Maple Bandits

History repeats itself.

Photo: Jim Mauchly. Source: Mountain Graphics

That’s what I thought when I read about Quebec’s maple syrup rebels. Quebec is the Saudi Arabia of maple syrup, producing 70% of the world’s supply. And it’s no wonder: with its cold winters and long, muddy springs, the province’s climate is ideal for creating a long, active run for their millions of acres of maple trees.

Source: Maple Syrup World

Since the Province dominates production, they can control the market. 25 years ago, maple syrup prices were rock bottom—half of what they are now. Farmers organized a cartel—the Federation of Quebec Maple Syrup Producers—to control how much of Quebec’s syrup could be exported. They set the price for how much they pay producers, and they charge a 12-cent fee for every pound sold.

Producers can only sell a very small amount independently—just to visitors to their farms, or to local markets. And they still have to pay the commission. Under the Federation’s control, prices have almost tripled.

The result is what happens whenever a cartel raises prices: producers start cheating. Their individual benefits outweigh the cost to the total system from over-production. They also claim that the arrangement means they don’t own their own syrup any more. So they smuggle their syrup across the border into New Brunswick, or find other ways to outfox the system.

Illustration: William De La Montagne, c. 1870. Source: Wikipedia

Naturally, the Federation has taken a dim view of such activities. Backed by the Canadian courts, they have their own security staff, and can impound production and sue producers for selling syrup outside their system—sometimes amounting to hundreds of thousands of dollars.

Cartels usually fail because they can’t enforce production quotas. They usually last a few years, then break up. This cartel has lasted longer, in part because Quebec is so dominant, and because maple syrup is homogeneous: you can’t taste much difference between Ohio’s grade-A syrup and Quebec’s. Also, demand for the syrup is fairly stable. But more efficient farmers are penalized: they should be able to profit more from greater production, but there’s less incentive for them to innovate.

Eventually, low-cost producers will find a way to get their product to the market. Either that, or Vermont and New Hampshire will learn how to frack their maple forests.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2017-07-17T12:22:19+00:00December 16th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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