A mystery

by Russ Roberts on June 30, 2011

in Food and Drink, Prices, Trade

James Roane, Jr., a reader of Cafe Hayek and listener to EconTalk writes:

I just bought a 4 oz package of Dole peaches. When I looked at the package I noticed the following:

Grown in Greece

Packed in Thailand

Sold in the U.S.

Oh, and the price, $.79 in a convenience store-not even a mass merchandiser like Wal-Mart, which would probably sell it for $.59.

How is it possible for peaches, a commodity product, unlike say a car or pc, to be shipped around the world to be packed, so that it can be shipped around the world again to be sold? Everybody in the chain has to make some money off of the transaction and even if the packers in Thailand make the equivalent of nothing, why aren’t they packed in Greece? Last I heard unemployment was a problem there, right? Seems like the transportation cost alone would make this incredibly expensive. If fuel is this cheap, why are we paying $4.00 per gallon for gas? This is blowing my mind.

Good questions. Take a shot in the comments and I’ll weigh in later.

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Subhi Andrews June 30, 2011 at 7:08 pm

Packaging might be made in Thailand or somewhere close by in South East Asia. If they don’t ship peaches to Thailand, they will have to ship packaging to Greece. Besides Thai labor might be whole lot cheaper. Doing packaging in Greece might be more expensive in terms of regulatory compliance and taxes. May be Greece grows only peaches, where as many other fruits are grown and packaged in Thailand, therefore Thailand has better economies of scale when it comes to packaging fruits.

LowcountryJoe June 30, 2011 at 10:12 pm

Sorry, you were the one who called it first.

vidyohs July 1, 2011 at 9:18 am

James Roane, Jr. said Peaches (plural) in a 4 oz package. Want to bet that one average sized peach weighs that much? The peaches had to be dried, or cut and frozen, not fresh. So any costs related to shipping speed can be factored out. No urgency to shipping dried or frozen product.

See my thought below at 9:04 last night.. What we know of Greece today from their severe economic troubles is that money flowed out to the people like water.

Heavy subsidies is the only logical answer to explain how a Greek farmer could sell his peaches at a virtual loss and still profit.

Bill June 30, 2011 at 7:12 pm

It blows my mind as well. You would think with all that moving around it would be more expensive. I think two things are at work:

1) Extreme efficiency at each step of the operation. I’m sure the company is running their operations at a neurotic level of efficiency. I would imagine they have super tight controls at all locations and monitor every step of the process carefully while continually doing cost/benefit analysis.

2) Economies of scale (as stated before). I would imagine they just produce a whole buncha peaches.

LowcountryJoe June 30, 2011 at 10:11 pm

#2 for the win!

Andy June 30, 2011 at 7:21 pm

Maybe the Greeks decided to leave a basket of peaches outside the Thai’s hut everyday… and eventually the Thai’s realized that canning Greek peaches allowed them to specialize in canning… and they were both better off. ;-)

Steve_0 June 30, 2011 at 7:51 pm

I wish there was a “like” button on here.

dave smith June 30, 2011 at 7:24 pm

The cost savings of the division of labor are mind blowing. Read your Adam Smith and Dave Ricardo (or check some podcasts out.)

Also, read Paul Romer. There are so many people eating peaches that ideas on how to make transportation costs smaller.

Daniel Kuehn June 30, 2011 at 7:28 pm

Scale economies.

The classics put economics on the wrong path in more ways than one. Keynesians usually harp on one mistake in particular. Another mistake is diverting economics from Smithian work on division of labor. Keynes rescued macro from the classics. Stigler (1951), Coase, Williamson, Krugman, Romer, etc. rescued micro and trade theory from the classics.

Roane is amazed over peaches. We could just as easily be marveling at pins.

Sam Grove June 30, 2011 at 7:34 pm

There are a plethora of amazing things created in the human economy.

A tiny screw I can barely see…how do they make those?
The list is quite long.

Subhi Andrews June 30, 2011 at 7:36 pm

Daniel,

Surprisingly, pins don’t rot before it is packaged.

Daniel Kuehn June 30, 2011 at 7:47 pm

I imagine that depends on how long it takes you to package them, their iron content, and whether you leave them out in the rain in the meantime.

Daniel Kuehn June 30, 2011 at 7:47 pm

How is “producing a pin” any different conceptually from “producing the means of transport of fruit”?

Subhi Andrews June 30, 2011 at 7:58 pm

I am an engineer, but not an expert in producing pins or transportation. I can talk certain types of software.

Methinks1776 June 30, 2011 at 8:31 pm

And who will rescue us from them?

SheetWise July 1, 2011 at 6:15 pm

As I understand the narrative, we get to remain the victims.

SheetWise July 2, 2011 at 2:05 am

Anxiously awaiting the rest of the story ….

Josh S June 30, 2011 at 9:20 pm

Way to give a non-answer and pimp Keynes instead.

Daniel Kuehn July 1, 2011 at 6:22 am

How is that a non-answer. I have no idea how else to answer this question except to reference the division of labor: specialization and exchange. That is the answer. What’s yours? Do you disagree?

Josh S July 1, 2011 at 7:37 am

You didn’t say “specialization and exchange.” You rambled about how Keynes rescued economics from the classics. Maybe you were *thinking* about specialization and exchange, but you didn’t write it, at least not clearly.

Daniel Kuehn July 1, 2011 at 8:16 am

What do you think the division of labor is, Josh S???

Shidoshi July 1, 2011 at 10:59 am

Schooled.

Shidoshi July 1, 2011 at 11:00 am

(by Josh S, that is)

Daniel Kuehn July 1, 2011 at 11:08 am

Shidoshi -
If you think so then maybe you can tell me what the difference is between the “division of labor” and “specialization and exchange”, because Josh S doesn’t seem interested and you certanily appear to be enthusiastic enough to answer.

SheetWise July 1, 2011 at 6:39 pm

“If you think so then maybe you can tell me what the difference is between the “division of labor” and “specialization and exchange …””

Sticking with the topic and thread …

It is not the rescue of economic theory by central planning. I’ll go with Josh S on this.

Ed C June 30, 2011 at 11:06 pm

Prices don’t change, so government must print money. Investment is determined by star maps and indigestion, so government must print money. Wants can be converted into physical goods…so long as government prints lots of money. Thank god Keynes “rescued” macro from the classical economists.

Craig June 30, 2011 at 7:35 pm

Yes — division of labor. It’s amazing.

What distresses me is that the peaches cost 79 cents! Without the Fed’s four-decade-long policy of inflation,they would probably sell for a dime.

Daniel Kuehn June 30, 2011 at 7:48 pm

And you would also be earning 10/79ths as much as you’re earning now.

You should read Andolfatto’s takedown of Ron Paul’s screwy economics.

Subhi Andrews June 30, 2011 at 7:56 pm

And you would also be earning 10/79ths as much as you’re earning now.

How would you know that?

You should read Andolfatto’s takedown of Ron Paul’s screwy economics.

I guess Ron Paul’s economics is screwy in some ways. I just finished reading “Return of the Depression Economics”, and I felt that Paul Krugmans economics is screwy as well.

PrometheeFeu June 30, 2011 at 9:14 pm

Well, by definition, inflation is a general increase in the nominal price of goods and services so yes, over the long run, if inflation was 1000%, that is the case for both peaches and wages. Of course, price changes are rarely entirely the result of inflation, but what Daniel says is true by definition.

tkwelge June 30, 2011 at 10:04 pm

But prices and wages do not move perfectly in kind. The process of credit expansion is basically counterfeiting in the way the fed does it. Counterfeiting transfers resources from those who receive the money last to those who receive the money first. Had inflation not been occurring over the last 100 years, who knows where we could be in terms of wages and prices.

Richard Stands June 30, 2011 at 11:38 pm

So that’s why I didn’t get a raise the instant The Bernank spent that last 800 billion of money from nowhere. Luckily for his close friends, they got Dollars 3.0 a bit early. So those peaches look really cheap to them. But then again, so must everything else.

PrometheeFeu July 1, 2011 at 6:13 pm

@tkwelge: I never said that prices and wages move perfectly in unison. I simply stated and applied the definition of inflation. If the price of oranges triples and your salary does not move, that is NOT inflation.

@Richard Stands: Please notice in my comment above the phrase: “over the long run”. You are not actually responding to my comment. All that you are saying is that monetary policy has non-inflationary effects in the short run. I couldn’t agree more.

Martin Brock June 30, 2011 at 8:24 pm

Ron Paul is not running for economist in chief, so I’m happy to live with his screwy economics, as long as he slashes the empire.

gregworrel June 30, 2011 at 11:30 pm

Absolutely! I just donated some money to his campaign. No sense waiting for Godot. Ron Paul will do.

Marc June 30, 2011 at 9:15 pm

So… inflation doesn’t hurt anybody then, huh?

SheetWise July 1, 2011 at 6:47 pm

Not anybody in debt. I think if you compare people who have a lot of debt with people who are most likely to vote, you’ll find they’re similar. Inflation helps people who are in debt. And it sure seems there’s a lot of people pushing for some inflation — might even solve the housing crisis if they get it going quick enough.

aldous July 1, 2011 at 10:18 pm

you mean ‘Hide’ the housing crisis. It won’t solve it.

SheetWise July 2, 2011 at 1:07 am

It could solve it. It would, of course, create an avalanche of other issues — but when has that ever been any concern of the Keynsians? They just need to tweak the model, rework the theory, contemplate the outcome — rework the model, tweak the theory, deplore the outcome — deny the model, rework the theory, and predict the future.

Josh S June 30, 2011 at 9:22 pm

If Andolfatto is so lacking in confidence at he would rather argue with a politician than another economist, why would I bother reading him?

Daniel Kuehn July 1, 2011 at 6:24 am

You realize you are commenting on a blog that largely dedicates itself to arguing with politicians, right?

Politicians need to be kept in place – that’s why. Lot’s of people are willing to yank Obama’s leash when he gets out of line. Too few people have been willing to do that to Ron Paul.

Josh S July 1, 2011 at 7:39 am

Really? No one yanks Ron Paul’s leash? I guess that’s why his bill to audit the Fed passed so easily.

Daniel Kuehn July 1, 2011 at 8:17 am

The fact that other politicians disagree with him is no substitute for an electorate that will rebuke him.

Subhi Andrews July 1, 2011 at 11:26 am

The fact that other politicians disagree with him is no substitute for an electorate that will rebuke him

Oh, much of the media like to pooh-pooh him all the time. Sure, he has gained a little more respect since his run for republican nomination last time. However do you see him appearing regularly on O’Reilly, or Hannity or Maddow or Wallace or Meet the press? Not even close.

Andolfatto is only helping Ron Paul, not hurting. Ron Paul is trying to reach the masses through his message. Andolfatto is getting applause from one group of economists ( including you )

carlsoane June 30, 2011 at 10:50 pm

It seems more of a grapple than a takedown.

Ron Paul does not claim that wages have not risen. He only claims that there has been monetary inflation.

As for the money out of thin air claim, Andolfatto does nothing to refute the basic concern Ron Paul has which is that a fiat currency gives the monetary authority arbitrary discretion over how much money to print.

Sam Grove June 30, 2011 at 11:24 pm

Gotta pay for empire and bureaucracy somehow.

Sam Grove June 30, 2011 at 11:22 pm

Really?
How much greater is the cost of living due to political diversion of resources?

dsylexic July 1, 2011 at 12:42 am

andofatto got screwed by the commenters for his mischaracterization of ron paul’s views and took down the post.sorry,the fed shill knows nothing except to be a good supplicant to his masters.
also,inflation is not a constant K which you can multiply to all prices in the economy.those at the bottom of the chain get hit the worst while the banksters gain the most.surely,you havent read or understood hazlitt .

Nathanael Snow June 30, 2011 at 7:36 pm

This truly is remarkable, and something we don’t appreciate fully.
That there has been a growth in global supply chains is indisputable, but the fact that GSCs might be procyclical has yet to be commented on, though a good Austrian should point out the roundaboutness of GSCs as an expected Hayekian result.
Transportation costs are almost zero. Container ships have revolutionized the world.
That the can, with the peaches in it!, is so inexpensive should cause everyone to almost completely ignore those who claim natural resources are scarce, like Simon told us.
That the goods cross multiple borders should encourage us about the relative conditionof the rule of law and reduction in trade facilitation problems.
Yet, we might want to recognize that labor may be held artificially cheap due to mobility restrictions. Nonetheless, I’d expect them to be even cheaper if migration were liberalized.
Behold, the humble can of peaches, and respect the market, feeding Greeks, Thais, Americans, and humans everywhere!

Sam Grove June 30, 2011 at 7:37 pm

I had a similar reaction years ago when I was working a trade show in NYC.
I bought a collapsing umbrella for $5. Knowing it was made in Asia, I wondered how it was possible to make so far away, ship them across the ocean, and sell them for such a sum, and yet everybody who had a hand in the process had to make a profit.

vikingvista June 30, 2011 at 9:02 pm

Many people think profits are a cost to the consumer. But in a competitive market, profits are the reward for LOWERING costs to the consumer.

Randy July 1, 2011 at 4:37 am

Like

Shidoshi July 1, 2011 at 11:03 am

Nice.

David Daniel Ball June 30, 2011 at 7:38 pm

I had to consult my copy of Catch – 22. I think the answer goes like this .. it isn’t profitable if things aren’t distorted by regulation. Unemployed in Greece are paid more than workers in Thailand. It helps if there are subsidies greasing the wheels. Greece has a more technically advanced workforce which wouldn’t benefit from the menial labor .. even for the unemployed. There is an established transport network which needs to have something going through it all the time, and so peaches are one of many commodities and the transport of peaches becomes negligible as the network is more important than the items transported. The producer, transporter and wholesaler are all one company which can claim discount for doing business a certain way from its host nations.

David Daniel Ball June 30, 2011 at 7:42 pm

Also, the materials needed for packing are better available in Thailand, while the mass picking and collection in Greece is mechanized.

Brock June 30, 2011 at 7:46 pm

Everybody’s wrong (although economy of scale is close). Each individual package is a net loss, but they make up for it in volume. :-)

Subhi Andrews June 30, 2011 at 7:49 pm

LOL. During the commodity bear markets of the 90s. Gold miners sold every ounce below cost, but made it up on volume :-)

Steve_0 June 30, 2011 at 7:57 pm

For lack of a better term, I’ll add “economies of aggregation”. Many have mentioned division of labor and comparative advantage, but something like the opposite of scale is happening in the shipping.

Economies of scale involve the ratio of peach capital to peaches produces. One peach robot to one peach to one peach customer is a bad deal. One peach robot to one million peaches, and the cost of the robot become nearly inconsequential.

With the aggregated shipping, boats are loaded with all kinds of goods, such that for each shipper, their cost of the boat+diesel etc. is very small.

Emil July 1, 2011 at 3:10 am

I think that is called economies of scale in shipping…

Steve_0 July 1, 2011 at 2:43 pm

I agree that it really is the same principle. I just wanted to point out that it doesn’t have to involve one agent (company) increasing the size of their vertical product market in order to make their capital investment marginally close to zero cost. (Which I think is what we usually imagine in economies of scale)

I was pointing out that this is a horizontal aggregation of many types of products, from many different companies which do not necessarily need to “coordinate” or make specific agreements with each other. Just another market feature; signs of the price mechanism at work, voluntary and peaceful cooperation (without even intention), risk sharing, cost sharing, etc. None of this requiring a grand planner, and none of it requiring one individual (agent, company, whatever) to grow his own empire large enough to afford the savings by economies of scale.

“Economies of Scope”, perhaps?

Mike M June 30, 2011 at 8:00 pm

I would venture a guess that the Thai folks have a comparative advantage when it comes to packaging foods, the Greeks when it comes to growing peaches and the US in some other activity, but my econ training is quite limited.

vikingvista June 30, 2011 at 9:05 pm

Good guess.

Scott June 30, 2011 at 8:08 pm

There’s not enough information here about the particulars to understand why the peaches are like this… only to speculate.

Scott June 30, 2011 at 8:15 pm

By the way, $4 a gallon is cheap. At 15 cents per KWH, the equivalent amount of electricty for the same amount of energy content costs about $5.20.

Matt Bramanti June 30, 2011 at 9:44 pm

Yes, but in most of the country (basically everywhere in the lower 48 except the northeast), power isn’t $.15/kWh, it’s more like a dime.

Richard Stands July 1, 2011 at 12:09 am

And, of course, it’d be 10% cheaper than that without the added taxes.

Scott July 1, 2011 at 12:40 am

Concede. Now if we could only figure out a way to make electrical energy as compact per btu as gasoline.

T Rich July 1, 2011 at 12:47 pm

What? Electricity is sort of hard to quantify by volume. Please elaborate.

Eric Hammer July 1, 2011 at 5:36 pm

Electricity is difficult to store is the issue. The amount of energy you can store in the best batteries is still less than you can store in an equivalent volume of gas. I.e. a battery the size of a gallon gas can can’t hold as much energy as the gallon of gas.

T Rich July 1, 2011 at 12:46 pm

That’s a good point, Scott. Why would we be willing to pay extra for 1 Kwh of electricity than its energy equivalent in gasoline? The reason is that electrical energy is much more versatile than the energy in gasoline. However, Matt is correct that we pay about 10 cents per kwh, and, using your math, that would mean a $3.48 per gallon equivalency – I paid $3.55 on my last fill up. It could be that electricity suppliers are using other forms of fuel and getting awesome conversion efficiencies.

If you haven’t seen them, there are commercials running now that state, “what if everything ran on gas?” I haven’t paid enough attention to know what the point is, but there are a lot of great images of gas-powered toasters, coffee machines, etc.

The more I think about how little we pay for electricity (as compared to what amazing work it does for us), I feel like I am reading the mystery of cheap peaches thread.

T Rich July 1, 2011 at 12:49 pm

Holy smokes, I am on the peaches thread *shakes head, makes funny noise.* Wha’? Wher’? More caffeine, please.

Oliver June 30, 2011 at 8:17 pm

There’s someone who has likely thought of of this and come up with the solution of growing it in Greece, packing in Thailand, and shipping to the US, because overall there saving money if for example it’s packed in Greece. It’s like labor laws, unions, and some other political factors make it cheaper to do it this way.

Against the grain June 30, 2011 at 8:20 pm

The long distance shipping costs are only a small fraction of the costs. I figure you need two Twenty foot equivalent units (TEU) of Greek peaches to make one TEU of canned peaches, TEU rate from Europe to Asia per TEU are $1000 and from Asia to US $1500 per TEU (see link below for source of shipping rates, Hofstra Geography of Transportation). I estimate that 65,000 cans of peaches can be shipped in one TEU at a retail price of $.79 that is $50,000 of retail product. The shipping to Asia is made cheaper by the need to send products both ways. The higher transportation costs are most likely getting it from the farm to the port and from the rail terminal to the conveince store. With your excellent point that the marginal cost of provide peaches at a convenience store compared to a grocery store is $.20 is quite amazing. Shipping a can of peaches in bulk around the world costs 5 cents per can, shipping it to a convience store instead of grocery store costs 20 cents and there is a sufficient market to pay for the extra 2 miles.

http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/maritimefreightrates.html

Charles Twardy July 1, 2011 at 10:15 am

At last, after 55 replies without a single calculation, someone looks up some prices and makes an estimate.

Mark M July 1, 2011 at 11:46 am

Nicely done. Private corporations have a large incentive to track fully burdened costs across transportation and storage activities.

Against the grain July 2, 2011 at 9:52 pm

I over estimated. I looked in my cupboard and found 14 oz cans, I did not read close enough to see the obvious 4 oz in the statement. I think this would change the cans in a TEU to 195,000 cans for $150,000 in retail product and a cost of more like 2 cents per can to ship them in bulk around the world. .79 cents for 4 oz is pushing the unreasonably high in my book, but then as earlier stated there is a market at this price.

kyle8 June 30, 2011 at 8:27 pm

The simple answer is that even though fuel costs have risen in recent years, Shipping prices are very very low. In fact they are ludicrously low.

I just got a five kilogram package of spices from India and the cost of shipping was less than one dollar more than the cost if I had had it shipped from California.

This, of course, is a big factor in why global trade has lifted so many millions of people out of poverty, because modern transportation is so efficient.

gregworrel June 30, 2011 at 11:40 pm

I have done a lot of selling on eBay and international buyers are often willing to pay shipping costs but complain loudly about tariffs. I was constantly asked to list an item as a gift or to undervalue the item on the bill. Even to Canada, the tariffs can be prohibitive. Governments are a major impediment to trade, at least the direct to consumer variety.

Emil July 1, 2011 at 3:12 am

Shipping costs are low if you ship containers and higher if you ship individual packages…

Ken June 30, 2011 at 8:34 pm

“Seems like the transportation cost alone would make this incredibly expensive.”

This is the part that is incredibly wrong. Transportation of goods, especially transcontinental ocean going transportation has almost no effect on costs as is explained in The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.

Regards,
Ken

BonnieBlueFlag June 30, 2011 at 8:39 pm

Because a large enough quantity of fruit is transported so that the per-unit total cost is profitable.

Floccina June 30, 2011 at 8:43 pm

Volume goes up fast and so transport is cheap.

jb June 30, 2011 at 8:43 pm

Because the fruit is priced at actual cost and fuel is not.

Next question?

Matt Bramanti June 30, 2011 at 9:48 pm

The Greek government provides (or at least it used to) a pretty big subsidy to domestic peach growers, something like 20% of the farmer’s sale price.

lowonprozac June 30, 2011 at 8:47 pm

Ok, I’ll take a stab at it.
The Greek grower sells to the highest bidder – some packer in Thialand.
The Thai packer sells the packed peaches to the highest bidder – some grocer in the U. S.

danny June 30, 2011 at 8:47 pm

I’ve heard the shipping operators have been taking a beating due to an oversupply of shipping container ships. So is this really low price for shipping because of over-supply (are they all losing money?) or is it really that efficient? Anybody know?

vidyohs June 30, 2011 at 9:04 pm

My first thought was the Greek growers are (maybe were) receiving subsidies which make it profitable to sell their peaches at so low of a price that it all makes profit at each stage of the game.

Then on the other hand what James Roane, Jr., bought just may have been moved off regular distributors shelves as old product and picked up by the convenience store at next to nothing which allows them to make a profit on their price.

Then another possibility is that major distributors routinely jack prices up as high as they believe they can get away with and still be competitive with other major distributors.

I can get things at the local dollar store that are just as good as what I can buy in Walmart and never pay a penny over a dollar. A Qt bottle of dish soap for a dollar, 25′ of good aluminum foil for a dollar, etc. etc., huge brand name chocolate bars for a dollar that I know Walmart would sell for 2 or three dollars.

My last thought is that maybe James Roane, Jr., has uncovered a major peach smuggling ring by being the first customer to actually read the label.

vidyohs July 1, 2011 at 9:06 am

A follow-on thought about the peaches, is that I made the assumption that they were fresh in my last reply. Upon reflection 4 oz is very slight and one peach would probably weigh that much or more, so the peaches had to be dried. Which means that time was not of an essence, speed in moving the product was not essential, and that cost can be factored out.

I think subsidies are the real answer to the cheap price to James Roane, Jr. With subsidies it entirely plausible that it could be done.

Josh S June 30, 2011 at 9:25 pm

Just to chime in…what everyone else said about container ships. They take very little labor to operate, and the ratio of pounds transported per pound of fuel burned is absurdly high. Since the price of labor in Thailand is low, and since many plastics and other packaging-related things are made in Asia, it’s cheaper to ship the peaches to China than to ship packaging to Greece, or even worse, to make packaging in Greece.

W.E. Heasley June 30, 2011 at 9:38 pm

“Everything should be made as simple as possible, but not simpler.” – Einstein

James Roane, Jr. poses a most excellent question.

The answer may be quite simple: the peaches were brought to Mr. Roane in the most cost effective manner currently known to Dole. The cooperation of many occurred and that cooperation to deliver the peaches to the isle/shelf Mr. Roane plucked the peaches from, was done so in the most cost effective manner given current real time conditions. The cost effective manner yielded something known as profit which is the by-product of efficiency given current real time conditions.

Price is merely a signal. In this particular case the signal astounds Mr. Roane. The $0.79 signal immediately has Mr. Roane finding exchange occurring at the point of mutual self interest.

However, Roane being the rational consumer did not clear the self of peaches at the convenient store as he perceived the ability [even though the price signal was astounding] that even a better price [an even stronger signal] could be found at a retailer with more scale. That Roane could increase his value at the point of mutual exchange, in the future, by he himself being more efficient in peach purchases.

Ah, the evil of it all!

Matt Bramanti June 30, 2011 at 9:50 pm

“Roane being the rational consumer did not clear the self of peaches at the convenient store”

That’s best done in the privacy of his bathroom, I’d think.

W.E. Heasley June 30, 2011 at 10:00 pm

Matt:

You really need to remove the copy of “Peaches Today” magazine from your home bathroom. There is really no place for such a magazine at Johnny Library for Solo Readers.

Max Marty June 30, 2011 at 9:56 pm

I asked a “progressive” friend of mine what she thought, her answer:

“It’s because the shipping industry and everyone in the supply chain for global agriculture is causing negative consequences on the environment, the oceans, and using farming techniques that destroy the soil, pollute the drinking water, and hurt native plant species.”

No joke.

Josh S June 30, 2011 at 10:17 pm

Because if you hurt the environment, you get free money.

Max Marty June 30, 2011 at 10:42 pm

Knowing how she thinks, I think her argument boils down to, in econ terms, “they aren’t internalizing all the costs of their operations”, then she goes on to say those costs are astronomical. I think this line of reasoning is fairly common on the left.

dsylexic July 1, 2011 at 12:47 am

true.by expressing the desire to eat a peach,you are raping mother earth.end of argument

Whiskey Jim July 1, 2011 at 8:06 pm

Except the air, water, and earth has not been this clean pretty much since industrialization.

Frank33328 June 30, 2011 at 10:34 pm

First guess: Greece has subsidies on its peaches so part of the cost comes from Greek citizens. http://westernfarmpress.com/greek-peach-subsidies-troubling

Another guess: The Thai packaging market is blessed with heavy government incentives http://www.value-chains.org/dyn/bds/docs/347/Chotiwutti.pdf. Ironically, other websites indicate that the monies that create the incentives to Thai packers at least partly come from US foreign aid programs, US citizens are also paying for the price competitiveness of Thai packers.

Lastly, as others have mentioned, ocean freight is very cheap.

Brent Crater June 30, 2011 at 10:58 pm

I got curious and looked up the shipping time between Greece and Thailand: between 18 and 22 days. (So we add refrigeration to the cost; it’s still not very large.)

Steve_0 has a point. Since the packing process is a mature industrial process it is draws benefits from aggregation and scale. A few large packing plants are cheaper to build (on a per-can basis) and within limits easier to manage. It’s usually best to pick the spot with good transportation links instead of being near one of the supply sources. Late 19th / early 20th century steel mills had almost everything hauled in by rail – just as one example. The only thing that had to be on site was water.

The central node(s) also benefit from a stable operating environment and low level of permitting rituals and propitiations. Greece’s current situation shows that they have neither. Having multiple peripheral sources actually reduces the overall risk as the expected maximum proportion of the supply that is interrupted goes down.

I suspect that if you were able to run a random sample of 4 oz cans of peaches you would find only a couple of countries indicated as packing locations and a much larger array of peach sources.

Whiskey Jim June 30, 2011 at 11:24 pm

Here is the supply chain:
1. Grown in Greece.

2. Packed in Thailand. There may be several reasons for packaging in Thailand, one of which is that it is a logical supply chain aggregation point before boarding the ship to the USA. Greece may not be the only place peaches are grown, and it is most inexpensive to pack them in one place. Or, the packed peaches are loaded with other packaged products (e.g., Thai pineapple) from the supplier, which again makes Thailand the logical place in the supply chain to do so.

We do not know if there are other regulatory reasons; Greece may have labor laws that preclude packing automation. We also strongly presume that the Thai packing plant will be very close to the docks; it is common for truck freight 2-400 miles inland to cost as much as freight across the Pacific.

3. Shipped via ocean freight to USA. So the freight or transportation is not as expensive as first considered. The peaches are in effect always going fairly straight to the USA; Suez Canal, Red Sea, Arabian Sea, Thailand, USA.

Having said all that, .79 cents is still remarkably inexpensive, given that someone is dedicating land with an ROI and then picking the peaches.

Whiskey Jim June 30, 2011 at 11:31 pm

As a further reference point, steel pipe made from several alloys mined from the earth is traditionally more inexpensive per pound than tomatoes or peaches.

But then, gasoline is incredibly inexpensive as well given the exploration, refining and capital required. Historically it is cheaper per gallon than bottled water.

Of course, all these folks are greedy, thieving, masochistic business folks who will rip you off or worse if you threaten them:) They are really just plain evil. But I’d still like to let them loose on health care and education.

Richard Stands July 1, 2011 at 12:23 am

I thought they cost $.79 because James Persica, America’s Peach Czar set the price at the level most conducive for “jobs”. These are hard times and “our leaders” must make hard decisions.

Given that there are tens of thousands of items carried in each supermarket in America, we’re gonna need a lot of czars. I think they’re still looking for a new Hemorrhoid Ointment Czar.

Wait, this could help with “jobs”. Maybe everyone in America could hold a part-time job being a product czar.

Maybe they already do.

brotio July 1, 2011 at 12:31 am

I’ll beat Yasafi to the punch, and point out that it’s Reagan’s hatred of Jimmy Carter (the second-greatest president of the 20th Century) that caused him to remove corporate welfare for Georgia peach-growers, thus allowing Greek peaches to be cheaper.

Then again, Georgia is in the South, and George Soros is from Greece. Yasafi hates Southerners as much as Woodrow Wilson hated blacks, so maybe Yasafi is glad Georgia peach growers are getting screwed by the Greeks.

vikingvista July 1, 2011 at 1:02 am

I thought he was Hungarian.

Chucklehead July 1, 2011 at 2:23 am

You are right as always.

Chucklehead July 1, 2011 at 2:50 am

A Greek ship is loaded with Cyprus wood bound for Oman to make the traditional Dhow boats. The cyprus does not fill the boat ,so other goods such as peaches and olives piggyback the load. A Indonesian company just lands a contract for patio furniture from Costco and buys up most available teak from the local mills to fill the order, which pushes up prices. The Thai junk builder needs wood, but finds the Indonesian teak too expensive or unavailable. The buy the shipload from the Greek shipping company en route, and substitute the cyprus for teak in their junks. Along with the wood, they end up with peaches and olives, which they sell to local wholesalers, who in turn sells them to local packagers. A convoluted explanation, but a illustration on why markets can not be centrally planned.

Nick Burns July 1, 2011 at 7:20 am

A few months ago I purchased a USB memory card reader for 69 cents which included shipping. Here is a similar current offer – http://dealmac.com/USB-SDHC-MMC-Memory-Card-Reader-for-69-cents-free-shipping/475819.html

Its the second one I purchased; the first was 49 Cents. And the complexity of this item does not compare to a peach. The cost of the raw materials, labor to manufacture the case, pc board, USB port, and internal electronic components, packaging, and the shipping – all for 49 cents? Assembled in China and delivered to my door. HOW? :)

SheetWise July 1, 2011 at 6:59 pm

“And the complexity of this item does not compare to a peach.”

You’re right — the peach is much more complex ;)

But I’d guess that the marginal cost of producing another peach is fairly linear, while the cost of producing another USB stick is very, very, very low.

Lauren July 1, 2011 at 8:05 am

A tidbit about the actual structure of the processing from Dole’s website:
http://www.dolecsr.com/DoleWorldwide/DolePackagedFoods/Thailand/tabid/450/Default.aspx

My guess is that part of the solution is that there is a substantial subsidy from the Thai government involved to have enticed Dole to locate and maintain its processing plant there.

Economiser July 1, 2011 at 11:04 am

The problem is that it’s not just peaches that are ridiculously cheap. Nearly EVERYTHING is ridiculously cheap given the complexity of production and distribution involved. Clearly we’re not getting everything inexpensively as a result of a subsidy.

Against the grain July 1, 2011 at 5:52 pm

Every indication that I have seen regarding the Thai government is that it is as profit maximizing (corrupt?) as possible. Making it highly unlikely that the subsidy if any is at anything other than the market price. I endorse the Economizer view that the subsidy argument doesn’t make sense for all the things that are this cheap.

Even subsidies are based on market forces.

nailheadtom July 1, 2011 at 10:23 am

Why do you people believe everything that’s printed on a package?

kirby July 1, 2011 at 10:48 am

Greece is a good place for growing peaches, but nobody wants to pay taxes on manufacturing.

Gene July 1, 2011 at 10:58 am

“The curious task of economics is to demonstrate to men how little they know about what they imagine they can design”–F.A. Hayek

Artemis Fowl July 1, 2011 at 11:45 am

First:
The fuel cost analogy to the price of a gallon of gas is inaccurate. The cost of transporting what is probably TONS of peaches on a boat to Thailand, and then ship them again by container ship to the US does not take nearly as much fuel per pound.

Second:
Your fuel cost at the pump includes a lot of government markup. First there are the taxes. Then there are the mandatory government additives and changes that purportedly exist for environmental reasons. Finally there are the extra controls in regards to the way the fuel is pumped (not just at your car, but at every transfer point along the way) and transported. If you bought a diesel car with an engine made under the same rules that ships are allowed to follow (with regards to emissions etc.) and burn the same diesel fuel, your cost/gallon would be MUCH cheaper and you would get more MPG.

Seth July 1, 2011 at 12:18 pm

This amazing thing happens because it was designed by government officials, of course.

Aron Martens July 1, 2011 at 1:19 pm

The answer is simple. The advantages of specialization more than offset the added costs of transportation. All this assumes, of course, that all the relevant decision makers operate in the private sector without any government intervention.

Gary Rogers July 1, 2011 at 1:22 pm

I was surprised that I did not see more discussion about the seasonality of peaches. If a cannery were to be built in Greece, it would need to be started up every year at the beginning of peach season and would run through the end of the harvest. Compare this with a more universal canning operation that cans not only peaches but other fruits, vegetables and even meats. A universal canning operation like this would have a big advantage not only in cost but quality that overrides transportation costs of shipping the contents of the cans from points all over the world.

Mike M July 1, 2011 at 2:46 pm

I’m not convinced that the peaches are packaged in Thailand because they can do it cheaper there, although it may be the case that they can. I think the reason that they are packaged in Thailand and not Greece is that the opportunity cost for the Greeks to package peaches (versus doing something else) is too high. Why “waste” your time packaging peaches when you have a comparative advantage doing something else?

Don N. July 1, 2011 at 3:13 pm

The paper and packaging materials industry has been undergoing a migration from the US and Europe to Asia for many years now, due to the high costs of many inputs, so the packaging is already in Asia. There’s point to shipping bulky packaging materials to Europe. To boot, shipping vessels transport all sorts of finished goods from Asia to Europe as a primary trade route and they have to ballast, or “dead-head”, back to Asia. Ship owners seek to offset the costs of running an empty ship by taking almost any cargo at almost any price just to have at least some revenue to offset the costs of sailing the ship empty. So shipping peaches from Greece, where it is warm and sunny and likely to produce wonderful peaches, is probably dirt cheap because it is the return leg of a route where the money is really made going the other direction.

SheetWise July 1, 2011 at 7:09 pm

What taxes does Greece place on items sold domestic vs. exported? Does the government treat fresh and processed foods alike? Is the Greek canning business unionized? Does their agriculture department regulate fresh peach sizes (like is often done in the U.S.)? Can they get product to Thailand by rail (much shorter)? If so, how much can they sell along the way (combining shipping costs)? Maybe the U.S. growers have perfected the “preferred” size peach, and we sell them fresh to Greece and Thailand. There’s too much to know — even when the market is regulated beyond recognition, it’s still better to let the market figure it out.

Mauro Mello Jr. July 1, 2011 at 8:43 pm

In my view there is a mistake in identifying the problem to be solved.

The problem is not how (or why) to employ Greeks to pack the peaches.

The problem is how to sell 4 oz. of Greek-grown peaches at US$0.79 in a convenience store in the US of A – then work it in reverse.

The solution is simple (sort of): All the individual participants in the huge network of current and potential peach-packing and -shipping actors freely bid for the opportunity to use their knowledge and skills to do it, informed by what suits them most, and the result emerged as what James got.

I, Peach.

SheetWise July 2, 2011 at 1:45 am

No collusion, price support, or price fixing to solve the problem? You’ve got to at least concede a toehold to government — let them deal with the rogue who undercut your tacit agreement.

;)

Name Redacted July 1, 2011 at 9:09 pm

1. Each step of the proces is very inexpensive and takes a tiny profit margin.
2. Specialization makes for very efficient production.
3. You are grosly overestimating transportation costs which are minuscule compared to the cost of actually growing the food. This is not uncommon for people to do, because moving people is rather expensive. Moving bulk goods, however isn’t expensive at all. For example: the cost to ship a ton of coal as of 2001 was about 1.1 cents per mile.

SheetWise July 2, 2011 at 1:15 am

>”For example: the cost to ship a ton of coal as of 2001 was about 1.1 cents per mile.”

When you ship coal, you only tic off about two of the contingent liabilities of the shipper — it’s dry and it’s on time. That changes for every commodity, and very few are that easy.

SheetWise July 2, 2011 at 1:19 am

I should have finished that. Transporting food is a precise science, and needs to be not only negotiated between, but agreed between, the grower, the shipper, and the client. With liability and hedging all around. It’s not a simple game.

joe cushing July 2, 2011 at 7:39 am

The only reason people are confused is in the premis to the question–that it takes a lot of fuel to ship a can of peaches around the world twice. The reality is, it takes more fuel for you to get in your prius and drive to the grocery store than it takes to ship those peaches–even if you spread your fuel cost over $200 worth of other things you bought.

Here is some simple math. A truck pulling a 48 foot shipping container with 43,000 lbs of peaches on board gets about 6.5 miles to the gallon. Now let’s say it takes 6oz of gross weight to ship 4oz of peaches. That means one shipping container could hold 114,667 cans of peaches. (Peaches are heavey, so weight would be the limiting factor–not volume. This means that 1 $4.50 gallon of fuel is enough to take a can of peaches around the entire circumference of the planet 29 times in a truck. Trains are 4 times as efficient as trucks–that’s 119 trips around the equator per gallon. Ships are more efficient than trains but I don’t know the numbers there. Peaches have a long shelf life when picked unripe. No doubt most of the miles were by boat. No doubt the canned peaches were shipped by train in the States. Problem solved: any questions?

joe cushing July 2, 2011 at 7:46 am

This is why it takes less fuel to buy peaches from half a world away, in the grocery store where you buy everything else, than it takes for you to make a special trip to farmer’s market to buy peaches grown right outside of your town.

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