Sunday, January 06, 2013

The economics of cocaine

Do you which three countries produce all of the world's cocaine? Stewart Scott says they are Columbia, Peru, and Bolivia! Do you know its monetary value?

As cocaine progresses from the production site to the end users, it increases in value. According to figures provided by the Colombian National Police, a kilogram of cocaine can be purchased for $2,200 in the jungles in Colombia's interior and for between $5,500 and $7,000 at Colombian ports. But the price increases considerably once it leaves the production areas and is transported closer to consumption markets. In Central America cocaine can be purchased for $10,000 per kilogram, and in southern Mexico that same kilogram sells for $12,000. Once it passes through Mexico, a kilogram of cocaine is worth $16,000 in the border towns of northern Mexico, and it will fetch between $24,000 and $27,000 wholesale on the street in the United States depending on the location. The prices are even higher in Europe, where they can run from $53,000 to $55,000 per kilogram, and prices exceed $200,000 in Australia. The retail prices per gram of cocaine are also relatively high, with a gram costing approximately $100-$150 in the United States, $130-$185 in Europe and $250-$500 in Australia.

Then, how did Mexico get so involved in cocaine trade?

As U.S. interdiction efforts, aided by improvements in aerial and maritime surveillance, curtailed much of the Caribbean cocaine flow in the 1980s and 1990s, and as the Colombian and U.S. governments dismantled the Colombian cartels, the land routes through Central America and Mexico became more important to the flow of cocaine. It is far more difficult to spot and seize contraband moving across the busy U.S.-Mexico border than it is to spot contraband flowing across the Caribbean.

So, it is all about business competition!

While marijuana sales have always been an important financial source for the Mexican cartels, the large profits from the cocaine trade are what have permitted the cartels to become as powerful as they are today. The billions of dollars of profit to be had from the cocaine trade have not only motivated much of the Mexican cartels' global expansion but have also financed it. Cocaine profits allow the Mexican cartels to buy boats and planes, hire smugglers and assassins ("sicarios") and bribe government officials.

Cocaine is a product that has a very limited and specific growing area. Consequently, that distinct coca growing area and the transportation corridors stretching between the growing area and the end markets are critically important. With a business model of selling cocaine at over 10 times the cost of acquisition -- and even greater over the cost of production -- it is not surprising that the competition among the various Mexican cartels for the smuggling corridors through Mexico to the United States has become quite aggressive.

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