Insuring Profitability When Your Raw Materials are Free

 

This 80-year-old pecan tree toppled by Hurricane Mathew will be converted into furniture, pen blanks,  knife scales and charcoal  for a much higher return on what otherwise would be free firewood. Converting the tree into a higher value consumer product also saves the costs having to pay others to remove the tree.

The basic premise that if you get your raw materials for free, then it should be easy to resell those materials and make a profit. This is a throw-back to hunter-gatherer societies where things growing or living in whatever environment is used to provided food and shelter for the community. Today all over the world people hunt, fish, gather wild mushrooms and cut wood for resale to others.

I encountered a modern example when I attended the November Minnesota Governor’s Deer Opener in Hinckley.  The Minnesota Deer Hunters’ Association, which is a well organized group with chapters all around the state, have collected donated deer hides and sold these to the Chinese market. The hides are made into running shoes and other items of clothing where the soft flexible leather is superior to other harder leathers such as those derived from cattle. The money from the sales is used in their Hides for Habitat program to improve deer, and other wildlife, habitat throughout the state.  The result has been that tens of millions of dollars have been raised over the years for the state’s wildlife.

This year because of the tariff war with China, the hide buyers have been informed that the Chinese may no longer accept green deer hides, that is uncleaned and not salted, and that a 3 percent tariff may be charged for the importation of cured deer hides. In addition, the running shoe market is moving towards using synthetic leathers  which require less cutting, sorting and processing as well as responding to those who do not want dead animals on their feet.  Even outside of trade war activities, the general trend over the past few years has been depressed demand and consequently a lower market price for deer hides.

Last year the Chinese also decided to reduce their use of salvaged cardboard and steel  which cut the prices on those commodities. With the world’s largest market restricting is use of American waste products, falling prices have forced many waste collectors and processors out of business.  These examples illustrate the dangers of working in commodity markets where world market conditions may change without warning and seriously reduce demand. History is replete with countless examples where changes in market prices have killed once-thriving industries. Another classic example is the collapse of the American fur trade in the 1850s when beaver fur hats were no longer in fashion.

How to avoid being punished by changing market prices

The more processing steps that the gatherer of free raw materials can give to his product, whatever it is, the higher value it has and the less impact changing market prices will have on that product. China will still accept processed deer hides and some chapters of the Minnesota Deer Hunters’ Association salt and cure the hides to obtain a higher price, and now a more secure place in the hide market.  This is simple secondary processing – like selling shelled nuts, rather than in the shell or smelting metal, instead of selling just crushed aluminum cans. In the glass market this would be sorting and returning bottles for refilling, rather than re-melting and making new bottles from them.

These secondary-processing steps improves the sellers position in the marketplace, but an even better position is to be obtained by tertiary processing – that is making consumer goods directly from the raw materials. An  example might be a nut grower who makes pies from the products that he grows and sells these on the world market or a hide collector who sews clothing from his hides. The more processing one can do to the raw materials the higher the price you can charge for your product and the better you will be able to ride out changing economic trends in commodity prices.

An extreme example of this are artists who take materials found in urban areas and make artworks from them. Typically one has to do this for decades to be noticed, shown in galleries and obtain a local and national reputation. Often such artists give classes in local community colleges and this way increase the demand for their art. Not everyone is an artist, wants to be or can be; but if you have an extreme creative drive transforming trash to fine art can work.

The final words here are with whatever raw material that you select to work with, the more you can process it towards a salable product, the better you will be able to ride out

changes in market prices that you cannot control.