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Price data
There is a considerable body of data about prices going back a very long time ... but rather less about
what these prices mean.
Learning about prices
When I became the CFO of Continental Seafoods I needed to get an understanding of
the dynamic of the industry ... I needed this to be a deep understanding that was
likely to be right ... and I needed to get this quickly. I asked a lot of questions and did
my best to mine the knowledge of everyone in the company ... and friends of the
company, and that was a good start.
I also plotted shrimp prices in the US market month by month from 1946 to 1974.
The data were available in a government produced market report ... but taking the
data out of a table and plotting it on graph paper told a story. Four weeks into my
new job, I knew more than most about shrimp prices ... and this gave me a good
insight into the potential for the company as we went forward.
This time series plot told me a lot about the long term trends ... and it told me about
price behavior month by month during the year, and how different industry
conditions impacted this behavior.
We know a lot about some prices, and rather little about other prices. Some prices seem to be hidden from
public view ... and one has to wonder why?
What prices should be
It is relatively easy to make a judgment about what something should be priced at.
From this it is reasonably easy to judge that a transaction reflects a fair price ... and is
probably an honest transaction. But that presupposes that it is possible to see the
price of a transaction ... and this is usually not the case.
A colleague had a job in one country (around 1988) where he had to review big
contract pricing to help reduce corruption and kick backs ... and he did his work very
conscientiously. He refused to OK one big contract because the pricing was way too
high ... only to have the contract resubmitted again some months later with the price
even higher. The explanation turned out to be that now it was going to take even
more bribery to get the contract approved!
These are big numbers and the temptation is huge. With very weak accounting and
no accountability it is not at all surprising that corruption is endemic and financial
control a shambles.
And even where there is publicity about prices, it is not always clear what the information really means ...
price disinformation is as common as price information.
Example
Government data about prices is often obtained using a crude system of telephone
questioning ... while it gets the information reasonably right it is not perfect by a long
shot. It certainly does not have accounting precision.
I was not told about this until after I left the company ... but it turned out that
whenever we had a large stock of a specific item we advised the price surveyors that
this particular product was selling at a particularly high price ... and when we had
low stocks, we reported that the market price was low. In the real world we were then
able to discount the one item below market and move the product and overprice the
product we did not have, and not be embarrassed by the lack of inventory.
It did not distort the price statistics that much ... but it certainly was a clever little
ruse to help keep product moving!
Transfer prices
Prices are critical to corporate profit ... which in turn has a disproportionate impact on value as measured
by capital markets.
But price is transient ... and just a part of the data needed to understand and record an economic
transaction. It does not matter much if one barrel of crude oil sells for $200 a barrel ... but it matters very
much if 100 million barrels of crude oil sell for this price.
In value chain analysis, the transfer price determines how the value adding is shared between the entities
in the chain it is very important. Because of its importance very little information is available about
transfer prices. The idea that the “market” determines the price assumes a high degree of information and
this is rarely the case. Transfer pricing serves those that have the control.
Because of its importance very little information is available about transfer prices. The idea that the
“market” determines the price assumes a high degree of information and this is rarely the case. Transfer
pricing serves those that have the control.
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