Who Makes The Profit?

If you have been paying attention, you have watched lumber prices soar over the past year with a corresponding bullwhip effect in the supply chain.  Lumber has been all over the place.  A friend of mine, Mike W. started MaterialsXchange a number of years ago. He traded lumber and can track cash prices along with organizing deliveries.  Mike traded lumber at CME so he knows the business.

What’s really interesting to me about commodities is who makes the real money?  In the case of lumber, the people that took risk, bought up land, planted trees and waited for them to grow aren’t making money.  Sawmills are.  I think the same can be said for a lot of commodity-focused businesses.  It’s not the source grower or miner that makes the money, it’s the middleman that takes the raw materials and processes it.

A number of years ago, my wife wanted to buy a farm and raise livestock.  We looked into it.  I ran the numbers.  I figured out that as a grower, I wouldn’t make much money but if you could own a slaughterhouse and packing plant you could.  One of the reasons was the permitting and regulatory structure of state and national government, but the real reason is you turned commodities into something.

Another acquaintance of mine once went to all the television studios in Hollywood.   He asked if he could have their old television shows from the 50s and 60s that were just sitting around collecting dust.  They gave them to him.  He created a television channel out of it and put it on cable systems in Europe.  Turns out, the viewers were dying for American content, no matter what it was.

There are consistent stories of how people take what seems to be commoditized goods or worthless goods/information and add value, turn them into something else and build big companies out of the product.

I think it’s something to keep in mind when you think about startup companies.

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