The parable of bananas and pumpkins.
In a distant and contested land, full of desperate people, a group of jolly canucks found an amazing banana tree. Even though the price for bananas at that time was kind of low the Canadians realized that the tree, with a little investment in pickers and boxes and ladders, could give them bananas for a low price (about $1.15 each.)
The happy Canucks made a deal with the locals to get the bananas out of the tree and get them sold at the market. They said “we will bring the ladders and boxes and pay to pick the bananas and we will only keep 40% of the bananas and 40% ownership of the banana tree.”
There was much happiness and everyone celebrated. The banana chief went on a world tour telling everyone about the wonderful, cheap, perfect fat, ripe bananas.
The Canucks were extra elated when they found great reception to the talk of their high grade banana find. People all over the world decided to line up and offer money… but they were not offering money for the bananas, no, they were offering money for rights to own a piece of the 40% of the rights to the banana tree and it’s production.
These people rightly decided that the whole rama-banana operation was worth many billions of dollars. They rubbed their greedy hands together imagining the riches they would reap from their banana tree.
To their surprise and added happiness the banana trees in other countries started producing less bananas and the leaders of some of the countries decided they wanted to keep a few more bananas to give to their hungry citizens (mainly so those citizens would not decide to eat the leaders) and the demand for bananas started increasing.
Now, when it comes to food, bananas and pumpkins are worth the same. You can mush up a banana and mix it with mushed up pumpkins and low and behold you can push electricity through the mush.
Some other dudes, who had spent several years planting pumpkins and watering them in the hot Nevada desert, almost lost their investment when the price of pumpkin and banana mash went down to $2.50 a pound. The bananas were doing fine because they were only to cost $1.15 each but the pumpkins were to cost about $2.00.
Then the price for banana pumpkin mash went up, and up. It even surpassed the wildest dreams of the early banana collectors. The high price excited the banana farmers and then their 40% ownership in the tree (and in the tree’s yet to increase size) became very valuable ($8.5 billion.)
The pumpkin growers were a little behind, and their operation smaller, but as the price of mash went up they stood to gain much more because their starting point was already so low. Whereas the almost free bananas now sell for double what was expected and create double the profits, the pumpkins now sell for more than five times the profit than originally expected (economists call this “marginal profit.”
The pumpkins were going to cost $2.00 and be sold for maybe 50 cents more, if lucky. This created risk and it became the reason that no one wanted a pumpkin farm.
Now the pumpkins can also be sold for $4.50, just like the bananas! Each pumpkin now returns five of the original fifty cent of cash flow units, plus the 4 of the 50 cent units required to grow and pick the pumpkins.
Most of the banana farmers forgot to realize that pumpkins and bananas have the same value and that you can buy the rights to sell pumpkins at about one third of the price you have to pay for rights to sell DRC bananas.
$1.8 billion dollars buys you a huge pumpkin patch that is ripe in 2025 and will give 290 million pounds of pumpkins. In the same time frame there will be a fully grown DRC banana tree that, for $8.5 billion in today’s money, will give the rights to about 460 million pounds of bananas.
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Cheers,
Notgnu