NAME:________________________
Ec.6000-Tansey July 17, 2016
EXAMPLE OF FINAL EXAM VERTICAL SECTION
For each of the following Five articles, there is an underlined event in bold letters that
causes a shift in demand or supply. There is also a market failure [bracketed in
italicized bold letters]. In each of the five answer sheets provided for each
article:
A.
Set up and write down the LONGEST POSSIBLE supply chain that uses ALL
BUT ONE of the markets and participants listed under the article. Each market
and participant can be used at most one time.
B.
In the market where the underlined event first has its impact, circle the letter of
the appropriate shift on the answer sheet:
"A" represents a leftward (upward) shift in supply.
"B" represents a rightward (downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
C.
To indicate the vertical impacts of the initial event, place "X"'s on the answer
sheet over the appropriate letter in the rest of the markets in your supply chain based on
the rules of supply and demand transmission to vertical markets that we studied in class.
(Every market must have a shift that is circled or have an X, but no market should have
more than one circle (or “X”).
D.
On your answer sheet describe each market as monopoly, oligopoly,
monopolistic competition, perfect competition, monopsony, oligopsony,
bilateral monopoly, or bilateral oligopoly. Support your description first by:
(a)
Circling the size of the market? Circle if it is international (“I”), national
(“N”), regional (“R”), statewide, or local (“L”)
(b)
Circling “Y” if there is product differentiation and “N” if there isn’t.
(c)
Circling on the answer sheet “m” if there are many, “f” if there are few,
and “1” if there is only one firm in the market place. Do this for both the
buyers and sellers in a market.
Article 1.
Award Plans Earn Cash for Airlines
By SUSAN STELLIN
Published: April 1, 2008
[Travelers have been complaining more often about frequent flier
programs — namely, the lack of award seats on desirable flights,
escalating fees for ostensibly free tickets and quicker expiration dates for
miles.]
1
The airlines counter that they are giving away more awards than ever, despite generally
fuller planes, and that most programs allow members to book any open seat on any flight,
albeit in exchange for more miles.
In a sense, both sides are right. But this debate misses a fundamental change that has
occurred in the economics of frequent flier programs in the last decade. What began 27
years ago as a way to win the loyalty of travelers has turned into a lucrative business for
the airlines.
Many airlines now earn hundreds of millions of dollars a year by selling miles to partners
like credit card companies and hotel chains. Those companies, in turn, give the miles to
customers as sign-up bonuses or rewards for hotel stays. That revenue is critical for the
airlines in an era of escalating fuel prices. But it has also changed frequent flier programs
into more complex businesses, where fliers are just one of the constituencies carriers are
trying to please.
“The real change over the years has been the evolution from being a loyalty program for
the airline’s best customers to today being a currency program for anybody’s best
customers,” said Randy Petersen, publisher of InsideFlyer.com, which tracks frequent
flier programs.
The currency is measured in accumulated miles, which consumers value so highly that
thousands of companies now purchase them at prices ranging from one to three cents a
mile. (About half of all miles given out these days, in fact, do not involve flying.)
But as consumers can earn miles in more and more ways, the number of miles
accumulated each year has vastly outpaced the number redeemed, an imbalance many
airlines are now being forced to address.
“We’re at a turning point,” said Jeff Robertson, managing director for Delta’s SkyMiles
program. He said that its members earned 27 percent more miles in 2007 than in 2004,
yet the capacity allocated for award seats remained flat.
“We at Delta and as an industry cannot continue to have customers earn a significantly
greater number of miles year after year without providing customers some flexibility in
ways to use those miles,” Mr. Robertson said.
2
Delta’s SkyMiles members had 510 billion unused miles in their accounts at the end of
last year, while the MileagePlus program offered by UAL’s United Air Lines had 488
billion unused miles and the AAdvantage plan of AMR’s American Airlines had 613
billion.
The AAdvantage program, the largest in the world with 60 million members, awarded
200 billion miles last year, while 150 billion miles were cashed in.
Airline executives point out that the number of awards redeemed each year has generally
been increasing. In American’s case, 4.8 million awards were used in 2007 versus 4.4
million in 2006. That number includes tickets on American and its partners, flight
upgrades and products like magazine subscriptions or vacation packages.
“We redeemed more rewards in 2007 than in the prior five years, and our load factor in
2007 was at an all-time high,” said Rob Friedman, president of AAdvantage.
The number of awards issued by Continental Airlines also increased, to 1.8 million in
2007 from 1.5 million a year earlier, as it did on United, to 3.1 million from 2.9 million,
though United’s figures do not include upgrades. Delta has not released its 2007 figures
yet, but expects to exceed the 3.3 million awards given in 2006, not including upgrades.
One way that carriers are trying to reduce the mileage backlog is by adopting stricter
expiration policies. Miles now typically expire after 18 months or two years of account
inactivity, instead of three years.
Airlines are also offering more ways for members to use their miles, like bidding for
things like Broadway tickets at online auctions, trading miles for merchandise or using a
combination of cash and miles for air travel.
Delta, for instance, recently introduced a “Pay With Miles” option that lets members with
American Express Gold or Platinum SkyMiles cards redeem 10,000 miles to save $100
on flights costing $250 to $1,000. (Northwest and United have similar deals.)
Delta also plans to change its flight award tiers this year, adding a 40,000-mile domestic
coach award that will be available for roughly half the seats on any flight. The more
restricted 25,000-mile award will remain the same, and the number of miles needed to
book any open coach seat will increase to 60,000 miles from 50,000.
3
But even these moves may not provide enough of the free seats that the frequent flier
business is built on, and that may jeopardize a critical source of revenue for the airlines.
Award Plans Earn Cash for Airlines
While most carriers have traditionally been tight-lipped about how much they earn from
these programs, more details are starting to emerge. United reported revenue of $800
million last year from selling miles, while Qantas earned $218 million in the last half of
2007 from mileage sales to third parties.
American Airlines has revealed only that it sold 100 billion AAdvantage miles in 2007,
but assuming an average price of one cent a mile — a conservative estimate — that adds
up to $1 billion. None of these figures include fees, like $100 to change a ticket or
redeposit miles.
But the best snapshot of a loyalty program’s performance comes from Aeroplan, a
business that Air Canada spun off in 2005. It now operates as a publicly traded trust, and
it reported income of $185 million last year on revenue of $926 million.
In fact, the success of the Aeroplan spin-off has put pressure on other carriers to consider
a similar strategy. In the last year, Qantas, Delta, United, Northwest and American have
expressed interest in exploring that option.
But for most carriers, it is not clear that a divestiture will benefit either the airline or the
frequent flier program, not to mention their partners or members.
Kevin Crissey, a senior analyst with UBS, said that “as an equity holder for an airline,
you’re much happier to have the frequent flier program currently as part of the business
than just owning the airline stock without it.”
With high oil prices and merger talks, the consensus is that no carrier in the United
States is likely to spin off its frequent flier program in the near future.
“The view of the market is, there’s a lot of value to these programs, but today disclosures
are insufficient to estimate that value,” said William Greene, an analyst with Morgan
Stanley.
4
The evolution of the Aeroplan program since its spin-off provides an interesting road
map of where things may be headed.
Marc Trudeau, Aeroplan’s vice president for strategy and business development, said that
operating as a separate entity has allowed the program to attract more partners outside the
travel industry and diversify redemption options to include things like DVD players and
plasma TVs.
“Four years ago, less than 5 percent of miles were used for nonairline rewards,” Mr.
Trudeau said. “Today, we are in between 15 and 20 percent.”
Aeroplan also offers more tiers for travel awards than most other programs, essentially
pricing a flight in miles based on what it would cost to buy that seat. So shorter flights
require fewer miles than longer ones, and there are typically half a dozen mileage award
levels for any flight.
“People have more flexibility to pay more miles to get a travel date that is closer to their
intended plans,” Mr. Trudeau said.
http://www.nytimes.com/2008/04/01/business/01frequent.html?_r=1&oref=slogin
What is the market failure suggested by the bold, italicized bracketed part of the
quotation?________________________
What type of government intervention would be the least restrictive way to deal with
such a market failure?_________________________________________________
What type of government failure would likely occur from such intervention?
Should the government intervene to correct this type of market failure?
5
Markets and Participants
Airlines
Frequent flier miles
Oil refineries
Landowners
Fuel
Jeff Robertson
mineral rights
credit card services
Customers
Credit Card companies
Participants
Landowners
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
competition,etc) Left Right Left Right
I=international,N=national, (Y= yes, N=no)
R=regional, L=local
Seller
Oil refineries
Buyer
Markets
Mineral right Y N sm
Airlines
Extent: I N R L
Seller
Fuel
Buyer
Extent: I N R L
Y Nm
comp
f 1 m f 1 ___________
oligopoly A
f 1 m f 1 ___________
Seller
Frequent flier miles
Y Nm
Extent: I N R L
Credit Card companies
Seller Credit car svcs
Y Nm
Buyer
Customers
Extent: I N R L
Buyer
A B C D
bil olig
f 1 m f 1 ___________
oligopoly
B C D
A B C D
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Circle one for each
market
Circle One Circle
One
Circle
One
Write down
one market
Type
Circle One of the
four possibilities
6
Article 2.
Confidence Falls as Home Prices Decline
By MICHAEL M. GRYNBAUM
Published: April 30, 2008
http://www.nytimes.com/2008/04/30/business/30econ.html?_r=1&ref=business&oref=slo
gin
Americans’ confidence in the economy plunged again this month, and
their homes lost value at the fastest rate in two decades, according to
two reports released on Tuesday.
Federal Mortgage Plan Falls Short, Critics Say (April 30, 2008)
The Road to a Jumbo Mortgage Was Supposed to Get Easier (April 30, 2008)
The data ratcheted up pressure on the Federal Reserve to take further steps to stave off a
[prolonged slowdown, even as inflation remains a threat.] The central bank is
widely expected to lower its benchmark interest rate by a quarter-point when it concludes
its policy-setting meeting on Wednesday.
Most economists said the consumer confidence and housing reports were consistent with
a recession, although some maintain that the economy is growing, albeit at a very slow
pace. In a news conference on Tuesday, President Bush sided with the optimists although
he said the economy was facing “a tough time.”
In the 12 months ended in February, the S.& P./Case-Shiller home price index, which
measures the value of single-family homes in 10 major metropolitan regions, fell 13.6
percent, the biggest decline since records began in 1987.
The slump in home prices was more severe than at the deepest point of the recession of
the 1990s, which was the last time values fell so far so quickly.
A broader 20-city index dropped 12.7 percent. Prices are nearly 15 percent off their high
in July 2006.
As foreclosures rise and mortgage lenders tighten their standards for loans, the market is
expected to continue to feel the pressure of large inventories and a dearth of qualified
buyers, economists said.
7
“This is not, alas, a fluke,” Ian Shepherdson, a London-based economist at High
Frequency Economics, wrote in a note to clients. “The monthly declines have been
accelerating steadily over the past year and this just marks another step on the way.”
The slump has hurt manufacturers, construction firms and other businesses that depend
on the housing industry, forcing layoffs in some companies. It also lies at the root of the
credit crisis on Wall Street, where banks were left holding investments linked to
mortgages that defaulted or were downgraded.
The problems are likely to weigh heavily on the nation’s overall economic growth in the
first three months of 2008. Many economists think the economy slowed to a crawl in the
first quarter; some predict it contracted. The government will release its first-quarter
growth estimate on Wednesday. The technical definition of a recession is two
consecutive quarters of negative growth.
The fall in home prices has also cut into Americans’ home equity and forced some
homeowners to grapple with mortgages for more money than their houses are worth. The
problems have contributed to a deepening gloom, reinforced on Tuesday by the grim
confidence survey released by the Conference Board.
The private report, which polled up to 5,000 households in April, showed Americans’
confidence in the economy fell to its lowest point since March 2003, at the start of the
invasion of Iraq. The respondents also felt worse about the economy’s future prospects
than at any time since the mid-1970s, and many were bracing for job losses.
At just over 15 percent, the number of respondents who said they expected their income
to increase in the next six months was the lowest reading since the survey began 41 years
ago.
A depressed consumer is likely to spend less, which will also suppress overall growth.
“With house prices falling, wages failing to keep pace with inflation and job worries
growing, we suspect that both confidence and spending will remain under downward
pressure,” wrote James Knightley, an economist at ING Bank, in a research note.
The effects of the housing slump were spread more or less evenly across the country. All
20 regions included in the Case-Shiller index recorded price declines during February,
8
with Western cities like San Francisco, Los Angeles and San Diego showing the steepest
drops.
Compared with February of last year, only the Charlotte, N.C., region showed a price
increase.
Single-family homes in Las Vegas, Miami and Phoenix lost more than a fifth of their
value over that period, according to the report, which is released by the Standard &
Poor’s ratings firm.
Home values in the New York City area fell 1.2 percent in February and were down 6.6
percent compared with February 2007. Homes in Washington suffered a 13 percent yearover-year decline. In both Boston and Atlanta, home prices fell about 5 percent in 12
months.
David M. Blitzer, who oversees the index, said the prices would most likely keep falling.
“There is no sign of a bottom in the numbers,” he said in a statement.
What is the market failure suggested by the bold, italicized bracketed part of the
quotation?______dynamic market failure__________________
What type of government intervention would be the least restrictive way to deal with
such a market failure?________taxes subsidies (or regulation)
What type of government failure would likely occur from such intervention?
Should the government intervene to correct this type of market failure?
9
Markets and Participants
Homeowners
Conference Board
Lenders
Participants
Fed
Lenders
Federal Reserve Funds
Loans
Federal Reserve
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
competition,etc) Left Right Left Right
I=international,N=national, (Y= yes, N=no)
R=regional, L=local
Seller
Markets
Reserve FundsY N m
Buyer
Seller
HomeownersBuyer
Extent: I N R L
Loans
Extent: I N R L
monopolhyA B C D
f 1 m f 1 ___________
competition
A B C D
Y Nm
f 1 m f 1 ___________
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Circle one for each
market
Circle One Circle
One
Circle
One
Write down
one market
Type
Circle One of the
four possibilities
10
Article 3.
A $7 Billion Expansion
Updates Texas Refinery
Aramco, Shell to Double Size
Of Historic Plant,
Modify It To Handle
'Nastiest Crudes'
By NEIL KING JR.
April 7, 2008; Page B1
PORT ARTHUR, Texas -- Oil companies are traveling farther and drilling deeper to find
that next barrel of crude. But the oil they're unearthing is increasingly gooey, acidic or
laced with sulfur.
That's why two of the world's largest oil companies -- state-controlled Saudi Arabian Oil
Co., known as Saudi Aramco, and Royal Dutch Shell PLC -- have begun plowing an
expected $7 billion into the most ambitious U.S. refinery project in more
than 30 years.
Doubling the size of the storied Motiva refinery, whose roots go back to the days of the
famous Spindletop gusher of 1901, will turn the sprawling plant here on the Gulf Coast
into the largest crude refiner in the U.S. But the bigger plan is to make the Port Arthur
facility the best equipped in the country to digest the world's most challenging oil -- the
stickier, high-sulfur stuff that sells at a discount to the light, sweet crude that first put
Texas on the map.
"This is all about handling the nastiest crudes," says Forrest Lauher, a Motiva engineer
who is in charge of an expansion project that will drive 50,000 concrete piles into the
swampy soil here and consume more than 27,000 tons of structural steel and 450 miles of
pipe. The refinery, now capable of handling around 275,000 barrels of oil a day, will
grow to a capacity of 600,000 barrels a day by 2010.
From Asia to the U.S., refiners are bracing for increasing flows of heavier or more acidic
crudes from the Middle East, Sudan, Brazil, Canada and Venezuela. Some of the logic is
simple economics. The most easily refined light crudes, such as West Texas Intermediate,
now sell for more than $105 a barrel. They yield the most high-value products, like
gasoline. But the heavier, more troublesome grades go for sharp discounts. In recent
months, Canada's heavy crudes have sold for as much as $20 a barrel less than West
Texas intermediate.
The Port Arthur project also reflects a longer-term reality as oil producers, many of them
boxed out of the richest oil regions, such as Iraq, move to tap some of the least desirable
pockets of crude. Heavier grades of oil now account for around a quarter of daily worldwide supplies, but some forecasters say that figure could jump to more than half by 2030.
11
Refiners must be ready to turn that crude into usable gallons of gasoline, diesel and jet
fuel.
Shell, which owns half of Motiva alongside Aramco, is now investing in heavy-oil
projects in regions ranging from South America to Canada, where the company claims 20
billion barrels in heavy-oil reserves.
But the expansion is more important strategically for Aramco. In three years, Aramco
plans to open the spigots on what could be Saudi Arabia's last giant reservoir of crude:
the Manifa field that stretches from the kingdom's east coast into the Persian Gulf. The
field, first discovered in 1957 but later mothballed, is slated to pump 900,000 barrels a
day of heavy Arabian oil.
With Port Arthur, Aramco is moving to turn a potential weakness into a commercial
strength by ensuring that its shipments of heavier crude have a guaranteed home. As part
of the expansion deal, Aramco has pledged to provide at least half -- and possibly all -- of
the heavy crude the new venture will need for the next 20 years. That will come on top of
the 400,000 barrels a day of Saudi crude that Aramco already ships to Port Arthur and
Motiva's two other area refineries. Aramco now ships around 1.4 million barrels a day to
the U.S., or roughly 15% of the kingdom's total production.
["The advantage that we provide ... to a venture in the U.S. is a long-term
guarantee of supply, which no one else can do,"] says Ziad Labban, chief
executive officer of Saudi Refining Inc., an Aramco subsidiary based in Houston.
Boosting its refining foothold in the U.S. is central to another Aramco objective. Long
seen as mainly a crude-oil supplier, the Saudi oil giant is pushing to gain more control
over the entire supply stream, from the oil well all the way to the gas pump. The aim is
not only to increase profits, but also to reduce bottlenecks along the way that have helped
to drive gasoline prices in the U.S. to record highs.
"Our concern is always reliability of supply, and that reliability has to be end to end,"
says Mr. Labban. "We have to do that to protect our market."
Aramco is now bulking up its refining partnerships in the U.S., South Korea and China,
as well as its refineries at home, some of which are targeting the export market. In the
U.S., Motiva gives Aramco a 50% interest in more than 8,000 Shell service stations
scattered across 22 states from Texas to Massachusetts.
Mr. Labban says it's extraordinary that U.S. refining capacity has hardly budged in the
past 30 years. The country's 149 refineries can now handle 17.4 million barrels of crude a
day. In 1978 there were twice as many refineries able to handle nearly the same amount
of crude. To make up the difference, the U.S. last year imported an average of 3.4 million
barrels a day of products like gasoline, diesel and jet fuel.
12
"That is exactly what the problem is in the U.S.," says Mr. Labban. "There is a shortage,
and so there are huge imports of refined products."
Shell officials say that along with the heavy Saudi crude, the expanded Port Arthur
refinery may also take on large volumes of Canadian heavy crude shipped down from the
oil sands of Alberta, where Shell, Chevron Corp. and Marathon Oil Corp. are active. But
that will depend on whether various companies move forward with ambitious plans to
snake a pipeline down to Texas.
The big Motiva expansion comes as many U.S. companies are looking to refocus their
refining operations. San Antonio-based Valero Energy Corp., the country's largest
refining company, says it is considering selling five of its 17 U.S. refineries. But Valero
is also deeply involved in its own multibillion-dollar expansion in Port Arthur to make its
plant there more capable of handling more heavy, sour crudes.
William Welte, Motiva's chief executive, says it makes sense to prepare to digest more of
the nastier crudes. "We're not building this for 2010 or 2015," he says. "This is a longterm asset, and the heavy sours are going to be there for a long time."
What is the market failure suggested by the bold, italicized bracketed part of the
quotation?_______market power (public goods)________________
What type of government intervention would be the least restrictive way to deal with
such a market failure?_________antitrust, subusides?
What type of government failure would likely occur from such intervention?
Dynamic, market inefficiencies
Should the government intervene to correct this type of market failure?
Can’t avoid it.
13
Markets and Participants
Mineral Rights
Consumers
Land owners
Service Stations
Wholesale gasoline market
Saudi Aramco
Participants
Markets
Land owners
Seller
Saudi Aramco
Buyer
Seller
Oil Refinery
Buyer
Seller
Oil distributors Buyer
Oil Refinery
Retail Gasoline Market
Forecasters
Crude Oil
Refined Gasoline (sold at refinery)
Oil distributors
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Mineral rights
Extent: I N R L
Y Nm
monopsony
f 1 m f 1 ___________
Crude Oil
Extent: I N R L
bi oligopoly
Y Nm
f 1 m f 1 ___________
Refined Gasoline
Extent: I N R L
Wholesale gas
A B C D
A B C D
oligopoly
Y Nm
f 1 m f 1 ___________
Y Nm
f 1 m f 1 ___________
Seller
comp
A B C D
A B C D
Service stationsBuyer
Extent: I N R L
Seller
Retail gas
Buyer
Extent: I N R L
Y Nm
f 1 m f 1
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Consumers
monop
comp
___________
A B C D
Seller
Buyer
Seller
Buyer
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
Article 4.
14
New soy-based products pulled into the market
By Doug Rich
"Biodiesel gets most of the publicity, but the hottest thing going right now is polyol,"
Todd Allen said. Allen is a soybean farmer from West Memphis, Ark., and New Uses
chairman of the United Soybean Board (USB).
Polyol is chemically modified soybean oil that competes with petroleum based polyol in
a variety of products.
"We are able to substitute soy polyol for a petroleum polyol and still maintain all of the
characteristics for whatever product you are making," Allen said. "This year polyol will
be the biggest user of soybeans behind biodiesel."
There is a 9 billion pound worldwide market for polyol, according to Allen. He said if
soybean could get only 10 percent of that market is would use 90 million bushels of
soybeans.
Worldwide Market
"You can have the best product in the world but if you can't get into the marketplace,
what have you accomplished?" Allen said. "That is why we try to work with a
manufacturer that can pull it into their system. They already have an established base for
selling their products."
This is the approach that the United Soybean Board has taken with polyol. They are
working with the Ford Motor Company to make foam seating out of soy-based polyol.
This year soy foam will be in the seats for new Mustangs. Production actually started in
2007.
Ford has decided to use soy-foam in their 2008 Ford F-150, Expedition, and Lincoln
Navigator. Next year the 2009 Ford Escape will have soy foam seating, as well.
In January Ford licensed Deere & Company and Sears Manufacturing Company to
further develop Ford's soy-based flexible seat foam for John Deere farm equipment and
other applications. Deere will use the foam seating materials in tractors, riding mowers,
and other equipment. Sears Manufacturing will use the soy-based foam seating in Class
V-VII medium and heavy trucks.
Deere has been using soy-based products for body panels and some farm equipment.
According to USB at a 20 percent soy foam inclusion rate, Ford could potentially use up
to 844,000 bushels of soy throughout its product lineup annually.
15
"To break into an automotive application is pretty tremendous," Allen said. "[Ford
wanted more sustainable, cleaner products and less dependence on foreign
oil]. All of the intermediate manufacturers in the middle were not really concerned until
Ford said they wanted this in their vehicles. Then all of the seating manufacturers jumped
on board."
"Sustainable materials research is more than a promise at Ford Motor Company, it is a
commitment to our customers to do the right thing for the environment, " Matthew
Zaluzec, Manager of the Materials and Nanotechnology Department at Ford Motor
Company's Research and Innovation Center. Zaluzec spoke during a joint news
conference with Ford, John Deere, and USB at the Commodity Classic.
"This is a commodity that we have brought back to the heart of America," Zaluzec said.
New Uses
Another example of this push-pull technique is a project with Sherwin-Williams. USB is
working with the well-known paint manufacturer to use soybean oil as a component of
latex paint.
"When they get all of the formulations done they can put it into every paint store they
have," Allen said. "It will be all over America almost overnight."
In addition to automotive applications USB is working with a company to introduce
sulphur into a polyol to make a poly thyol. Another company is working to develop a
slow release fertilizer that uses polyol from soybeans.
"This could be applied at a rate that is consistent with what the plants needs and make the
urea available when it is needed over a longer period time," Allen said.
"Basically, we have grown soybeans over the years to crush to get the soybean meal then
we had all this oil left over," Allen said. "That is why most of our projects over the years
have been devoted to soybean oil. We had an abundance and we were trying to use it up."
The soybean meal market is still very important to the industry and the News Uses
Committee is working on two projects that involve soybean meal. The first is
aquaculture. The second largest imported product to the U.S. behind oil is fish. We can
grow fish here in the U.S., but have just not developed that market yet.
"If we can ever get legislation to grow fish off-shore in cages that will be very beneficial
to the soybean industry," Allen said. "Right now we do not have legislation to allow offshore production in federal waters."
USB also has a project to make ethanol from soybean meal. Allen said soybean meal has
indigestible sugars in it so they are trying to use enzymes to take those sugars out and
make ethanol.
16
"Soybean meal will still be left over that can be fed to livestock," Allen said.
"We have found that after we run meal through this process we are getting about 70
percent protein left over." Allen said. "So what are the applications for 70 percent protein
meal? If we were shipping that overseas we should not have to ship as much and that is a
big savings. Take the sugars out of the meal and it is very well adapted for fish feed."
Making ethanol from soybeans does not require special facilities. The process involves
heat, enzymes, and time to work. At the present time it is only being done on a trial basis.
USB and the soybean check off funded 26 new products in 2007. These new products
included plastics, lubricants, coatings, printing inks, adhesives, and emerging industrial
opportunities.
"U.S. soybean farmers partner with industry to carry out research into new soy products
as a means to increase the use of soy in everyday products," Allen said. "USB and the
check off become the catalyst by providing the initial funding, which allows corporate
partners to invest in projects they otherwise might not have been able to develop."
"This is an exciting time for soy, as more and more new products are being introduced
that are using soy," Allen said.
Doug Rich
http://www.hpj.com/archives/2008/mar08/mar24/Newsoy-basedproductspulledi.cfm
What is the market failure suggested by the bold, italicized bracketed part of the
quotation?________________________
What type of government intervention would be the least restrictive way to deal with
such a market failure?_________________________________________________
What type of government failure would likely occur from such intervention?
Should the government intervene to correct this type of market failure?
17
Markets and Participants
Manufacturer of foam seating
Soy farmers
USB
Ford
Soy beans
Labor market
Automobiles
Car dealers
Participants
Consumers
Car distributors
Polyol Producers
Wholesale cars
car parts
Polyol
Retail cars
COOP
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no)
competition,etc) Left Right Left Right
Markets
Soy bean farmer
Seller
Coop
Buyer
Seller
Polyol Pducer] Buyer
Labor market
Extent: I N R L
Y Nm
oligopsony
f 1 m f 1 ___________
Soybeans
bi. olig
Extent: I N R L
Polyol
Manufacturer ofBuyer
foamExtent: I N R
Car Parts
Seller
Ford
Y Nm
f 1 m f 1 ___________
Car dealers
L
Buyer
Extent: I N R L
Seller
Automobiles
Seller
Buyer
Extent: I N R L
Y Nm
f 1 m f 1 ___________
Y Nm
f 1 m f 1 ___________
Extent: I N R L
Extent: I N R L
olig.
A B C D
A B C D
bi
olig
___________ A B C D
olig.
f 1 m f 1
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
bi
Y Nm
Wholesale cars
Retail cars
Consumers
A B C D
oligpoly
Seller
Car distributorsBuyer
A B C D
monopolistic
competition
Seller
Buyer
Y N m f 1 m f 1 ___________A B C D
Article 5.
18
Wall Street Journal: “Farm Lobby Beats Back Assault On Subsidies”
Categories: Farm Bill / Food Prices / Audio
Lauren Etter and Greg Hitt reported in today’s Wall Street Journal that, “With grain
prices soaring, farm income at record highs and the federal budget deficit widening, the
subsidies and handouts given to American farmers would seem vulnerable to a serious
pruning.
“But it appears that farmers, at least so far, have succeeded in stopping the strongest
effort in years to shrink the government safety net that doles out billions of dollars to
them each year.
“‘At some point, you have to step back and ask, ‘Does this make sense for the American
taxpayer?’’ says Rep. Ron Kind. The Democrat from Wisconsin sponsored a measure
that would have slashed about $10 billion over five years in subsidies —
and saw it get crushed on the House floor.”
Etter and Hitt explained that, “A little more than a year ago, the stars appeared to be
aligned for significant changes to the complex piece of legislation known as the farm bill,
which allots billions of dollars to farmers and landowners to help stabilize grain prices,
make products more competitive abroad and provide a plentiful food supply.
“President Bush wanted to cut subsidies. California Rep. Nancy Pelosi, who had backed a
high-profile effort to reshape the system in 2002, had become House Speaker. And a
broad coalition of advocacy groups was assembling to press lawmakers.
“But now serious reform is likely to be left behind like corn husks flung from a combine.
As Congress tries to finish writing the new farm bill, the final tab is likely to be larger
than the 2002 bill, which totaled more than $260 billion.”
The Journal article pointed out that, “Influential interest groups — which had toyed with
supporting changes — cut deals to get their own piece of the action. Lawmakers who
supported an overhaul peeled off as the debate moved into the election year. Historical
alliances between rural and urban lawmakers proved difficult to untie.
“The agribusiness industry plowed more than $80 million into lobbying last year,
according to the nonprofit Center for Responsive Politics, which tracks spending on
lobbying. Much of that was focused on the farm bill.”
After noting the historically roots of U.S. farm policy, the article provided this context
with respect to the U.S. agricultural economy, “Today, farmers make up less than 1% of
the U.S. population, and agriculture production is dominated by large, industrial farms
that have annual sales of $1 million or more. In 2006, average farm household income
was $77,654, or about 17% more than average U.S. household income, according to the
Department of Agriculture. Average farm household income is expected to be about
19
$90,000 this year. Current law allows subsidies to farmers with annual adjusted gross
income of as much as $2.5 million.”
Etter and Hitt also reminded readers that, “An effort was made to overhaul farm
programs in 1996, when grain prices were high. That year, Congress enacted the Freedom
to Farm Act, which was supposed to give farmers more control over production and
planting decisions, while moving away from federal support.
“Those efforts were largely abandoned soon after the bill became law, when a downturn
in the farm economy prompted lawmakers to pass emergency-relief bills. By 2002, when
the next farm bill was being written, big changes were off the agenda.”
And, the Journal article noted that the Bush administration proposed some reform ideas
with respect to U.S. farm policy back in January of 2007: “In January 2007, as Democrats
took power on Capitol Hill, the administration proposed a sharp break with past farm
bills. The plan emphasized the need for spending on ethanol and other biofuels,
conservation and rural development. Most important, it proposed big cutbacks in farm
subsidies.
“The goal was to target [more benefits at farmers who work the land and
need financial assistance, while weaning benefits away from the well-todo]. Recent recipients include 92-year-old David Rockefeller Sr., heir to oil-baron John
D. Rockefeller.”
“Among other things, Mr. Bush proposed to end payments to producers with adjusted
gross incomes greater than $200,000, instead of the $2.5 million under current law,” the
Journal said.
(To listen to a FarmPolicy.com podcast from January of 2007 regarding the Bush
administration’s agricultural proposals, click here (MP3-10:00). The audio segment
includes comments from then Agriculture Secretary Mike Johanns, as well as comments
made to FarmPolicy from Mary Kay Thatcher of the American Farm Bureau Federation
and Scott Faber, who at the time worked for Environmental Defense).
While the administration was proposing changes in policy, the Journal article indicated
that, “At the same time, disparate advocacy groups came together and began pressing for
change. The loose-knit alliance included the National Black Farmers Association, which
felt the subsidy system had ignored black farmers; the faith-based Bread for the World;
and Taxpayers for Common Sense, a group advocating fiscal responsibility. ‘We decided
to put on a game,’ says Washington lobbyist Rick Swartz, who organized the alliance.
“Some groups argued that farm subsidies hurt poor, unsubsidized farmers in the
developing world. Others argued the programs can’t be justified with the federal budget
deficit as large as it is. Still others blamed the commodities subsidized in the farm bill for
contributing to obesity, diabetes and heart disease.”
20
Countervailing pressure ensued; Etter and Hitt explained that, “The farm lobby already
was fighting back. Led by the American Farm Bureau Federation, with more than six
million members nationwide, the pro-subsidy force includes trade associations
representing farmers of corn, wheat, cotton, soybeans, sugar, rice and peanuts. Many of
these groups have their own lobbyists and entire teams devoted to farm-bill strategy.”
And in the end, “The safety net was essentially left intact. Basic support for commodity
programs remained,” the Journal said.
Near the article’s conclusion, Etter and Hitt stated that, “The House bill passed by a vote
of 231-191 in July. The Senate bill, passed in December, would eventually ratchet down
the income cap to $750,000. Like the House bill, it proposes to bar farmers from
collecting multiple payments, among other changes. Key members of the House and
Senate are hoping to negotiate a compromise package by mid-April.
“Mr. Bush has vowed to veto both bills, a threat that gives him leverage in negotiations to
wring concessions on reform. At the same time, Mr. Bush is dangling the prospect of $10
billion in new spending, in return for congressional support for more aggressive changes.
As an inducement, the White House has suggested it could raise its proposed income cap
to $500,000 from $200,000.”
(To listen to an audio recap (MP3) of some of the recent Farm Bill developments, see this
FarmPolicy.com audio podcast from March 18 (MP3- 8:18)).
Meanwhile, as the Farm Bill negotiations move forward to final resolution, Jon Knutson
reported yesterday at The Forum Online (North Dakota) that, “Congress is ‘very, very
close’ to reaching an agreement on the next U.S. farm bill, Sen. Kent Conrad, D-N.D.,
said Tuesday.
“An agreement could be announced in several days, Conrad said at a Fargo news
conference.
“Conrad, who’s played a key role in farm bill negotiations, said he’s not free to discuss
details or specifics.”
However, Tom Steever reported yesterday at Brownfield that, “Iowa Senator Charles
Grassley is not satisfied with conference proposals to fund the farm bill, nor does he think
payment limits have been adequately addressed so far in conference committee action.
Grassley told reporters Wednesday that among funding allocations proposed so far, none
are acceptable to him.
“‘Continuing to put forward allocations that expand programs outside the House and
Senate bills, or cutting programs further than either of the two bills already did give me
much heartburn, as you can probably tell,’ Grassley said Wednesday from a stop on a
series of meetings he’s holding in Iowa during the Easter Congressional recess.”
21
Chris Clayton noted yesterday at the DTN Ag Policy Blog that, “‘If we don’t get a farm
bill by April 18, then there is no doubt we have got to continue the existing farm law,’
Sen. Charles Grassley, R-Iowa, said Wednesday.
“Grassley said his staff has briefed him on funding for proposed allocations that the
House and Senate Agriculture Committees chairmen and ranking members crafted last
week. He didn’t see much promise in that framework.
“‘Nothing I have heard would be acceptable,’ he said.”
http://www.farmpolicy.com/?p=669
What is the market failure suggested by the bold, italicized bracketed part of the
quotation?________________________
What type of government intervention would be the least restrictive way to deal with
such a market failure?_________________________________________________
What type of government failure would likely occur from such intervention?
Should the government intervene to correct this type of market failure?
22
Markets and Participants
Farmers
Land
Grains
Land owners
Food manufacturers
Retail food
Manufactured food
Wholesale food
Congress
Consumers
Food distributors
Grocery stores
23
Participants
Product
(m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
competition,etc) Left Right Left Right
I=international,N=national, (Y= yes, N=no)
R=regional, L=local
Seller
Markets
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Y Nm
f 1 m f 1 ___________
A B C D
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Seller
Buyer
Extent: I N R L
Circle one for each
market
Circle One Circle
One
Circle
One
Write down
one market
Type
Circle One of the
four possibilities
24