Bonsai Economics

Reed

The below is meant to be a discussion on the economic aspects of the bonsai market, not the feasability of actually being a bonsai vendor. I have attempted to address many of the economic issues and questions brought up in the field growing thread.

The basic supply and demand model applies to all markets that are not subject to outside interference (ex. rent ceilings or floors) it also assumes that the markets are perfectly efficient, and that people act in an economically rational( read: profit maximizing) way. This being said people can rationally act against the supply and demand model and sell a product at a price that is lower than they could possibly receive in the market (ex. In California, Brent in sells Al a well-styled 50-year-old Black Pine with a market price of $500 for $50, because he likes Al). An efficient market means that everyone knows all relevant information at the same time. So if Brent were to start selling those $50 pines, an efficient market would assume every interested party knew about it as soon as he put the price tag on it.

Efficiency in the Bonsai Market

The bonsai market is not efficient. Even the stock market is not efficient. (This may be a statement of contention for some but is only to make a point about the bonsai market) A lack of knowledge causes people to violate the assumption of economically rational behavior. Continuing with our example of Al and Brent, it is currently impossible for Will in Michigan to know what price Brent is offering Al in real time. If he did his economically rational decision would be to offer Brent $51 because he knows that he could sell it for more, Al would then offer $52 and so on until they were at a price where they could no longer make a profit ($500), which would be the efficient market price of the tree. The point of this is that no matter if Brent sells the tree for $50, in an efficient market price for the end user will still remain constant.

Factors that make the Bonsai Market inefficient
1. Regulation (Import restrictions etc.)
2. Environmental restrictions ( Climates, diseases, pests)
3. Difficulty in transporting product
4. Technology to update prices continually
5. Lack of comparability among product ( No two are alike)

The most important factor in the existence of an inefficient market is the lack of a large liquid market for bonsai. Bonsai are sold in what are essentially very small sub markets with little to no communication or movement of product between the markets. This explains why Black Pines are so much cheaper and more readily available in California than Michigan, Ohio, Pennsylvania or New England. In a small sub market the economically irrational actions of one market participant can have a much greater effect. Returning to our previous example, lets say Brent made the decision to sell all his Black Pines at $50. This would have an effect on the market price in his sub market, if Will did not know about it. Without Will or another outside participant bidding a higher price the price of Black Pines would not return to its efficient price. Because of a lack of many market participants to create a demand greater than could be supplied, other bonsai vendors would be forced to match that price or not sell any pines. Thus the market price of Black Pines in that sub market, assuming no outside involvement would move to $50. At the same time the market price in Michigan, Ohio, Pennsylvania or New England would remain at $500. This same principle applies to excess supply and demand in a sub market. The large supply of Black Pines in the California drives down the price of the Black Pine in that market but does not have the same effect on the bonsai market as a whole.

Why can prices still go up if there is an increase in supply without a larger increase in demand? Could this happen in the bonsai market?

In a word, no. The example of gas prices rising even as the supply of oil goes up is not comparable. In the case of gas and oil this is accomplished in an extremely large and liquid market using financial instruments know as a derivative and options. In layman’s terms these instruments give the purchaser the right to buy something in the future at a fixed price. They are essentially a gamble that the price of an asset will either increase or decrease. Using oil as an example, an investor would purchase the option to buy a barrel of oil at $58 in 30 days, for $3.00. He is betting that in 30 days the price of oil will be greater than $61 (58 to buy the barrel plus $3 for the option to buy it). If the price of oil is $63 per barrel he can buy the barrels from the person he purchased the option from for $58 and sell it in the open market for $63 netting $2 in profit. Because people believe demand will be greater in the future they are less likely to sell the oil now but rather wait for a short period of time until they can sell it for more. Therefore the availability of these securities that do not force people to actually physically hold the barrel of oil but just derive their value from a barrel of oil, allows the price of oil to rise without a faster rising demand. (It should be noted that this situation is temporary and without a subsequent rise in demand, the price oil will eventually return to its efficient price) This situation is therefore extremely unlikely to happen in the bonsai market because it is not liquid, does not have financial derivatives, and lacks consistency in product (no two trees are alike, but one barrel of oil of quality A is equal to any other quality A barrel)


Is raising the price on a tree even though it is not selling because it will eventually sell at that higher price economically rational?

It depends on the rates of interest at the time. There is a concept in finance called the present value of money. It simply states that $100 today is more valuable than $100 in the future because of the missed opportunity to earn interest on that $100. For example if the prevailing rate of interest was 15% and Brent had a tree to sell at $200 but it did not sell two options are to cut the price to $150 and sell it for sure and take a loss, or to raise the price $210. If it did not sell it for 5 years and he raised the price $10 every year it would cost $250 when it was finally purchased. This is more than $200 so one might say that it was a good decision. However, had he sold it for $150 and earned 15% compounded annually over 5 years that $150 would have turned in $302 in the same time frame. Accordingly, while it is certainly good idea to raise the price every year Brent would have to raise the price of the tree at a rate which would match or be greater than the interest earned on the $150 to make it an economically rational decision.


As a side note I apologize if I have offended anyone by using their names in this post. This is not meant to be a criticism. I simply chose the names of those who were active in the discussion on the economics of field growing.

-Reed

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bonsaial1

Way cool! In short I hope the present conditions in the bonsai "stock" market stay just the way they are, thank you.

further.. I need to call my new friend Brent and get some of those 50.00 dollar pines he's holding for me

Al

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A tree a day...thats all we ask.

rockm

The bonsai market has precedent in the plant nursery and even agricultural commodities market. Might do well to take a look at how those industries operate...

Attila

The inefficient market is to be blamed for many problems in this niche.

But it has a good side: it allows the little guy to make some money by taking advantage of those inefficiencies. It also allows for a smart buyer to find terrific bargains.

For example: I was able to buy relatively old (30+ yrs) japanese black pines at the price range of $50 - $80 going out into an inefficient market environment instead of buying from mainstream vendors (more efficient market) who were selling those for $250 and up. From almost the same area.

If you are a big-volume vendor, you need to have daily traffic, reliable markets and constant supply, so you want an efficient market.

But if you are a street-smart individual, you've got to love the inefficient market.


(btw, that 15% annual compound interest, make it 5% would you; the 15% makes Brent look real bad!)

Long live inefficiency!

Attila

Since you've mentioned derivatives in the oil markets...

Since I've been entertaining the idea of specialty nursery for a long time, I did some research: Nursery people use the concept of derivatives in a different way. I call it "virtual derivatives" In fact nursery people are forced to use these virtual derivatives because the time it takes to develop their inventory (three years or more).

They always have to think in terms of future prices and therefore they always try to predict future supply and demand. That's what derivatives are for. But since they have no standard contracts, they have these future prices in their heads, thus the term "virtual derivatives".

An example.
Lets say that right now there is a large excess of one-gallon english oak supply. The prices therefore are at an all-time low. Everyone is selling them. And lets say that it takes 4 years to grow a one-gallon english oak. What could a smart nurseryman do right now? He could buy one year-old english oak liners at rock bottom price betting that the price will skyrocket in another 3 or 4 years. So, he is thinking in terms of a virtual call option (a virtual derivative).

Why would he think that the price of oak will go up in 3 to 4 years? The answer is, because since right now the market of the one-gallon oaks is terrible, nobody will want to grow oaks. Therefore, in 4 years there will be a huge shortage in the one-gallon supply.

So, you see, it's all about derivatives in the nursery business.

rockm

This idea of future derivatives has precedent in the Japanese bonsai market. There was an article a while ago in a bonsai publication (can't remember exactly which one--it was several years ago) writteny by a Japanese grower bonsai grower. He said he burned hundreds of old stock plants every year because the plants were planted a decade ago on the speculation that larger plants of this particular species (plum, I think) would be popular in 10 -15 years. They weren't...tastes turned to smaller trees and away from larger ones. The nursery took a bath on them, the plants were burned rather than having to keep them growing --which would have required more good money (care and other overhead) chasing trees that wouldn't sell...

Attila

Rockm

That's very true, speculating with derivatives/futures is a very tough business. You have to have a lot of money and cut your losses as soon as you recognize them. If you have little money, one of these losses can wipe you clean. The idea is that one profit is so huge that it should cover many losses and still leave some profit left. Not too many can do it successfully.

I used to trade currency futures in the currencies market, 24 hours a day. It was exciting but very scary. I am lucky that I survived it without any significant loss and turned to the "safer" stock market.

Reed

Rockm: While the nursey market is somewhat similar in type of product it is fundamentally different in that it provides a commodity, a healthy tree, plant etc. the bonsai market provides a highly diffentiated product that cannot be substitued for with an indentical product. However, the mallsai would follow this model because they are for the most part undiferentiated.

Al, Attila: There is no question that inefficient markets are sometimes great things for the consumers who take advantage if it(Which by the way I completely advocate). But conversely for the unknowing consumer in New England, paying $500 is not any great bargin so he has the raw end of the deal.


Atilla: That is an interesting and very logical approach to growing in the nursery market, but what happens if everyone plants those oaks? The only major difference that I would see in that is that it does not have the ability to drive 3-4 gallon prices higher in the short run. Very interesting though. By the way I only selected 15% because it makes the example easy. A better number would be around 7-8%, the historical average annnual return in the U.S. stock market.

-Reed

John Dixon

Once again I am so glad that I don't rely on "selling" for my income.

In my ignorant mind the key to success is a happy buyer. Many of them who return, again and again.

My core rules:

1) Make a modest profit that makes the endeavor an "earner". Not a windfall, just financially attractive.

2) Provide a product that satisfies the customer. Put yourself in their
position, and consider if the merchandise is worth the price.

3) Plan ahead to minimize the chance of not having the products the customer wants.

4) Half-assed attempts will produce the same level of result. Do it right or don't do it at all.

5) If you lie down with dogs, expect to get fleas. Don't associate with those not worthy of trust.


In my unrefined mind, that's how I would approach it. Doomed to failure I'm sure, but I don't think I've ever met a potential buyer of ANYTHING that cared how the seller could justify the price. They only care if the product is worth the price to THEM.

John (proud government employee)

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John Dixon

Si vis pacem parabellum

Stay off the trails of others, that's where the booby-traps are.