90...115...135...195! In between daydreams of Spring, I’ve spent a lot of time thinking about the price of bulk rock salt. For those of you not up to speed on the way the bulk salt market works, here’s how I see things through my dirty loader window. Call it Salt Econ 101.
Giant salt producers rent space on riverside docks around the Detroit area to store their bulk rock salt. The companies that own those docks control trucking and logistics. They then divide the tonnage amongst various, deep-pocketed middle men who handle billing and deal with the distribution to smaller companies all over the Midwest (like us) . For my salt allotment, each September I pull info from Quickbooks based on last season’s sales, cross reference it with the Farmer’s Almanac and a wooly caterpillar matrix and, voilà, a magic number appears and I mail out deposit checks for my “reserve” of bulk rock salt.
In normal years, this supply/demand intersection works like a well oiled machine; then winters like 2013-2014 come along. We had a brisk start to the salt selling season, (sales in December!) but it became a race to secure enough inventory to get through Old Man Winter’s unending grip. What makes this season unusual is the widespread need for salt across the Midwest region. Generally, snow events have been more common to the “lake effect” areas, but this year it seems everywhere east of the Mississippi and north of Miami has required more salt than before. It is this increase in the cold winter’s geographic reach that has created the salt shortage we are dealing with now.
In addition to that, we can’t forget about the municipalities and their budgets. Considering the that the last two winters have been relatively mild and coupled with tight economic times, we can assume that salt budgets have been reduced to help balance the municipal account. For example, a local Department of Transportation (DOT) could “save” a few bucks at the old salt dome and pre-buy 4,000 ton instead of 5,000 ton of salt...This sounds just fine until you have an abnormal winter (like this one) and the dome is empty mid-January.
Recently, I had salt prices on my mind (as I often do) while I caught a couple episodes of Gold Rush on the Discovery Channel. Gold, like salt and other commodities, becomes more expensive when demand outpaces supply. For the most part, market prices regulate themselves with the ‘Invisible Hand’ of Adam Smith. (Free bag of salt to the first customer to stop by and know who Adam Smith is without using Google!) Imagine, though, if periodically the government stepped in and said “no more gold sales in the open market, only the government can buy gold.” This is Eminent Domain and is the circumstance we face when state governments step in and take all the salt on the docks for the public roads. I’m definitely not saying this is a bad thing since we all want to be able to get to work in the morning and have the roads safe for school buses and commerce. I’m merely stating that this is somewhat unique to the bulk salt market, and it is this particular aspect that results in the price of the remaining salt approaching infinity.
Whoa...did I just say that the doubling or tripling price of salt is appropriate? Maybe not appropriate, but understandable for sure when viewed in light of the Gold analogy. It doesn’t make me happy to sell expensive salt; rather I get a little sick about it. I do my best to find reasonable sources so I can keep my customers in supply, but I do have a ceiling and when the market goes really crazy I'd rather have no salt than look like I'm price gouging. Actually, expensive salt presents more of a risk to me both financially and personally. Let me explain. Financially, if I buy really expensive salt and it doesn't sell this year I have to store it and sell it at a loss next season. That hurts, but what bothers me even more is the personal side of it. I consider myself a partner in the progress of your business. Anybody could sell you salt but I try to execute in a way that adds value and, ultimately, saves you money. It bothers me when someone thinks I am selling salt at an outrageous price for personal gain. I do not do business that way (just ask my wife and the 200,000 miles on her car). I try to maintain a similar profit margin per ton throughout the season regardless of the price I’m selling it at.
Perhaps someone somewhere IS profiteering from the increase in salt prices but in all free markets, profits follow risk. I don’t begrudge the profiteers...to some extent I can even rationalize it. Here goes - If I normally sell 10,000 ton a day and due to salt shortage I’m only selling 1,000, I still have fixed costs to cover. If I got by on $1 a ton at 10,000 a day don't I need $10 a ton at 1,000 a day to break even? I’m pretty sure I remember something like this in my college Microeconomics class, but it was much more confusing with all the marginal revenue equals marginal cost stuff. There you have it...Salt Econ 101 in a nutshell. No pop quizzes, but coffee for the professor always appreciated. Here’s hoping for warmer weather when I can blog about those who grumble and criticize my mulch prices.
Giant salt producers rent space on riverside docks around the Detroit area to store their bulk rock salt. The companies that own those docks control trucking and logistics. They then divide the tonnage amongst various, deep-pocketed middle men who handle billing and deal with the distribution to smaller companies all over the Midwest (like us) . For my salt allotment, each September I pull info from Quickbooks based on last season’s sales, cross reference it with the Farmer’s Almanac and a wooly caterpillar matrix and, voilà, a magic number appears and I mail out deposit checks for my “reserve” of bulk rock salt.
In normal years, this supply/demand intersection works like a well oiled machine; then winters like 2013-2014 come along. We had a brisk start to the salt selling season, (sales in December!) but it became a race to secure enough inventory to get through Old Man Winter’s unending grip. What makes this season unusual is the widespread need for salt across the Midwest region. Generally, snow events have been more common to the “lake effect” areas, but this year it seems everywhere east of the Mississippi and north of Miami has required more salt than before. It is this increase in the cold winter’s geographic reach that has created the salt shortage we are dealing with now.
In addition to that, we can’t forget about the municipalities and their budgets. Considering the that the last two winters have been relatively mild and coupled with tight economic times, we can assume that salt budgets have been reduced to help balance the municipal account. For example, a local Department of Transportation (DOT) could “save” a few bucks at the old salt dome and pre-buy 4,000 ton instead of 5,000 ton of salt...This sounds just fine until you have an abnormal winter (like this one) and the dome is empty mid-January.
Recently, I had salt prices on my mind (as I often do) while I caught a couple episodes of Gold Rush on the Discovery Channel. Gold, like salt and other commodities, becomes more expensive when demand outpaces supply. For the most part, market prices regulate themselves with the ‘Invisible Hand’ of Adam Smith. (Free bag of salt to the first customer to stop by and know who Adam Smith is without using Google!) Imagine, though, if periodically the government stepped in and said “no more gold sales in the open market, only the government can buy gold.” This is Eminent Domain and is the circumstance we face when state governments step in and take all the salt on the docks for the public roads. I’m definitely not saying this is a bad thing since we all want to be able to get to work in the morning and have the roads safe for school buses and commerce. I’m merely stating that this is somewhat unique to the bulk salt market, and it is this particular aspect that results in the price of the remaining salt approaching infinity.
Whoa...did I just say that the doubling or tripling price of salt is appropriate? Maybe not appropriate, but understandable for sure when viewed in light of the Gold analogy. It doesn’t make me happy to sell expensive salt; rather I get a little sick about it. I do my best to find reasonable sources so I can keep my customers in supply, but I do have a ceiling and when the market goes really crazy I'd rather have no salt than look like I'm price gouging. Actually, expensive salt presents more of a risk to me both financially and personally. Let me explain. Financially, if I buy really expensive salt and it doesn't sell this year I have to store it and sell it at a loss next season. That hurts, but what bothers me even more is the personal side of it. I consider myself a partner in the progress of your business. Anybody could sell you salt but I try to execute in a way that adds value and, ultimately, saves you money. It bothers me when someone thinks I am selling salt at an outrageous price for personal gain. I do not do business that way (just ask my wife and the 200,000 miles on her car). I try to maintain a similar profit margin per ton throughout the season regardless of the price I’m selling it at.
Perhaps someone somewhere IS profiteering from the increase in salt prices but in all free markets, profits follow risk. I don’t begrudge the profiteers...to some extent I can even rationalize it. Here goes - If I normally sell 10,000 ton a day and due to salt shortage I’m only selling 1,000, I still have fixed costs to cover. If I got by on $1 a ton at 10,000 a day don't I need $10 a ton at 1,000 a day to break even? I’m pretty sure I remember something like this in my college Microeconomics class, but it was much more confusing with all the marginal revenue equals marginal cost stuff. There you have it...Salt Econ 101 in a nutshell. No pop quizzes, but coffee for the professor always appreciated. Here’s hoping for warmer weather when I can blog about those who grumble and criticize my mulch prices.
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