Sunday, September 16, 2007

The power of commodity

A 355 ml can of Coca Cola contains about 10 teaspoons of sugar. About 5 times the amount that an average coffee-drinker in India would use for same quantity,

No, this is not one of those email forwards that warn you of the terrible things that cola can do to your system. Far be it from me to preach on what you should drink or eat.

I was just trying to read up on how the fortunes of business conglomerates or empires often rest on a single, simple commodity. The case of oil and the OPEC countries is well known, but so many other basic items have been controlled by a few parties with vested interests. For several centuries, Arab seafarers and Venetian merchants kept such a tight control over the movement of spices, especially pepper from India.

For Coca Cola, the main raw material and their life line is sugar and they need to secure the supply of this valuable commodity. In India, according to some reports, Coca Cola is the single largest purchaser of sugar. This thesis claims that during World War II, when sugar was rationed in the USA, Coca Cola along with another large sugar consumer, Hershey chocolates, managed to get plentiful supplies of sugar from Cuba and kept its production in full swing, actively lobbying with the Govt at every stage. No sugar, no Coke. And Coke entering the sugar market can drive the prices up or keep the supplies down..

Mcdonalds is believed to be the single largest purchaser of beef, pork, potatoes and apples. Similarly, Heinz is one of the largest purchaser of tomatoes. Supplies of these items are critical to the business and the price of these commodities will determine the profitability.

In his classic book, Bound Together on how traders, preachers, adventurers, and warriors shaped globalization, the author Nayan Chanda, of the Yale Centre for the Study of Globalisation, quotes a Reuters news item which said that the four giant roasters and retailers - Procter and Gamble, Kraft Foods, Sara Lee and Nestle- which together control 40% of the world’s coffee have benefited immensely from the falling price of coffee. They have passed on some of the lower price to consumers but have also fattened their margins considerably. Prices paid to growers have plunged more than 80% since 1997, but average retail prices for ground roast coffee in American cities have fallen only 27 to 37%. The companies that have done well in this downturn are specialty boutique retailers like Starbucks that charge customers up to 5 dollars for a cup of coffee- of which barely one penny goes to the farmer.

In its website, Starbucks claims that twenty-one percent of the Fair Trade Certified™ coffee imported into the U.S. in fiscal 2005 was purchased by Starbucks, making them the largest purchaser of Fair Trade Certified™ coffee in North America. And what does Fair Trade Price mean? The Fair Trade Certified™ label certifies that farmers who grew the coffee received a minimum price.

The story of De Beers and their attempt over the decades to control the price of diamond has been very well chronicled. One of DeBeers’ main roles is to maintain the notion that diamonds are a scarce commodity. This they do by means of advertising and by purchasing excess supplies when that is needed to avoid price decreases: as a matter of principle, prices are never lowered by DeBeers.

So, the most basic of commodities and the most precious can confer enormous power when amassed on a large enough scale and hoarded or released in a controlled manner.

The power of the basic commodity has been used in history; the tea in Boston tea Party to make a point of “no taxation without representation’; the salt in the Salt Satyagraha movement or even the lowly onion in removing the BJP Govt in Rajasthan and Delhi in 1998..


dipali said...

Amazing what links exist between big business and politics. Nothing is what it seems, sad to say.

Raj said...

Dipali, not all of that is wrong, though. Most businesses depend on some crtical supplies or other, over which they need to keep a close watch

Sudipta Chatterjee said...

Came here from Hari's blog. Well written, I'd agree. But end of the day, these corporates need to market themselves as the greatest philanthropists of all and they get off the hook for the common consumer.

Kiran said...

And how about Indian team without the all-important, vital commodity called 'Agarkar' - we would have won so many matches without him :D - He is absolutely priceless!!!!

Raj said...

sudipta, not all MNCs are bad. I work for one myself.

kiran, agarkar is the mystery that can never be solved.

Unknown said...

now lets apply this to one of India's largest commodities.. (no offense, but they taught this in 8th std. geography a few decades ago)


Now that we (along with China) control the worlds population and have amassed it in such large numbers,how can the country profit from it using similar logic ?