortgage on your building, the payments you make on your fryers, or a fleet of trucks.
So your challenge becomes trying to control the costs of potatoes, because even if they increase, you can’t increase the price on a bag of chips, you still have to sell those chips for about 2 bucks a bag.
How much can the price of potatoes change? In June 2008 they were $10.37 per 100 pounds, A year earlier they were $7.75.
That is an increase of 34 percent. Can you imagine making a car and the raw materials for the care increase 34 percent? Yet potato chip manufacturers have to deal with that 34 percent increase without passing it onto the consumer. Can you imagine of the price of chips went up 34 percent in a year?
What is going on here? Where are my cheap potatoes?
But why does the price of raw materials, potatoes, fluctuate so much?
A number of factors affect the price of potatoes and many factors are out of the chip maker’s control. This means, and this could be the key lesson for any business person.. Is that you must adjust, adjust and adjust again.
Anyway, while we always take for granted that we will have always have potato chips, let look at the many factors that snack food companies fight against everyday, just to get potatoes to make chips.
One key reason for the 34 percent price increase in potatoes was that flooding destroyed a number of acres of new crop potatoes, up to 50 to 70 percent in Missouri and other areas.
Hmm – that can’t be good when the materials you need to make your product are wiped out by flooding and you still must get chips to the shelf to keep your employees employed and your customers happy.
Remember there ain’t no revenue if you don’t sell any chips.
But hey, despite the occasional flood, what else could happen.
Well, the total US acres of potatoes planted has been reduced by ten percent from 2007. Why? The government has mandated that 25 percent of all the corn crop must be used to make ethanol and not food.
And if you are a farmer with half a brain and the government is paying you to grow corn and not potatoes, you are going to grow corn.
Opportunity costs – a cool economic term
Let me sneak in another economic term here. Opportunity Costs. Everything has a opportunity cost. If you watch TV for a hour, you have lost the opportunity to read a book, eat dinner, play catch with your son.
If you grow corn on your 100 acres of land, you have lost your opportunity to grow potatoes on that same land.
We obviously choose what is more desirable by the choices we make.
You think the opportunity to watch TV for an hour is more profitable than reading a book. You may argue that you don’t think that way at all, but you had the opportunity to read a book or watch TV. Your choice tells me what you think is more profitable.
All resources are scarce and if you grow corn on your land instead of potatoes, you have chosen the “opportunity” that offers the best best profit. Unfortunately and this could lead into a long, long discussion of free markets, but your decision to grow corn, was not influenced by what the consumer needs, it was decided by a government mandate the incentive of government payments.
Which, believe it or not, leads us back to potatoes.
What could happen? This is no B.S.
So to recap, what can happen to the potatoes you need for your chips.
Hmm, so far the demand for corn has increased, limiting the land available to grow potatoes and there was that flooding which wiped out 70 percent of the Missouri potato crop.
What else can happen. Well, farmers want to make a profit. What could they be thinking?
And in recent years, the cost of producing potatoes has increased. Think of all the costs associated with growing potatoes which includes higher land, fuel, equipment, fertilizer and storage costs. And the high cost of fertilizer translates into the higher cost of potatoes that .
Think about that. Who thinks about the cost of fertilizer?
Heck I don’t wake up at three in the morning worrying about fertilizer and I hope you don’t either. But every time you eat a bag of chips and every time that bag of chip increases in price you are paying for the increasing costs of fertilizer.
So if you run a potato chip company, fertilizer must factor into your business thinking. I could say that is no B.S., but that would be a bad pun.
Tariffs and chips – what’s the connection?
Tariffs can also raise the price of potatoes.
American potato farmers sell a lot of potatoes to Mexico. And Mexico and other foreign markets get angry at us, I know – hard to believe that some country might get angry at us – but let’s say Mexico does. And they stick a tariff on American grown potatoes. It has happened and can happen again.
So you are a Mexican buying potatoes, what are you going to buy. The cheaper Mexican grown potatoes or the ones with the extra tariff tax on them.
Of course, you are going to buy the cheaper potatoes.
No big deal, but a Mexican tariff on potatoes can cost America farmers $80 million a year. And if they aren’t making that $80 million in Mexico, they will raise prices to Americans. And that can hurt, especially if you buy nillions of pounds a potatoes a year, for instance if you own a potato chip factory, like Golden Flake.
Another quick detour, as we return to a favourite theme of this essay. How one action leads to another action and affect you as a business person.
Mexico did impose a tariff on potatoes and it was not the snack company’s fault or the poor guy growing potatoes.
The tariff was imposed , costing potato farmers over $80 million a year, and forcing Golden Flakes to face rising potato costs because of some obscure act of Congress.
A news story on what happened might read like this:
“Fruits and vegetables – including potatoes- are the most common items on the list of 90 products hit with tariffs as of today, as Mexico retaliated against a U.S. decision to block Mexican trucks from traveling north of a commercial zone along the border.
Potato growers alone could lose an annual market of $80 million
Mexico acted after Congress inserted in a budget bill a provision to halt funding for a program that let a limited number of Mexican trucks deliver goods throughout the U.S. “
Growing houses, not potatoes
Okay, so now we have Tariffs, congressional actions, floods, the costs of growing potatoes, better money growing corn, less land to grow potatoes all affecting you, as you
sit in your office at Snack Foods R Us, trying to keep the costs of potatoes down, so you can keep selling chips at a two bucks a bag .
Can it get more complicated? Of course it can. That is the challenge of doing business in the real world. Just when you ask “What could happen”, it happens.
Potato chip makers follow the potato chip market from south to north which makes sense when you think about it. They aren’t growing any potatoes in North Dakota in the winter, but they are growing potatoes in Florida.
So you buy your first crop of potatoes in Florida.
But Florida is one of the fastest growing states and will grow even faster when 75 million baby boomers all cross the Florida border at once. Okay that might be a small exaggeration , but think about this.
To accommodate the growing Florida population, you need more houses, And you need land to build houses on. And the last time we checked, no one is making any more land. There is a limited supply of land ( notice how cleverly, we snuck in the basic rule of supply and demand). So where do you get the land to build houses on?
And if you are a potato farmer and someone offers you a million bucks or more for your land and you no longer have to grow potatoes all day, what would you do?
In short, the housing boom in Florida has impacted potato growers and Florida has lost a lot of potato farms.
For every action, another set of reactions. Will this ever end?
Okay, I know I am repeating myself here but the beauty of business is that there are so many layers to it and one reaction causes another reaction.
Your neighbor sells his farm and a developer comes in and builds houses. ( Notice the concept of opportunity costs here. It is a better opportunity to use the land to grow houses and not potatoes) .
But once your neighbor sells his land, you as a farmer have a whole new set of issues to deal with.
For some reason the new residents want clean water to drink – heck it is not your fault they are so picky – but you must deal with drainage issues and tougher water regulations. Plus chemical applications and spray drifts have to be carefully monitored, and highway rights have to be worked out so farmers can move their machinery to other fields on roads that carry more non-farm traffic.
Wait, even more terrible things can happen to potatoes, plus a real short history lesson:
Let’s think even more about potato farmers and how what happens to them affects Snacks R Us and what you pay for that bag of chips
Look at Florida for example.
Florida can get freezing temperatures in late February or early March, which can wipe out the potato crop.. How about throwing in some heavy rain which can knock down hilled rows, which can cause root damage and sunburn.
Let’s return to basics for a moment here. This essay shows that business can be a challenging endeavor and you can’t take anything for granted. The text books say “raw materials” and that is about all they say. But raw materials, in this instance potatoes, are never guaranteed and events can happen that can leave you scrambling to find potatoes to make chips to fill the bags that feed your customers.
But the deeper lesson here is that at times we all forget that our society depends on two acres of top soil to grow everything we eat and to grow cotton for everything we wear.
And even the smartest business person is at the mercy of the elements. You can crunch numbers all you want but a flood, tornado, hurricane , drought can wipe out the best laid plans.
We often forget the potato famine that devasted Ireland in two years Ireland lost lost two million people .
A quick history lesson.
The Famine began in 1845 as leaves on potato plants suddenly turned black and curled, then rotted. An airborne fungus (phytophthora infestans) originally transported in the holds of ships traveling from North America to England was the culprit.
Winds from southern England carried the fungus to the countryside around Dublin. Fungal spores settled healthy potato plants, multiplied and were carried by cool breezes to surrounding plants., A single infected potato plant could infect thousands more in just a few days.
And the Irish starved .
So what’s with all this history.
Okay – nice history lesson, but what does it have to do with potatoes today. Well diseases that attack potatoes have not disappeared, and our food supply is never as safe was we like to pretend it is.
Here are just some of the diseases that can ruin a potato farmer’s day. Or year. Or decade.
Alfalfa mosaic virus
Andean potato mottle virus
Arracacha virus B – Oca strain
Beet curly top virus
Cucumber mosaic virus
Eggplant mottle dwarf virus
Potato aucuba mosaic virus
Potato black ringspot virus
Potato deforming mosaic virus
Potato latent virus
Potato leafroll virus
Potato mop-top virus
Potato rugose mosaic
Potato stem mottle
Potato spindle tuber
Potato yellow dwarf virus
Potato yellow mosaic virus
Potato yellow vein virus
Potato yellowing virus
Potato virus A
Potato virus M
Potato virus S
Potato virus T
Potato virus U
Potato virus V
Potato virus X
Potato virus Y
Solanum apical leaf curling virus
Sowbane mosaic virus
Tobacco mosaic virus
Tobacco necrosis virus
Tobacco rattle virus
Tobacco streak virus
Tomato black ring virus
Tomato mosaic virus
Tomato spotted wilt virus
Tomato yellow mosaic virus
Wild potato mosaic virus
Air pollution injury
Internal brown spot = heat necrosis
Jelly end rot
Physiological leaf roll
Dexter in the lab!
Every year scientists are working to stop the latest potato disease. So far, they have been able to stop diseases from spreading. But while we worry about exotic events like a meteorite hitting earth, an even more realistic scenario would involve a disease that wipes out entire crops, leading to wide spread deaths from famine.
Conside the lastest threat that scientists are working on. According to the Texas A&M,
“Federal and state agricultural research scientists in South Texas have teamed up to combat a disorder in potatoes that affects the production of potato chips. So far, its cause is unknown. The disorder, called zebra chip for the dark stripes it leaves in the flesh of raw potatoes, is not harmful to human health but causes serious and expensive reductions in crop yields and quality, the scientists said.
Crops have been affected in Guatemala, Mexico, Texas and as far north as Colorado. Symptoms are especially pronounced when potatoes are sliced and fried to make potato chips, causing frying plants to reject entire loads of affected potatoes. It also affects fresh market potatoes.
An economic impact study by Texas A&M’s department of agricultural economics showed that, left unabated, losses from zebra chip would reach USD 100 million in lost business in Texas and almost 1000 jobs.”
Wait a minute – we have a disease that could could cost farmers over 100 million in Texas alone and cost the state of Texas over 1,000 jobs.
This could be serious.
I coached Babe Ruth baseball, kids in high school, and in the sixth inning, when my team was winning, we had a joke. The coaches would look at each other and say, ” what could happen.”
We knew that anything could happen and often did.
No lead was safe – pitchers could walk the batters, ground balls could be muffed, fly balls could be dropped, the kids could throw to the wrong base – a myriad of mistakes could pile up to cost his team the game.
And as an executive, if you are truly an executive, a manager , a leader, you know that “anything can happen” even to the potato crop that you depend on for the chips to put into the bags to sell to the customer, so you have revenue to pay your other business expenses.
The Snail Darter Lesson
Heck what else could happen to limit the supply of potatoes?
The classic example of “” the-best-laid-plans” being undermined by do-gooders involves the case fo a the snail darter.
In August of 1973, a biologist discovered a small fish species, the snail darter, in the Little Tennessee River. So what harm could oen small fish do? It turns out – a lot of harm.
At that time there was a major construction project, there was a dam being built which hired hundreds of workers. The Tellico Dam would create a reservoir. But the problem was, the reservoir would change the flow of the river and alter the snail darter’s habitat.
Again, so what.
Well the snail darter was on the endangered species list and environmental groups claimed the Tellico Reservoir would kill all the snail darters off. So .opponents of the dam iused the Endangered Species Act to stop construction of the multi-million dollar dam ( did I mentioned the Dam hired lots and lots of people and no one was on the snail darter’s payroll).
The Supreme Court eventually ruled in favor of the snail darter, halting construction on the Tellico Dam.. And, of course, everyone filed appeals and the dam was eventually completed, after a long delay and years of lay offs for the workers.’
Science, Politics and Business
The point is that the snail darter story also shows how science, politics and business are entwined. And to become a business person you must be competent in all three arenas.
But we digress – what does the snail darter and “do-gooders” have to do with the supply of potatoes?
The European Union wants to ban 50 chemicals used on crops because of their potential hazard to human health..
Think government regulations. Playing upon unnecessary fears and playing to a population, who has little scientific literacy , the government can pass regulations which can cause potatoes to be in limited supply.
For instance, as mentioned, the EU is trying to ban certain pesticides, which sounds good in theory , but can cause a drastic drop in the supply of potatoes.
Pests already, despite the use of pesticides, destroy, 20-40% of all the food cultivated in Europe every year. European farmers predict that if you ban certain pesticides you could lose 60 percent of the potato crop.
And if Europe bans pesticides, the US may not be far behind. And snack manufacturers have another worry about the supply of potatoes.
Freezes, floods, tariffs, increased cost of fertilizers, housing developments, more corn, fewer potatoes, banning pesticides, – heck what else could happen to your cost of raw materials? After all it is just potatoes and it can’t be that tough to buy them at a decent level so you can still sell your potato chips for 2 bucks a bag.
Welcome to Economic 101 where anything can and does happen, as our little story about the supply of potatoes shows.