Yesterday I was blown away by a conversation with a reader. This reader is a veteran of the pepper industry, and I am impressed by his deep understanding of pepper and his ability to grasp information. The seniors came to add me and told me about the industry, and I was flattered. Quickly write down a few strokes, and (with the consent of the seniors) publish them in fragments. This is also the first time that we, a self-media, have published such articles.
The underlined information below is the information in the exchange with the seniors (mainly the information of the seniors, supplemented by my information), and then the italics without underlining (analysis, thinking) are the fragments that I read after listening to the seniors. I met my predecessors in Pingshui, and I would like to express my respect for my predecessors.
1. The reader himself is engaged in production management in a condiment company in Shandong.
2. He told me: Our article about pepper has "gone crazy" throughout the spice circle. Spices are mostly made in the circulation field, and among the spices, pepper is a wonderful existence of a bulk product (the other two are somewhat similar: pepper and cumin, these three cycles and laws are different), they all reflect the characteristics of "financial products" to a certain extent.
Impressions: In terms of price performance, financial products often have a major feature: chasing up and down. When Coke sells cheaply, it will definitely sell more; And when the house is expensive, people's willingness to buy is stronger. The former is not a financial product, while the latter is. Another major item in the condiment field is soy sauce, but it does not have the attributes of a financial product.
The common feature of some financial products is that they are related to land. Land is not renewable (real estate), and the customs and properties of a place are often closely related to the land (pepper). Land is a strong constraint. Soy sauce manufacturers can produce in large quantities in a short period of time after a shortage of soy sauce to balance supply and demand. However, the upper limit of the annual production of pepper is basically fixed, and once there is a shortage, the financial attributes of the product will be revealed.
3. He further introduced: pepper has the habit of storing goods in the villages around the condiment market, and the inventory is very large, from a few tons to more than a dozen tons of farmers, and some enterprises and operators also have dozens of tons to hundreds of tons. The hoarders are mostly farmers (rich or poor) and are mostly engaged in related industries. (In the past five years, the average annual production of pepper in the world has been around 500,000 tons). This point directly shocked my jaw. He said that the price increase of pepper is the result of the entry of external funds, but the hoarder does not know when pepper is a head (how much can it rise), his own hoarding position is 20 yuan / kg, he sold some in his 40s, but he also left a few tons for later profits.
Reflection: Transaction costs (and the liquidity they determine) are one of the many key reasons why pepper is the king of spices. The convenience of inventory and shipment, and the rigid demand of pepper in people's taste, these two factors have two-way positive feedback, so that pepper not only has a long-term human table on the consumer side, but also has the premise of continuous attention at the circulation end. This has allowed pepper to gain its place today in the condiment sector, comparable to (or even surpasses) coffee, cocoa, cashews in agricultural products.
After Ronald Coase explicitly identified transaction costs in his 1937 paper "The Nature of the Firm", people gradually realized that among the many factors that affect transactions (and further affect the form of economic organization), such as production costs and information asymmetry, transaction costs are actually the core factors shaping the circulation process. This has even determined the landscape of the global pepper trade today.
4. The reason why pepper is special is because the inventory is very convenient, and there is no problem in storing it for a few years. The earliest goods in his hands were from 2018. Pepper is not the freshest and best, and similar to red wine, there is a difference in vintage, and the pepper is fuller during full fruiting (with a higher piperine content and a better taste). In recent years, the supply of pepper around 20, 21 and 22 years old should be denser.
Thoughts: This is something I have never heard of before. The low cost of inventory provides the premise for a large inventory of pepper and shapes the pepper supply chain to a certain extent. On the one hand, it increases the resilience of the supply chain, but on the other hand, it also increases the volatility caused by human control factors.
To be a qualified commodity, its quality must be relatively stable. Information about product quality is often an important source of information asymmetry in transactions. If the product quality is stable (information is relatively symmetrical between counterparties), transaction costs will be reduced. Of course, as a cash crop and agricultural product, there are some "excellent products" between different years and between various production areas, which increases the "interest" of pepper.
5. Pepper is very affected by the climate, so the climate of Vietnam, India, and Brazil is very concerned by the pepper circle. He is personally concerned about the area under pepper cultivation in Vietnam, but the information available about Vietnam is very limited (but not zero). He also cares about coffee, because coffee is Vietnam's cash crop, so Vietnamese farmers choose to grow coffee or pepper (the two are substitutions in supply-side economics). The price of coffee is so fierce that Vietnamese farmers will choose between coffee and pepper and have a tendency to grow at a low cost, easy management and high price. And the picking cycle of pepper is at least 2-3 years later, that is, the first year of planting cannot be picked (that is, even if the pepper rises to the sky tomorrow, Vietnamese farmers will increase the supply of more pepper, and its supply will increase after 2-3 years).
Think: Vietnam's major specialties all have such characteristics. From planting to harvesting: coffee, which takes 3-4 years; cashew nuts, 3-5 years; Durian is longer and takes 5-7 years. Even if the price of pepper rises, several other items are cash crops that require a lot of upfront input, and it is a question whether farmers will abandon other alternatives because of the short-term increase in pepper prices. Therefore, it is important to further observe the distribution of cultivation in each production area, including Vietnam, and the cultivation information of its substitutes.
6. He is also concerned about the interest rate hikes and cuts in the United States and the European Union. Because of the rise in pepper prices this year, it is generally believed in Chinese pepper circles to be capital intervention rather than consumptive growth. It seems that the Federal Reserve recently has a working paper on the relationship between US interest rate hikes and commodity prices: a 0.1% increase in the Fed's target rate will reduce commodity prices by 0.5-2.5% in the coming weeks. It seems that the hot economy in the United States also supports the further rise in pepper prices. At the same time, he also pays attention to interest rates in the European Union.
Analysis: The Fed's paper is what I remember. But my understanding of this paper is not accurate. After further investigation, the current mainstream view is that lower interest rates mean lower cost of capital, and lower cost of capital means lower cost of inventory. Lower inventory costs mean a positive factor for increasing inventory. An increase in inventory usually reduces price volatility because low inventory costs help smooth out temporary supply and demand shocks. There are also studies that go further: if the shock is short-lived, inventories can effectively smooth price fluctuations, but if the shock lasts longer, the inventory factor has a weaker smoothing effect on price fluctuations. I believe this big logic (as one of several factors) may apply to pepper, cocoa, coffee.
Of course, for the vast majority of pepper farmers, because the funds are likely to be self-owned (rather than from loans), the funds required to press the goods mean that the opportunity cost of the funds is sacrificed. As a result, the attractiveness of other common investment opportunities, such as real estate and the stock market, also has an impact on where social money goes.
7. He pointed out that there is a discrepancy between the import volume of Chinese pepper in my article and the physical feeling. He admits that the import data I said is indeed true (official), but he guesses that pepper has been traded across the border for many years, and there is no inclusion in the customs statistics.
Analysis: According to the World Bank, China's border microtrade, especially informal cross-border trade activities, is generally not included in official customs import and export statistics. This type of trade often involves small-scale transactions, uses informal customs procedures, and is often dominated by women living on the poverty line, who often lack access to information on trade rules and customs procedures. Due to the informal nature of such trade and the limited nature of documentation, they are not usually included in official trade statistics.
I believe that it is unlikely that there will be an official public document stating the goods and value of such informal small-scale border trade in China, so I do not know if there is any smuggling involved. There is a basic principle of information here: in order to obtain a certain information, one must first master the methods of observing that information. To observe the trade information of pepper, of course, it is necessary to master the method of observing this information.
Pepper is a single item, and the value per unit volume is low. Based on the calculation of pepper of 6,000 US dollars/ton and the specification of 500g/liter, the volume of pepper worth 10,000 US dollars is about 3.33 cubic meters. Based on the unit price of gold and copper in the current period, the volume of pepper worth $10,000 is 480,000 times that of $10,000 of gold and 28 times that of $10,000 of copper. Physically, pepper smuggling (transferring a certain value of pepper from country A to country B) may be more difficult than smuggling other single items. Of course, for the common smuggled items from Southeast Asia to China: durian, mango, mangosteen as a comparison, pepper is much less restrictive than fruit.
Of course, only logically, pepper has an incentive to smuggle. Chinese pepper imports from Vietnam, Indonesia and Malaysia are subject to a tariff of 5%. Pepper imported from Brazil and India is subject to a tariff of 20%. In the past year or two, trade between China and Brazil has become more settled in the local currencies of both countries, making the two countries more willing to balance trade: in 2023, the trade deficit between China and Brazil will be about $63.3 billion. Local currency settlements make trade between the two countries less sensitive to exchange rate fluctuations. The value of Brazil's exports to China is three times that of exports to the United States. Brazilian pepper accounts for only three-tenths of the value of all Brazilian exports to China. In light of the recent close relationship between China and Brazil, a larger number of Brazilian peppers (compared to the current one) is a reasonable expectation for the future.
However, there is currently no free trade agreement between China and Pakistan. Brazilian President Luiz Inácio Luiz This is an opportunity for a range of commodities, including pepper.
8. He also said that China consumes a small proportion of the world's pepper, but the amount of stored stocks may be second to none in the world (Vietnam, as the world's largest exporter, does not necessarily have a lot of inventory, and the United States, as the world's largest importer, will not stock up). China's pepper inventories are likely to support the shortfall created by the global production cuts in recent years.
Think: This is really a very peculiar phenomenon. Given the perception of the private sector, it seems that China's private traders have stockpiled a significant proportion of the world's annual pepper production. Therefore, there is a possibility that Chinese hoarders will influence international pepper prices.
Looking at the apparent consumption of pepper in the United States over the past 20 years, we do not seem to have seen a significant decrease in pepper consumption in the last cycle (2011-2017) (which is basically the same as the average consumption in the past 20 years). Related reading: How rigid is the demand in the world's largest pepper consumer? And even in the United States, even if the price of pepper rises to the level of 2015, the annual additional household expenditure due to pepper prices is only a few dollars to twenty or thirty dollars, which intuitively makes it difficult for Americans to be sensitive to pepper prices. Therefore, the price of pepper has risen, and there is no resistance from the consumer side.
An analogy is the drought that occurred in Russia, Ukraine, and Kazakhstan in 2010. As a result, the production of these major wheat exporters plummeted, and Russia issued a more than year-long ban on wheat exports. All things considered, global wheat trade fell by roughly 10 percent that year. But wheat prices have risen by 80 percent. This is a typical example of a commodity with a very low price elasticity of demand, and a small fluctuation on the supply side, causing a huge shock on the circulation side and the consumption side. This "amplification effect" also applies to pepper to a large extent.
Therefore, China's stockpiling may have a greater impact on the price of pepper in the international market than expected. Assuming that Chinese stockpilers can stock up on 20% of the world's annual pepper production (about 100,000 tonnes), a quadruple of pepper prices on the international market may not be a dream. For 100,000 tons of pepper, if a warehouse is built at US$3,000 per ton (early 20s RMB per catty), the required inventory cost is about US$300 million. Obviously, this is not something that can be done by a single group. The formation of this kind of interest alliance requires the establishment of a long-term consensus on information and understanding of information logic, and a relatively effective organization.
9. From the perspective of commodities, the liquidity of pepper is very good, and there is no situation where a bunch of pepper is hoarded but cannot be sold, but it is just a matter of price. When the market is good, there will be consignees who are walking the streets and alleys (there are also WeChat groups), as long as it is the current market equilibrium price (or a little lower), it can basically be shipped in seconds. It's just that after the goods have been stored for a long time, there will be a little water loss (that is, pepper loses some water), and its proportion is less than 5%, compared to the possible price increase (200%-300%), this weight loss is not worth mentioning. From our point of view, it is very easy to complete a trade when the market is good.
10. Regarding pepper, in addition to Vietnam, he also pays attention to important production areas such as Indonesia, Brazil, and Cambodia. Brazil and India, in particular, are not because of their importance, but because there is simply too little information flowing into China.
Impressions: Relatively sufficient information, and symmetry of information among various stakeholders, is a must for the industry to further mature. The maturity of the industry, many situations are not only reflected in the production side or the consumption side, but more reflected in the circulation side. It is crucial to make sound decisions for people (such as pepper traders) in a relatively high-quality and substantial industrial information environment. Good information supply enables people to gradually and extensively form industry cognition, establish expectations, and make reasonable decisions.
In the field of big food, it seems that the beverage industry is slightly better (that is, the supply level of high-quality information is high), but the big tracks such as meat products, condiments (and spices), aquatic products, and snacks seem to have a long way to go. The fact that the pig cycle is so violent and continuous (plaguing tens of millions of farmers and enterprises) is a reflection of the insufficient level of industrial information supply.
Xiaobian WeChat: kurgerlion, welcome to talk about pepper and trade