Secondary and Tertiary Commodities

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

Those exporters who have been calling for a lower dollar to bolster their incomes would have to have had one of their better Christmases in some years. The currency kept falling right through Christmas dinner and New Year celebrations. The low point was reached on the first trading day of 1992 when the TWI hit 52.7.- a 9.1% fall since August 1991.

While dairy farmers have enjoyed some boost to their incomes through a 40c increase in the milkfat payout other primary producers have experienced very little improvement in returns. Wool farmers, for instance have seen prices at best remaining stable despite the fall in the currency, suggesting that buyers have been able to capture much of the depreciation benefits by driving down the world price. Such is the life of a commodity seller.

It would be unwise for all those managers of service companies and manufacturers out there to smugly believe they are immune from the afflictions suffered by commodity producers. Many businesses outside the traditional primary commodity producers are, in fact, deeply entrenched in supplying non- differentiated products and services to their clients. In an economic climate that dictates efficiency and lower cost structures many of these firms that have enjoyed a~ rather unchallenging life have begun to experience some of the discomfort of being in commodity markets.

Examples of commodity products are personal computers, televisions and much of the car market. There is often little to distinguish products and price becomes the predominant factor determining consumers purchases. Producers brand their products and attempt to differentiate them, primarily through technological innovations. But at the end of the day consumers compare like machines as much on price as wool buyers do when buying their wool. And while prices in these product markets are nowhere near as volatile as in the wool market they can be remarkably flexible.

Service sector companies have been slow to recognise activities within their operations that are essentially commodities – standard procedures that can be carried out by any number of firms with nothing other than price as the point of difference. Conveyancing has finally been exposed as such a commodity service. Basic accounting and auditing may well be in the process of succumbing to the same fate as consumers of these services realise that these activities are largely a standard product, or requirement, and therefore only distinguished by price. Hip replacements, life insurance, a BA, and fast food have all edged closer to commodity status, where price dominates the purchase decision.

For producers and service providers caught in commodity activities, changing relative prices, in the way the exchange rate does, provides a nostrum. But for those not involved in exporting even this temporary solution to their problems is not available. The pressure to innovate and differentiate is inexorable.

Secondary and Tertiary Commodities was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.