SUDS AND BLACK GOLD STORIES

Beauty is in the eye of the beer holder ~ Kinky Friedman 

Talk about market madness. The combination of the constantly-mutating coronavirus and the necessary Sheltering-in-Place (SHiPing), has dramatically unhinged our economy during the past several months. Many goods markets have become lop-sided rollercoasters. There has been radically reduced demand, consequent surplus supply, and even short-term excess demand. The federal government and the Federal Reserve have already provided multiple trillions of aid to people and businesses, with more on the way. States are now either extending or relaxing their SHiPing restrictions because no one really knows what path to follow for reopening markets in our devastated economy.

Gone into the mists of some ever-fainter past are the stable goods markets drawn by people like me on Economics 101 classroom white-boards. The traditional microeconomic market diagram shows product demand and supply curves intersecting at a single point, demarking market “equilibrium” price and quantity. Those were the days. It’s no longer a two-dimensional white-board world (it never was, but…).

The government announced on April 29 that the 2020Q1 real GDP dropped by 4.8%, with consumer spending down 7.6% and business investment falling 8.6%. March unemployment rose to 4.4%; about 13% of our labor force is now receiving unemployment benefits. April’s unemployment tally will be even higher. It’s not official yet, but everyone who’s breathing already knows we’re now dealing with a significant macroeconomic recession. Unlike other recessions, this one has happened quite suddenly, with rising unemployment as a leading, not lagging, indicator of distress.

The media attempts to explain our changing macroeconomic situation by using “letters”: like “V” showing a rapid expansion after the big drop; “W” a bumpy increase than another drop and a final improvement; and what the “L” that signifies an economic drop with no actual bounce-back recovery for a longer time. Very nasty. Very possible.

Much mention has been made about covid-19’s effects on business’s supply-chains, especially those that have anything to do with Asia. Less attention has been paid to how the virus has affected “demand-chains,” meaning in what way customer purchases are happening; and how we’re actually buying, and not buying stuff. Right now, we consumers are mostly “chained” to our shelters, with too many of us unemployed. That’s why aggregate demand for goods and services has plummeted so much and so rapidly.

But it’s consumers who will ultimately determine how and when our decimated economy will be revived. The media’s pics showing the first brave (bleeding-edge?) folks getting their hair cut and nails painted are curious. The economy won’t be adopting a general recovery “letter” until multitudes of just-regular customers like your Uncle Myron and Aunt Dorie feel safe and secure enough to physically re-enter the nation’s markets and stores on a regular basis.

Everyone has now has gotten through last month’s “where’s the TP?” epoch that was caused by panic buying. People no longer eat in restaurants; they pick-up food from them or have it delivered. Restaurants expect sales to decline at least 27%. The media is now braying about up-coming meat shortages because 33% of US packing plants have been shut down. Will there thus be a run on ground beef and Big Macs? Yet another reason to become a vegetarian.

Some medicines remain in short supply, like hydroxychloroquine for lupus and arthritis patients and azithromycin, because #45 made false public statements that they might prevent covid-19. It’s astonishing that despite his maskarading as our leader (unlike his VP, who won’t even wear a mask since it’s the devil’s mark), 31% of surveyed adults still believe he’s “trustworthy.” Seriously, it’s beyond depressing that nearly one-third of adults still trusts what he says is true.

I highlight here two very different goods’ markets – beer and oil – that caught my eye as consumers and producers attempt to adjust in our covidified economy. They don’t mix well at all, being oil and water, but they each offer a special type of liquidity that makes them quite popular.

Beer.  Beer with me for a moment. There’s a growing problem in the beer market, like many, because of an imbalance, especially for independent craft beer brewers and brewpubs that don’t bottle or can their product. Although total US beer sales were down 1.6% in 2019 (a long-term trend), craft-brewed sales increased to more than 25% of the beer market. In 2019 there were 8,275 craft breweries, up 9.1% since 2018 (also a trend). Until until several months ago, more craft brewers and their brews were facing a growing market. That’s always good news. But 2020 is a different kettle of beer.

Demand has sunk to the very bottom of a pint glass 🍺 and supply can’t easily adjust. Humans have been brewing beer for 7,000 years during good times and bad. Modern craft brewing usually takes two to three weeks to create a new batch of beer; a double IPA or sour beer can take five weeks or more. Also, draft brews taste best for a relatively short time.

Many brewers therefore are agonizing about dumping their excess craft beer. “There was literally nothing that we could do with it,” lamented a Minneapolis brewer, as he ditched his unconsumed product. Closed bars and abandoned social happenings have created a draft beer surplus, which is being abandoned into wastewater treatment plants. This frees up tanks, kettles and kegs for breweries to start post-covid production at some point, but this loss is a calamity.

So it might be a very good time to fill your growler at a favorite local bar or brewery with surplus banana-scented hefeweizen (OMG), or whatever your brewpub’s special spring beer might be. Sure as shootin’ they’re having unaccustomed challenges selling it.

One Oregon microbrewery has sold only draft beer since it served its first pint over 20 years ago. But after the state closed all bars and restaurants in March, distributors canceled their beer orders. The owner had to decide whether to dump all of his already-brewed, but aging IPAs. Faced with that disconcerting prospect, the brewery hurriedly swung to canning its product; something the owner previously had sworn he would never do. Canning involves considerable expense, but less risk. He stated, “I would rather eat a lot of crow than send beer to a sewer.” Only the crocodiles will be disappointed.

Petroleum.  Like beer, oil has been used for thousands of years. The walls and towers of Babylon apparently used asphalt in their construction 4,000 years ago. Until very recently, petroleum products like kerosene were mostly consumed as a fuel for night-time lighting and for lubrication. The I Ching, written around 1000BCE, mentions oil in its unrefined, raw state being used by Chinese people.

The first drilled (rather than hand-dug) crude oil well in the US was near Titusville, PA in 1859. Recently, about 1 million oil and gas wells were active in the US; fewer are now actually pumping. Until February, the petroleum industry had yearly revenues of about $1.7 billion. The world’s largest oil producers are the US, Saudi Arabia and Russia.

The real (inflation-adjusted) price of crude oil has significantly fluctuated over time, as shown in this chart. 

real price of crude oiL, 1860-2020 ($/bbl.)

Source: The Economist, 4/27/2020.

The US spot price of WTI (West Texas Intermediate) crude oil – the US benchmark – on April 27, 2020 was $12.17/bbl. Two months before, on February 27, 2020, it was $47.17/bbl, almost 4x as high. That’s market turmoil.

Although there were price spikes in the 1860s because of the American civil war, in the 1970s because of the OPEC oil shock and again during the 2000s commodities boom, the real price of a barrel of crude today is around the same level it was between the late 1800s and the early 1970s.

The recent price drop initially happened when Saudi Arabia and Russia couldn’t agree about how much to cut their production to push petroleum’s world market price upwards. The US president, displaying his own oleaginous properties, came down firmly on the side of oil suppliers – the US petroleum giants and their brethren – in facilitating an agreement between OPEC and Russia.

Then the coronavirus emerged as an all too powerful oil market counterweight by suddenly cutting the demand for the Saudis’, Ruskies’ and everyone else’s “black gold.” World-wide demand for petroleum is down at least 30%, causing prices to dramatically fall, as shown above.

The world’s huge oil markets are now in meltdown, just like the far teenier, but dearer craft beer market mentioned above – and for the same reason, a novel microscopic avenger.

This petroleum price reduction can have several consequences. First, much of the now-uncompetitive US shale-oil production will be drastically reduced, if not halted. This is no small matter because, according to the US Energy Department, 63% of total US petroleum production in 2019 came from shale. US shale has some of the highest lifting (production) costs in the world, requiring a market price around $50/bbl to breakeven. Watch for an increasing number of shale firms declaring bankruptcy and/or being purchased by the already-massive, established firms like Exxon/Mobil, Chevron and Shell. Also watch for the US to lose its ranking as the world’s largest oil producer, which was the Saudi’s and Russian’s original goal, and for us to eventually begin importing more petroleum.

Second, with very low oil prices alternative energy will have more challenges in usurping market share from fossil technologies; recent progress in clean-energy technologies might be threatened. Third, because of petroleum’s outsized influence on the economy, its much-lowered price will likely increase deflationary pressures on overall prices. This isn’t necessarily good. If oil’s price stays very low for a while, policy-makers’ near-total reliance on deficit-financed aid may become a bit more costly. Why? Because one often-used hedge against both bigger public and private debt – inflation – won’t be in the cards.

Here’s hoping the beer, oil and every other market’s turmoil can soon diminish in consumers’ favor. That will likely take a fair amount of time, far more covid-19 testing, large improvements in consumer confidence, as well as a practically light-speed-provided effective vaccine.

AN ALMOND TREE, LUTHERAN HOPS AND GREEDY WEED BUREAUCRATS

A fool sees not the same tree that a wise man sees. ~ William Blake 

Here’s a belated trick or treat. These three related events occurred during the just-past Halloween. Each one features a plant that is grown in the Golden State.

A tree grows in Hughson, not just Brooklyn.  This is an all too rare, whole-hearted good news story about caring people and an almond tree planted near Hughson, a small town in California.

Last year, the millions and millions of California almond trees that cover about 800,000 acres of Central Valley farmland, produced total cash receipts of $5.16 billion (B). California almonds represent the entire US almond crop and 82% of the global crop. That’s a lot of almonds.

But here I’m talking about a single, unique almond tree, shown in the pictures below. The Modesto Bee discovered this tree’s marvelous story.

This particular almond tree stands in the corner of an orchard near Hughson. It’s decorated each year on Halloween, Christmas and Valentine’s Day in commemoration of Danielle Genzoli, who died in a car accident 12 years ago when she was 16.

The tree had failed to thrive, and David Genzoli, Danielle’s father, planned to rip it out. But Danielle objected. “She was a nature girl and just loved the trees,” Kimber Genzoli, Danielle’s mother, said. “So it became their project to save this little tree. Before her death Danielle and her dad started the tradition by hanging a single bulb on the tree during the holidays.

The year Danielle died, David Genzoli didn’t have the heart to continue the tradition. But one day, when he and Kimber went by the tree they found that someone had hung homemade ornaments on it. They never found out who did it, but suspect it might have been a neighbor. “And it kind of morphed from there; people coming by just started adding to her tree,” Kimber Genzoli said. “It’s became a community project, and we are grateful for the people who contribute to this tree.”

Kimber Genzoli said Halloween was Danielle’s favorite holiday, so a few years later she hung some small pumpkins from the tree. This also was adopted by the community, with people stopping by regularly to add decorations.

From a single bulb, the tree at Christmas is now covered in ornaments and lights and even has a star at its top, as you can see above in the right-side picture.

Friends and strangers alike add ornaments, some personalized with pictures or their family name and the year.

People have left letters to the Genzoli family about Danielle’s kind heart and how she affected them, like one from a fellow student at Hughson High School who said Danielle one day sang “Don’t Worry Be Happy” to her when she saw her crying at school.

One year, Danielle’s first-grade teacher had her students make paper Valentines that hung from the tree in February. The tradition, too, has continued with Valentines from a new class each year, as shown in the left-side picture.

After Halloween and Christmas, the Genzolis take down the decorations and store them until the following year, and every year the collection grows. Danielle’s wonder-filled tree and its spirit is one more reason I enjoy eating almonds.

Lutheran Hops.  This Oct. 31st marked the 500th anniversary of Martin Luther’s protest to the Catholic Church. That’s because Oct. 31st isn’t only Halloween, it’s also Reformation Day, which celebrates Luther’s nailing his 95 Theses to the door of the Wittenberg Castle church in Germany on Oct. 31, 1517. His theses challenged the authority of the Catholic Church, and inspired the historic split in Christianity known as the Protestant Reformation. Apparently, historians now question whether Luther actually nailed his theses to that door. They think he might have merely mailed them to the archbishop. But beyond quibbling about whether they were mailed or nailed, it started something momentous.

That something wasn’t limited to changes in religious precepts. Nope, it also had to do with changes in beer production.

Every trendy craft brewery today touting hoppy beers should tip a brew towards Luther and thank him and his followers for stimulating the use of hops. Luther did it as an act of insurrection against the Catholic Church. He and his disciples provided a reformation in the production of beer. For the record, California grows a tiny amount of hops; much of our domestic hops come from Washington State, Oregon and Idaho. Here’s the story of Lutheran hops.

In the 16th century, the Catholic Church had a near headlock on beer production. History is repeating itself. My previous blog, “Wither My Craft IPA,” mentioned the heady concerns I have about today’s beer market where a very small number of producers (e.g., two) now dominate almost 40% of global beer making and distribution.

But let’s get back to the 16th century. The church’s control of the beer market came from its monopoly on the herbs and spices (e.g., sweet gale, mug wort, heather, rosemary, juniper berries, ginger and cinnamon) used to flavor and most importantly preserve the beer. The church taxed these needed beer ingredients.  

In an age when you risked your health by drinking plain water, beer was drunk by everyone. This widespread use of much safer fermented beverages was the norm in Germany and beyond for centuries. In the New World, beer and hard apple cider, whether it was made by Johnny Appleseed or not, was consumed by virtually everyone for the same reason. Treatment of public water wasn’t common until the late 19th century. Paisley Scotland seems to be the first Western European city to filter its water in 1832.

Fortuitously for Luther and other early German beer-makers, hops were not taxed by the Church. The Church’s priestly brewers considered hops unworthy, nasty weeds. In addition, Middle-Ages folklore which the Catholic Church adopted held that hops might not be healthy or good for you. Little did the Church know.

 

       Hops flowers

Beyond its being untaxed, hops were a far better preservative than herbs. Hopped beer thus contributed to local public health. It also contributed to regional and international business as hops’ preservative qualities allowed hopped beer to be safely sold further away from its brewery. This is why high-hopped beers like what came to be known as India Pale Ale could be transported across several oceans without problems. So, if you were an early Protestant brewer and also wanted to scorn the Church, you used hops instead of herbs. Such brewers changed the world of beer.

These Protestant brewers included Luther’s wife, Katerina. She opened a successful brewery that produced large amounts of hopped beer. Luther was delighted. Lord Katie, as he kindly called her, had assured him a steady supply of his favorite drink. We should thank Martin Luther for his bravery in pushing hops into beer. I’ll drink to that.

Some folks consider Luther’s strong promotion of hopped beer his second Reformation, and perhaps the most important one that many benefit from every day, not just Sundays.  

Greedy Weed Bureaucrats.  This tale is a coda to my blog last month, “The High Price of Getting High,” about marijuana, which California grows plenty of. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. More information about the California marijuana taxes became available on Halloween.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, like Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics and other states’ experiences. Time will tell as January 1st approaches.