Ahh Thanksgiving! That wonderful time of year when families come together, reflect on all they are thankful for, and share a delicious home-cooked meal. Everyone loves Thanksgiving dinner. So naturally, us market fanatics at Rapunzl decided to take a closer look at some of the market forces and economic concepts behind your meal and how it’ll impact certain stocks.
Turkey is the indubitable centerpiece of most Thanksgiving meals. It’s also quite an interesting commodity around this time of year. Many have difficulty wrapping their heads around why exactly turkey prices seem to plummet just before Thanksgiving.
Generally, when a good is in high demand, supply is pushed down. This should be causing prices to increase. Turkey seemingly defies this economic law. No, stocks can’t do that. But a closer analysis of the market will reveal that it’s no exception to the rule.
So Loss Leaders & Turkeys
Firstly, let’s discuss the concept of loss leaders, as they seem to be one of the most common explanatory factors behind turkey prices. “Loss leaders” are products which stores sell at a loss. They do this with the intention of attracting more customers to the store. The idea is that these customers will then buy other products, turning that loss into a net profit.
And this practice actually makes a lot of sense when it comes to turkey. It’s a very low-margin product. This means the price of a turkey is not much higher than what it costs the store to maintain turkey stocks to shelf. Therefore, knowing that Thanksgiving shoppers are preparing much more than just turkey, stores forgo the small profit.
They profit with the assumption that customers will spend much more money. They’ll spend that money on equally popular products like stuffing and seasonings. All of these, of course, have much higher margins. And it turns out stores do end up making most of their Thanksgiving-time profit from everything else on the table.
In fact, loss leaders are so effective that retailers will utilize the exact same method to lure you in just one day later on Black Friday (and let’s not forget Cyber Monday), one of the biggest shopping days of the year.
And The Turkey Dip?
Another reason turkey prices dip before the Thanksgiving rush? Most Americans buy frozen turkeys. This means suppliers can raise turkeys all year long. So this way, they can simply store them for November. As a result, they create a stockpile of frozen turkeys. But in order to ensure all of them are sold in such a short period of time, stores must lower prices.
Fresh, more expensive turkeys differ from their frozen counterparts. They are relatively supply-inelastic. This means an increase in price will not result in a proportionate increase in the amount of fresh turkey supplied. One problem: fresh turkeys can’t be stored all year long. Farmers would incur high marginal costs if production is ramped up. Plus, if we’re talking turkey, that’s a lot of turkeys.
This large excess supply that pushes down the pre-Thanksgiving price of frozen turkeys does not exist with fresh turkeys. Furthermore, fresh turkeys tend to be raised on smaller farms and have higher unit costs, preventing their suppliers from realizing economies of scale (read: lower marginal costs associated with increased production) enjoyed by the massive mega-farms that supply most of our frozen fowl.
THE BOTTOM LINE
So, if you’re looking to invest this Thanksgiving, your best bet is buying frozen, and purchasing some of your side ingredients before stores increase prices. Who knew achieving financial fluency would impact your turkey preference!
If you’re one of many people who take issue with certain mega-farm practices and are less concerned with cost than you are with the dubious ethics that put the turkey on your table, you may consider investing in a Heritage turkey, which is more often free-range, organic, and allegedly tastier. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.
However you prefer to invest, we wish you a Happy Thanksgiving from everyone at Rapunzl!
In case you missed it, check out our recent post about the G20 and if global leaders (and investors) are chasing an elusive dream
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