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Cocaine: coke, blow, yay, yayo, snow white, chanel, tina, nose candy, snort

Straight from the horse's mouth:

“Combining... drug control tools into effective market-disruption campaigns requires an understanding of the operation and organization of illicit drug markets.

In the past, a single drug cartel owned the drug that it trafficked from its cultivation and production all the way to its wholesale distribution. Now, many large trafficking organizations specialize in specific segments of the supply chain, such as cultivation, production, transportation from source country to US border areas, and smuggling across the border into the United States. By participating in only one market segment, traffickers can concentrate their expertise and connections while limiting their overall risk.”

www.ondcp.gov

Wait, wait, who exactly dismantled all the major drug cartels?

The following is all entirely true. Information is not taken from some hippie "legalize drugs" group, not some geocities website, but from the Office of National Drug Control Policy (ONDCP) and the United Nations International Drug Control Programme (UNDCP). I have taken their research and given you the conclusions that that they have chosen conveniently to ignore.

You cannot avoid it. You cannot deny it. The 'War on Drugs' has made cocaine cheaper and better than it's ever been. From the Medellin/ George Jung/ Carlos Lehder days to now, the yay, adjusted for inflation, is 3 times cheaper and nearly 2 times purer, which sums up to our blow being 5 times better than our parents'. FUCK YEAH.

How the Cocaine Market has Benefited From
the 'War on Drugs' and
Better Supply Chain Management

Abstract

Of all the illegal markets in existence today, the cocaine industry is arguably the most sophisticated in terms of supply chain management and distribution. The system begins with coca farms and HCI labs in South America, where numerous suppliers, or cartels, oversee production and collect finished goods. Before transporting the cocaine, the suppliers use brokers to negotiate contracts with domestic wholesalers. Then the cartels pay land-based Mexican and Caribbean subcontractors to ship their cargo into the United States, the world's largest consumer of cocaine. Alternate methods include direct shipment by sea and air. Afterwards, cargos rest and await delivery at transshipment points located in certain cities near US borders. Upon receipt, wholesalers act as hubs with spokes leading to regional distributors, or “cells.” Then the distributors sell to local crime organizations, which are the retailers for cocaine. All of these operations are only possible because of the impressive money laundering schemes that are required to move upstream the profits from this $70 billion market.

However, none of the sophistication in this market would exist if it were not for the so-called “ War on Drugs ,” whose sole accomplishment of any significance was the dismantlement of the original cartel monopolies. The response has been the creation of many smaller suppliers, wholesalers, and distributors; consequent competition has resulted lower-priced and purer end products. As law enforcement operations expand, each level of the cocaine market has reacted by developing better upstream and downstream communication to improve efficiency and integrity. Expenses have decreased for reasons such as shorter lead times and reduced transportation costs. Furthermore, mutual implementation of pricing mechanisms has maximized net profits at every stage.

As cocaine spends less time in transit and coordination improves, the weaknesses in the system have become more difficult to pinpoint and exploit.

Governmental counter-reply has been aimed supply side. Statistics report that production is lower and seizures are higher. Nevertheless, profits over the years have remained surprisingly stable even as customers continue to receive better, cheaper goods. Most per-unit expense factors in this market have remained relatively stable except for inter-level costs. What we are witnessing in this market is superior supply chain management.

As data for the U.S. market is most available and reliable, and as U.S. sales and distribution levels constitute a clear majority worldwide, much of the following will be primarily focused on this country.

Brief History of the Cocaine Market

The primary, reliable source for the history of this business comes from an excellent television serious called “Frontline,” which was hosted by PBS. Historical information for the past decade comes from various ONDCP and UNDCP publications.

With his organization, known as the Medellin Cartel, Pablo Escobar created the cocaine market. Simultaneously, another Colombian organization, called the Cali Cartel operated in southern regions. These two groups were in constant conflict from the mid 70’s to the mid 80’s. Both organizations were structured quite similarly, with influences or direct control over most of the wholesale and distribution stages.

During these times, major distribution routes were established. Using Mexican subcontractors such as the Ochoa brothers, the cartels established transshipment zones, such as the cities of Tijuana and Los Angeles, near the US border. Various couriers shipped small quantities along numerous routes and met again at a Mexican border city. Then the gathered cargo would be split again and shipped along many routes, only to meet again at a U.S. border city.

These transshipment points and their connecting routes amount to a classic transportation problem: the sources the Columbian wholesaling cartels, the nodes were the transshipment cities, and the sinks were the cities on the other side of the U.S.-Mexico border. Then each route is an arc and the respective cost factors of each arc are the expenses involved with shipping and seizure rates.

As with any transportation model, further additions of nodes between the source and the sink will increase capacity. As law enforcement exerted more pressure, the need for more nodes grew increasing significant. With this realization, Carlos Lehder pioneered new transshipment routes: He purchased an island known as Norman’s Cay, built an airstrip there, and established the first major Caribbean corridor. Two consequences are apparent: non-commercial air shipment is cheaper and faster than land-based shipment. Had a need to find new routes not occurred, this innovation would have never happened. Using direct-shipment, air-based transportation, the lead-time and shipping-expenses of the cocaine market dropped rapidly.

However, for all intensive purposes, the cocaine market began with oligopolies. There were no regulating factors. The common sense notions of supply, demand, and basic market competition were not applicable because violence suppressed these forces. Offering a better, cheaper end product usually helps one supplier kill the competition. Killing the competition, literally, was a much more effective alternative.

As the “ War on Drugs ” escalated during the 80’s with the Reagan administration, the rival Medellin and Cali cartels began to fragment. However, another cartel based in Northern Columbia, the Norte del Valle Cartel, assumed the power vacuum. In time, this organization would crumble as well.

Law enforcement agencies had one main strategy: attack the supply-side in order to weaken the market. The intuitive theory is that if supplies decrease, prices will increase. We can see this in the expenditures of drug control programs. Farmers were encouraged and literally bribed to stop producing coca. Cartels at the highest stages of the cocaine supply chain were hunted down. The statistic most often referenced in press releases is the worldwide decrease in coca cultivation and cocaine cultivation, coupled with seizures (Appendix 4). Nevertheless, instead of increasing, prices decreased (Appendix 8). One may argue that suppliers compensated by “cutting” the cocaine - decreasing the purity and overall quality. This argument fails monumentally.

A better measure is to say that if a customer were to buy a single gram of cocaine, he or she would have to pay a certain amount and receive a certain level of purity. If the user bought enough cocaine in order to obtain one gram of pure cocaine, he or she would obviously have to buy more cocaine. Let us call this amount the “estimated price per expected gram of pure cocaine” (Appendix 1). Trends for this amount unequivocally show that the expected goals of the “ War on Drugs ” are not happening. In fact, the exact opposite is true. (Whether or not causality exists remains for later discussion.)

It was soon plain to see that large, over-reaching cartels only attracted government attention. The obvious solution, and apparent action, was to dissolve these organizations into smaller cells. Moreover, wars to establish control also attracted unnecessary attention.

During the 90's another innovation arose: brokers. Like the National Crime Syndicate of the Italian-American mafias, the cartels realized that negotiations solved disputes easier and more effectively than violence. Essentially, law enforcement has done nothing more than regulating the cocaine market. There are more suppliers. There is more competition. With the discouragement of violence, competition is fairer. The customer benefits most by having a better end product.

The next policy change was the introduction of extradition laws, aimed at deterring Colombian cartels by threat of U.S. laws. What this policy translates into is separation of organizations by stages. Instead of conducting direct business in the United States, the Colombians simply relied more on Mexican and Dominican shipping groups. Since it was easier to make payments with cocaine instead of cash, these groups suddenly had wholesaling responsibilities as well. In turn, these once-transshipment organizations have evolved into suppliers themselves.

Now, vertical monopolies would dissolve as well. Each stage of the supply chain now competes with rivals within their levels, instead of rivals that operate at multiple levels and have clear advantages. Transshipment organizations used to move supplies from the producing source to the transshipment sink. They were not involved in wholesaling and thus, were primarily concerned with reaching their sinks.

The market has now evolved another step further: increased use of hubs. Prior to the hub networks, transshipment cities also served as hubs - multiple routes would meet together again at a transshipment point that collected the multiple shipments for redistribution to regional markets in a branching fashion. Since these cities are located only along the southern borders of the country, they were inherently inefficient. Most successful distribution networks such as private shipping and delivery companies or major retailers locate their distribution centers in the middle of major market regions.

Now the transshipment points for the cocaine market serve exclusively as such: supply gathering. Then the supplies are shipped to hubs that perform the redistributions instead. There are two readily apparent advantages to this new adaptation. First, the hubs are closer to their markets and gain all the advantages of increased locality. Second, hub-and-spoke layouts are more efficient in design than the older branching layouts, which leads to shorter lead-times. Appendix 11 shows that there is now proportionally more wholesale cocaine in regions not bordering Mexico, implying that there is less reliance on old transshipment points as wholesaling centers.

The modern-day cocaine distribution organization has not ceased to adapt to market influences. Increased governmental surveillance only leads to further use of disposable or untraceable cell phones, for example.

Cocaine at the retail level, however, has not changed much. The most penetrable of levels is the street level, where any undercover agent can buy a gram of product. Thus, wholesalers and distributors maintain a strong divide from retail sales of cocaine. Above this divide, we have witnessed the sophistication that has arisen from changing environments. The base dealer on a street corner and small-kilogram gangs that retail to such dealers are highly localized and territorial. Retailers do not have brokers; violence solves any and all disputes.

The most public level of the cocaine market is and will always be the retail level. Law enforcement will always find themselves entangled in this level and will always meet with great difficulty in crossing this divide. Wholesalers and distributors use the wholesale/ retail gap as a protective buffer.

Statistical Data Collection:
Sources, Methodology, and Limitations

Unlike legitimate markets, the cocaine business is not one with readily available or accurate data. This dilemma presents us with many unique and complicated consequences. In addition, the only empirical data available are production levels, percentage of users per region, usage habits per region, and seizures; all other data implies some combination and permutation of these two categories, which introduces more variability. Excluding production costs, data for expenses is too volatile to be worth consideration. The most available information are the wholesale prices from one stage of the cocaine supply chain to the next, but such figures and trends can be due to any number of reasons other than the actual expense of shipping. Consequently, supply chain expenses will be the topic of greatest interest.

The data we are interested in will be 1) supply levels at the farming and production stages, 2) distribution levels per region, 3) price and purity at each stage, 4) seizure amounts at each stage, and if possible, 5) expense figures at each stage. Data for production levels is most reliable: a simple count of farmland used for coca cultivation results in accurate figures. Distribution levels are an accumulation of usage statistics and interviews of traffickers and informants. Price and purity of cocaine are derived from data collected from seizures. Seizure amounts yield many other figures of interest such as trends in shipping methods to distribution effectiveness. Expense figures come from any number of sources, including money-laundering estimates to trends in distribution methods. For example, if there is a noticeable shift from Mexican transshipping to Dominican transshipping, the latter is clearly either more inexpensive, more reliable, or both.

Any semblance of a third-party collector of data is nonexistent. What we have available for analysis comes either directly or indirectly from the U.S. Department of Justice and the Office of National Drug Control Policy, or the United Nations International Drug Control Programme. The names of these organizations alone should immediately raise concern. However, these two organizations are gracious enough to provide detailed qualitative and quantitative methods on data collection. Unless the raw numbers are fabrications, these two sources are essentially the only places to gather statistics. In any event, if the methodology and the data do not correlate, alarms will immediately sound.

Concerning data for drugs and drug markets, both the ONDCP and the UNDCP release two main types of publications: reports and press releases. Reports are published yearly and commonly include data only up to two years prior to publication. A report published in 2006 will have data leading up to 2004 or 2003. This difference is due to the methodology somewhat like reverse-forecasting: predictions are made in 2004 for successive years, which must be compared with estimated true values that are collected in 2005. Then researchers evaluate the discrepancies between predictions and empirical data in order to readjust the 2004 estimates. Given such a level of scrutiny, the accuracy and precision of the data is further reinforced.

However, it is not uncommon to see a press release with very recent (and thus, volatile) data that has not seen publication in a formal report. Usually, this recent data is extrapolated or in worse cases, cherry-picked.

Hence, what we find to be consistently erroneous are press releases and summarized data analyses. As with any other field of data consequential to political agendas, it is the findings, and not the data, that is suspect. Repeatedly, we have seen this issue arise in other politically motivated press releases, including analyses on the supposed dangers of second-hand smoking and global warming. For example, Appendix 7 shows one such press release on price and purity trends states that cocaine has been increasing in price but decreasing on purity. Upon further examination, the trend was evaluated over a seven-month period, even though analysis of the same figures over a twenty-year period shows the exact opposite. Moreover, while the ONDCP published this press release in November 2005, the analysis uses data as recent as September 2005.

On the other hand, third-party examiners of data tend to be just as (if not more) biased themselves. Countless numbers of organizations, especially those claiming that the “ War on Drugs ” is failing, will ignore contradictory data, make unsubstantiated claims, and even exaggerate data. For example, if a statistic changes from 1% to 2% over a year, they will state that since this statistic has doubled, something extremely significant has happened. The wisest choice would be to ignore the claims of third-party organizations altogether.

Consequently, we will use data from published ONDCP and UNDCP reports with the assumption that the raw numbers collected for these publications are not fabrications or exaggerations. We can make this assumption because the researchers of these reports usually give clear explanations of their methodologies, as well as the limitations of their methodologies. Otherwise, no other choice exists.

Empirical Data and Analysis

There are two sets of data collected at the primary level, which are numbers derived from weighted averaging of all samples. These two sets are production levels and seizures. With the data from seizures, we can find the price and purity of cocaine and disruptions in supply.

The three chief cocaine-producing countries are Columbia, Peru, and Bolivia. Production levels from all other countries are negligible. Production data shows clear and evident trends. The percentage of cocaine produced in Colombia has increased at the expense of lower levels in Bolivia and Peru (Appendix 9). Worldwide cultivation of coca has decreased. Seizures at the supply source have increased. Ultimately, the worldwide available supply of cocaine has decreased (Appendix 4).

Price and purity levels of cocaine show undeniable trends as well. As the 2005 UNDCP admits,

...contrary to expectations, however, the rising interception rate was not reflected in rising cocaine prices or falling cocaine purity levels. In fact, the average inflation adjusted wholesale cocaine price in the USA even declined marginally, from $23,000 per kg in 2001 to $22,000 per kg in 2003.

Appendix 1 clearly shows that the expected price of a pure gram of cocaine has decreased significantly over the past twenty years. There are three levels of estimation corresponding to seizure amounts. The apparent purity of cocaine from seizures of quantities less than two grams are indeed larger than seizures of larger quantities - the reason is that at each successive stage of the cocaine supply chain, the cocaine is “cut,” with additives, thereby increasing the apparent volume.

Adjusted for inflation, the purchasing power of a recent buy is equivalent to more than five times the amount that one can buy in the early 80's. Let us compare the trends in this data to history. Expected price is obviously highest during the early 80’s. At this time, large oligopolies were in power. There is a noticeable downward trend throughout much of the 80's. During this decade, the “ War on Drugs ” was busy dismantling such oligopolies.

The end of the era of large, multi-level cartels came about during the early 90's. From the early 90's onward, the expected price of a gram of pure cocaine still seems to be declining, but at slower, more stable rate. The apparent connection, consequently, is that as competition within the cocaine market increases, the price and purity of cocaine decreases in an inverse fashion. (Unfortunately, the demand rates for cocaine are very volatile. The only inference, then, is that a demand exists.) On the assumption that a classic model of equilibrium pricing still exists for every rate of supply and demand, the correlation seems highly convincing.

Secondary Data and Analysis

All other sets of data come from some permutation of empirical data. There are more degrees of freedom inherent in secondary data, and we should place less weight in findings from these figures. Implied data gives distribution levels and routes and assumed profit and revenue models.

In order to obtain distribution data, researchers compare the potential production levels for cocaine versus the amount of seizures made - what is left is the supply available for sale. Then some evaluation of seizures is made to judge effectiveness, which in turn, implies the amount that has not been seized. The effectiveness is rechecked at every stage. For example, if seizures at that wholesale level are rated to be very effective, then seizures at the distribution level should be smaller and yield interceptions of worse price and purity.

The United States is by far the world’s largest market for cocaine (Appendix 5). Furthermore, holds the largest share of retail sales at nearly $43.6 billion of a worldwide market worth $70 billion (Appendix 6).

Statistical secondary data published in the ONDCP Estimation of Cocaine Availability: 1996-2000 shows a decreasing dependence on southern border cities as hubs and more dependence on centralized distribution centers (appendix 11). Annually released figures in the ONDCP publication, Pulse Check, show price and purity levels for cocaine decrease in a particular city as it is further up the distribution chain. Cocaine in a hub city such as New York is purer and cheaper than most of the cocaine in its spoke cities, such as Washington, D.C. or Boston.

Thirdly, the UNDCP publication of Global Illicit Drug Trends 2003, report on repeated tables that show a strong correlation between cocaine pricing, distribution, and supply expenses. As the destination of the market increases in distance from Columbia, Peru, and Bolivia, the price increases. As is in the United States, statistics trends for usage and users as population density are too volatile or unreliable to be worth consideration. Cocaine is much more expensive in Asia, for example, than it is in Europe, which is in turn, more expensive than in North America.

Analyses of secondary data show very convincing conclusions. The most significant data relevant to apparent pricing of cocaine is distance. As distance increases, the expenses involved with supply chain costs inherently increase as well.

One additional validation further supports the claim that effective supply chain management is crucial to the cocaine market: the ONDCP Estimation of Cocaine Availability includes a prediction model for distribution of cocaine, based off a transportation linear program. Given the demands for various destination sinks and the expenses involved with all combinations of routes through or without transshipment points, derive an objective function that minimizes costs. This function is subject to the capacity constraints of each route leading to and from transshipment points. Not surprisingly, distribution data bears strong correlation with the optimal solutions offered by this “Domestic Allocation Model.”

Tertiary Data and Analysis

The third level of data comes from interviews of arrested or anonymous people in the cocaine supply chain. While the information that they provide is the most unreliable of all available data, they do give valuable insight into methodologies. Most tertiary data comes from the excellent doctoral dissertation by Mr. Fuentes, “Life of a Cell.”;

A typical cell operating in America is extremely complicated, with many parts acting as contacts to superior and inferior stages within the supply chain (Appendix 12). These cells operate with a very strong buffer that separates and isolates them from the retail level, since the cells conduct business that is significantly removed from the public. Unfortunately, this buffer hurts forecasting and the inability to meet demand fluctuations.

Hence, cells conduct business through brokers. These brokers negotiate with retailers, which are typically local gangs, a long-term contract based on a mutually agreed risk factor and demand rate. In the event of delinquent payments, violence is a final resort. These cells also use broker negotiations with wholesalers. Brokers will also make negotiations on how risks will be distributed in the event of a seizure. Such negotiations continue all the way upstream. In the event that the shipping is independent of the cell or the wholesaler, or the wholesaler and the producers, the negotiation is done without the shipping company. Once prices are agreed upon, the shipping company is introduced into negotiations. These steps ensure that no one level charges some markup which causes a bullwhip effect further down the line.

The essence of the supply chain model is thus: the local organizations conduct their own forecasting, which is communicated up each stage of the market via contracts.

In order for such contracts to work, lead-times must be small enough such that fluctuations in demand or supply do not adversely affect contract terms. In interview after interview, and through extensive data provided by informants, the lead-time between each stage of the supply chain is quite literally, days. The clear implication is that that time it takes for cocaine to leave South American sources to reach the American retail level is limited to weeks. In order to limit lead-times, contracts are negotiated in advance of the actual demand and subsequent payment.

Here are the steps for a typical cell: 1) the brokers negotiate upstream and downstream to agree upon shipment levels and payment plans, 2) the cocaine is received and then shipped down the supply chain, and 3) when the cocaine is finally sold at the retail level, profits begin to make their way upstream. What follows are numerous money laundering techniques in order to hide revenues.

Why stay in a market whose supply is decreasing and competition is stronger? Appendix 13 shows us the most convincing solution: the cocaine market is still just as profitable as it has ever been. In order to maintain such high profit margins, given that everything else is working against the cocaine seller, some expense has to give: supply chain expenses.

Conclusions

The cocaine market is highly sophisticated. The two topics of interest with this market are the reasons behind the development of such sophistication and environmental factors that contribute to pricing and quality of cocaine.

From comparing statistical trends in data to historical fact, we have seen that every effort by law enforcement agencies has merely encouraged and stimulated competition. Supply-side ‘regulations’ have stopped the horizontal oligopolies, while extradition laws have separated and defined the various stages in the supply chain. Increased efforts to disrupt the supply chains have resulted in innovations that have shortened lead times. First came transshipment zones, followed by air routes, then hub-and-spoke distribution systems.

The modern system involves a highly complex network of brokers and negotiators Finally, the cocaine business remains a strong, viable market because of brilliant tactics in supply chain management have lowered expenses, in order to maintain excellent returns.

Written by Dinah Cheshire
Exclusive property of www.applesanity.com

Appendices

Appendix 01: Estimated Price per Expected Gram of Pure Cocaine

Source: Price and Purity of Illicit Drugs, pg. A2-A4

Appendix 02: Cocaine Trafficking 2000 - 2001

Source: Global Illicit Drug Trends 2003, pg. 70

Appendix 03: War on Drugs - Cocaine Seizures 2002 - 2003

Source: 2005 World Drug Report, pg. 75

Appendix 04: Worldwide Cocaine Interception & Available Supply

Source: 2005 World Drug Report, pg. 61

Appendix 05: Cocaine Regional Distribution

Source: 2005 World Drug Report, pg. 133

Appendix 06: Distribution of Cocaine Retails, 2003 Billions US$

Source: 2005 World Drug Report, pg. 132

Appendix 07: An Example of a Misleading Press Release

Source: Report on Progress in Columbia, pg. 2

Appendix 08: Price and Purity of Cocaine

Source: Price and Purity of Illicit Drugs, pg. 60-61

Appendix 09: Potential Manufacture of Cocaine, Metric Tons

Source: 2005 World Drug Report, pg. 207

Appendix 11: Distribution of Cocaine: Wholesale, Pure Metric Tons

Source: Estimation of Cocaine Availability pg. C-6

Appendix 12: A Typical Cocaine Supply & Distribution Network

Source: Life of a Cell, pg. 24

Appendix 13: Domestic Profit Margin at Retail Level, 2003 US$

Source: 2005 World Drug Report, pg. 182

Table 01: General Cocaine Statistics

Table 02: Cocaine: Valuation Trends

Table 03: Cocaine: Price and Purity Trends

Table 04: Worldwide Distribution of Cocaine

Table 05: Domestic Wholesaling of Cocaine

Bibliography

WAR ON DRUGS MY ASS