Editor’s note: This is the second part of a two-part series. Read the first part – The weird (but true) economics behind my $26,000 sweater – here.
I would like to say that this is where the economic formula really takes off. Because, you see now, it’s been several years since I started my second career as a hedge fund manager. But that is only one of my hats. I am also the hedge fund spender, the hedge-layer, the hedge repairer. Actually very little of what I do relates to the hedge “fund”, which is quite small, to be honest—it’s the bit of cash I can afford to sink each season into spiny shrubs that hopefully will grow into a hedge.
Laying hedges is one of the ways that I fence in my wooly Icelandic friends. So, even though they don’t generate billions of dollars, and I can’t use them to crash a country’s economy (think of George Soros on a very Black Wednesday for the UK in 1992), these are very important hedges. Alas, though, we’re still not at the point where this $26,000 sweater starts making economic sense. (You may also have noted that I left the labour factor out of the tabulation—more on that below.)
In fact, the high realms of financial wizardry and crooked fiscal high jinx have nothing to do with my argument: I will make no reference to bonds (neither AAA, nor “junk”), mortgage-backed securities, swaps, shorts, derivatives, or that other kind of hedge. To me all these concepts are kind of like fairies—they sound plausible enough when people talk seriously about them, but the more I look into them, the less believable they seem. Instead, I will root my argument in the solid and muddy experience of daily life—the life of piggy banks, cash in hand, small wagers, and small wages.
When discussing dollar figures attached to a certain object, economists have to make distinctions between cost, price, and value. For some objects, like a pack of cigarettes, the difference between a) the cost to produce an object, b) the price of the object, and c) the value of the object entails a very narrow spread: the cost to produce a pack of cigarettes is about $0.10. The price of that pack of cigarettes is about $13, and the value of that pack of cigarettes is about -$13 (since apparently most smokers hate the damn things), i.e. a spread of roughly $26. A loaf of bread is an even narrower spread—on average about $2.50. A barrel of oil on the other hand costs about $40 CDN to produce in Saudia Arabia today, and is priced at about $60 CDN today, but its value is rather higher.
A barrel of oil has the energy equivalent of about 23,000 hours of human work. If we were to pay that barrel of oil a Nova Scotia minimum wage ($12.55/hr) for those 23,000 hours (with no vacations, or bathroom or lunch breaks), then we owe that barrel of oil $288,650. If we were to move this barrel of oil to Ontario and pay it minimum wage there ($14/hr), the difference between cost/price and value would be well over $300,000 CDN. The price of oil is 0.02% of its value. The spread between the price and the value of oil is enormous.
I am hoping to do rather better with my sweater, and I am certainly not going to sell it at 0.02%, or $5.20. Nor do I expect to sell it for $26,000.
The peculiarity of the economics of my sweater has to do with the fact that almost all of the ingredients to my product are living things. They continue to produce more value after I have my sweater in hand. You see, my 5 acre pasture is a living thing, a network of visible plant organisms and invisible soil life. On the surface, you can see lush grasses, sweet clovers, lovely and fragrant field flowers, even weeds that are tasty and nutritious for my sheep; while below the surface is the ceaseless activity of invisible soil organisms: bacteria, fungi, protozoa, worms, etc.
This pasture can support a larger amount of sheep, or some of it may be devoted to a garden, including a year’s worth of potatoes, root vegetables and cabbages, and even a year’s wheat crop if you wanted. One acre of wheat will yield about 3000 lbs. of whole wheat flour. The straw from the wheat could be your sheep’s winter bedding, and the combination of wheat straw and sheep manure will make the most amazing garden compost you could ask for. And this same five acres will produce its vegetation year after year ad infinitum. It will even do it ever more productively, if I manage it with skill and wisdom.
But let’s say we just do sheep; another set of living things that continually produce more value. My five acre pasture can support perhaps three ewes per acre per year (including 1.5 lambs/ewe on average) so, this means 14 ewes (got to make room for the ram) and perhaps 21 lambs. We are now at 36 animals with 36 fleeces. If we only make use of the prime summer wool, then we will get about 2.5 lbs. of clean fleece per animal, or 90 lbs. of wool. Given that a sweater uses roughly 1 lb. of wool. We have enough wool for 90 sweaters. The price per sweater has just fallen drastically. But, wait a minute—where did all these sheep come from?
They don’t exactly breed like rabbits, but before any sheep breeder knows it—he’s got too many sheep to keep. You see, if we start year one with three ewes, and these are mature ewes, then each will likely have two lambs that year. If half of these are female, on average, then in our first season we should have about three ewes to add to our flock, making six, and three males for the mint sauce—or about 120 lbs. of delicious meat. (Now may be a good time to add that Icelandic lamb is incredibly sweet and mild, more like extremely tender young beef than it is like your New Zealand vacuum pack.)
Yearling ewes generally have a single lamb, so next year we would add maybe four or five more ewes to our six, making ten. Year three, we have easily 14 ewes, and in another year, i.e. year four, all those ewes are mature and should be producing twins annually. Icelandic ewes are fecund old birds, popping out hardy wee lambs proudly into their early teens. Not like the lazy modern “improved” breeds whose predominant thought becomes “tubal ligation or death” around their fifth year.
The plot thickens
So let’s look at the situation four or five years down the sheep-raising road: say we have a ram, 14 ewes, who all twinned, and 21 viable lambs from them. That means we will have the 36 gorgeous fleeces mentioned earlier. A meat-sheep farmer can expect about $1.50/fleece, if he’s lucky, but an Icelandic fleece in good condition fetches an average of $50, since it is a current favorite of knitters and spinners.
We are going to have to do something with those 21 lambs, and let’s say that we sell 11 males at an average market price of $150/lamb. And let’s say we are able to sell half of the females (5) as breeding stock at $300/head, and the other 5 as market lamb for $120 (since they’re lighter than the males). In year four or five we are spending roughly $1100 to feed the ram and fourteen ewes over the winter (the lambs are gone by time we start feeding hay).
Fleeces 36 x $50 = $1800
Male Market lambs 10 x $150 = $1500
Female Breeders 5 x $300 = $1500
Female Market lambs 5 x $120 = $600
Minus winter feed – $1100
Minus trucking, shearing, etc. – $300
So this little hobby could generate a good $4000 annually when operating efficiently. Moreover, you can add value and, hence, more profits, through a bit of hard work and looking for other markets. Icelandic horned ram skulls can go for $50/head—on a strictly don’t ask, don’t tell basis (black candles not included). The skins of the shorn and butchered market lambs can be tanned and sold as throws for $200 a piece, and there will be about fifteen of those I wouldn’t want to waste. If we can get the throws tanned for $50/hide, then we are up $500 in skulls and $2250 from fifteen hides. Our annual returns would be up to $6750. You can make even more for the market lambs if you learn the skill of butchery and sell them as farm gate sales. Then each market lamb is worth more like $300—potentially up to $9550. With these figures, and depending on the management and labour you want to put into it, it is about six to nine years and we can have paid off the land, fencing, housing, stock, and everything that went to make that first priceless sweater. And after this, you’re in the land of milk and honey.
Ten years into this sweater project, what do you have? Five acres of beautiful land that is all yours, and can be left as an inheritance, and a legacy. A flock of exotic, funny, entertaining sheep, that you can count during a restless night, by name. A productive after-work lifestyle—or let this be just the start, and really get going with “growing your own”, “getting high on your own supply”—leave the job and live on the land! A beautiful thing to share with children, family, and neighbours. The sense of not relying on the unknown world of factory imports for everything in your life—a foothold in the door of independence. Also, a foothold in the door interdependence, because even small-scale farming tends to intertwine you with other farmers, neighbours, breeders, customers. All the lamb-meat your family can eat, and a tidy sum of supplemental income.
And, finally, heaps of wool to make all the sweaters you want. And each sweater you make becomes progressively cheaper as a fraction of that original $26, 000. And if you begin to excel in the add-value arts of fibre, then the sky is the veritable giddy limit.
Just like that barrel of oil, whose value is far above the current market price, my $26,000 sweater costs only a small fraction of the value it brings. Who would even think of buying an expensive $150 factory-made sweater now? It just doesn’t make economic sense….
“if you interpret it correctly.”
My (Canadian) American dream
A word on labour. Labour is time plus work. I haven’t factored labour into any of my calculations. For me, this is a personal choice, and some see it as a mistake. They will argue that you can’t possibly understand the economic impact of an activity without understanding its cost in human labour, even and especially, when that is your own labour. But about five years ago I decided not to do anything (long term) that I don’t love. My time and my effort are way too valuable to me to put a dollar figure on them. The dollar sign attached to anything indicates a measure of exchange; it indicates that my labour and yours are identical commodities. This views human labour as simply a means of production, and what gives value to labour is the end result, or product. A person’s worth comes to be measured by his productivity. A person becomes simply a bit of information lost amid the numbers of the national GDP.
I wish to step off this train… Because I dream an American dream, much to my Canadian chagrin. I dream of life, liberty, and the pursuit of happiness. The meaning of each of these terms has changed dramatically since the framing of the American Constitution in 1787. For those founders, “life” was equated with virtuous toil, “liberty” was equated with the power to do good for oneself and one’s neighbour, and “happiness” was equated with the contentment one could experience by contemplating the innate beauty and goodness of the elements of our life.
It seems rather grand to say that pursuing a sweater is how I wish to realize that original American dream, but it is true, and really, it is a very cozy, very Canadian, version of life, liberty, and happiness.
P.S. Some sheep breeds are wool specialists; some are meat specialists; some are milk specialists. The Iclelandics are excellent at all three. Their milk is wonderful. In Iceland they were known as the poor man’s cow. So, if you really wanted to go hog-wild with Icelandic sheep, you could milk the ewes every morning. Fourteen ewes would give about 1 litre each in addition to feeding her lambs (you just separate mum and lamb for the night). Fourteen litres per day is about 3.5 gallons of very high butterfat milk. What this means practically is enough milk for a large family for drinking milk, butter, cheese, yoghurt, and sour- and coffee-cream—every day of the week. It tastes great, and is closer to human milk in composition than cow’s milk, and so has greater digestibility, even for people who have a hard time with lactose. They will produce this lovely milk for about four or five months of the year. So the ideal thing is to make enough cheese from this milk to last 365 days.
I think that the economic case for my $26, 000 sweater has just been proven beyond a reasonable doubt!
But if you really just wanted one sweater…
Note: Please subscribe to the Utopian Idiots’ weekly newsletter – all about living a slower, less-distracted life – below. You can also follow us on Facebook here, and Twitter here. We hope you’ll bookmark this site, share our posts, and visit us often.