Vegetable prices likely to fall - Article Example

Vegetable Prices Likely to Fall The price of vegetables is set to crash in the coming months as the weather cools and an influx of new produce enters the market. Warana Fruit Shed fruit and vegetable manager Jon Clinch expects vegetable prices to go down by almost 50% in the next two to three months as winter settles in. “A lot of farmers replanted not too long ago. We will be seeing everything coming back to normal price range in the coming months but vegetables will be the quickest,” he said. Broccoli, which was yesterday priced at $6.99/kg in store, could drop down to as low as $2.99/kg. Other winter vegetables, such as cauliflower and cabbage, will see similar reductions. Fruit would eventually follow, but would not drop as much, he said. Banana lovers will be the hardest hit however. “They will stay up for at least six months,” he said. Ausveg, the national peak industry body representing the interests of Australian vegetable and potato growers, has also predicted the drop in vegetable prices. “We’ve predicted a price drop in the coming months. We will see a return to normal pricing,” Ausveg spokesman Hugh Tobin said. “Areas devastated by the floods like the Lockyer Valley are getting back on track.” Ausveg had estimated national losses in vegetable and fruit production was at approximately $225 million. Price drop Winter vegetables such as broccoli, cauliflower and cabbage are expected to drop in price by almost 50% in the next two to three months. Fruit will slowly follow, depending on the weather, but bananas will not return to normal prices for at least six months.1 Report Introduction The price level of food products influences majority of each household’s expenditure, therefore changes in prices draw people’s attention. Recently along with popularization of healthy life style, rose the importance of fruits and vegetables. As the flood disaster struck in Australia’s Queensland, the prices of some products went up, the most affected being fruits and vegetables, and causing great social distress.2 However, farmers from other regions of Australia planted extra crops to gain an advantage.3 The article ensures that the vegetable prices and supply are slowly going back to normal. It also mentions fruits following sometime later, without being exact. It is expressing pessimistic predictions about banana’s specifically, affected by Yasi cyclone, estimating the recovery process to last at least 6 months. The national wealth suffered a terrible loss due to the flooding, and the article estimates $225 million loss in production. However, these estimates do not take into account the future consequences of losing the foreign market share. The reasons for prices being up for a long period of time and their estimated changes are hidden within laws of demand and supply. The elasticity of demand also influences the situation, and the purpose of the report is to give reasons for this thesis. There’s a high possibility of inflation affecting the situation further, and that will be also discussed. Analysis The law of supply and demand states that all other things constant, there exists an equilibrium point on the intersection of supply and demand curves, where the needs of customers and suppliers are met - optimal resource allocation, and that markets naturally strive for it (graph 1).4 Graph 1. Supply and demand equilibrium. Source: Investopedia. “The floods have damaged crops and caused disruption to supply.”5 What happened in Australia, with natural disasters – flood and cyclone – affecting available sources of goods, is called a supply shock. As the amount of fruits and vegetables supplied decreased, the supply curve shifted left, and the corresponding equilibrium price increased (graphs 2 and 3). “Growers whose crops have not been destroyed have had difficulty transporting their products to market because of flooded roads and rail lines. “6 This inability to sell their goods also affects the prices, as it affects supply curve even more. Graph 2. Equilibrium after a supply curve shift. The supply curve shifts from S to S2, moving equilibrium point from (Q,P) to (Q1,P1). Source: Biz/ed. Graph 3. Weekly whole sale prices at fruit market at the beginning of the crisis, source: ABARES special report, 21 January 2010. The demand curve did not move, therefore with the price going up the quantity demanded decreased. As Queensland have been responsible for big part of Australia’s fruit and vegetable supply, the aggregate supply curves also changed drastically. However the article indicates that it all goes for the better as the prices are predicted to lower. “In a quirky turn-around, southern growers hearing sustained media reports of floods and cyclones in Queensland have planted extra crops of leafy vegetables such as lettuce, broccoli and cauliflower.”7 These decisions will shift the supply curve to the right, and a possibility of reaching the original equilibrium price level appears. Price plasticity of demand is responsible for the slope of the demand curve – in other words percentage change in quantity demanded caused by a percent change in price.8 It is also responsible for the ways in which the price level affected Australians. The estimated elasticity of demand for vegetables is inelastic standing at -0.53 (B on the graph 4), and for fruits it is unit elastic (-1.05, midpoint on the graph 4).9 The possible reason for this particularity is that the vegetables are used during the meals, while fruits are considered an appetizer, not necessarily of importance. This means that the consumers have to spend significantly more on vegetables than they did before with a low drop in quantity bought, and that they buy significantly less fruits as the prices are unfavorable. Graph. 4 Price elasticity of demand. Source: University of North Carolina at Chapel Hill Economics Interactive. A – elastic; Midpoint – Unit Elastic; B – Inelastic. While the article is optimistic in its estimations of a price drop, it omitted an important issue – along with the losses of the fruit production, the national exports also suffered. Therefore the loss estimation of $225 million by Ausveg seems inaccurate, as it does not take into account the foreign market future losses. “Australia is considered a niche, high quality exporter of fruit and vegetables and has some supply advantages in the world market due to its ability to supply in the counter seasons to the northern hemisphere.”10 “David Minnis, the former chairman of the Australian Horticultural exporters Association, said market share has been lost in Asia and will be difficult to recover, according to the The Australian Broadcasting Co.’s website. “All the Asian markets have been full of cherries from Chile this year,” he is quoted as saying. “Once importers start to secure a good quality from one country, they’re reluctant to necessarily change, particularly if we can’t beat them on price.””11 The market loss might be impossible to recover, as new competitors will take over and the effects on Australian economy of this loss are hard to estimate. The government’s intervention also will have a lasting effects, as the planned actions will increase the inflation rate and might influence the prices even further. “The total cost of the devastating floods in Queensland to the federal budget would be 5.69 billion U.S. dollars, and the federal government earlier said the cost would be met by the flood levy and by cuts to government spending.”12 While dropping of the price level due to increased supply as mentioned in the article is certain, the actual price level might change less than predicted due to this type of influences. Conclusion To summarize, the flood and cyclone were a hard blow to Australian economy. The producers (farmers) and consumers suffered both, as the prices went up and some people lost their entire crops for the current year. The government tries to control the flow of events, reducing the strain on citizens suffering severe consequences, however its actions are likely to further increase already high inflation rate. The article only briefly mentions estimated losses on national wealth, and this estimation seems farfetched as it focuses only on one aspect – the actual loss, without concerning itself with future consequences. The real losses will predictably be much higher. The law of supply and demand explains the reasons for price changes during resource shortage, and people’s reaction to them is in accordance to the price elasticity of demand. The increase of available products will result in the lowering of the prices mentioned in the article. Elasticity of demand explains why consumers react less The inflation is also having its impact on the prices of fruit and vegetable, to a lesser extent. Works Cited 1 ”Vegetable prices likely to fall”, Sunshine Coast Daily, 22nd March 2011, 7th April 2011, http://www.sunshinecoastdaily.com.au/story/2011/03/22/vegetable-prices-likely-fall-farmers-cost-produce/ 2 Joe Kelly, “Fruit and vegetable prices to soar because of Queensland floods”, The Australian, 12th January 2011, 7th April 2011, http://www.theaustralian.com.au/national-affairs/fruit-and-vegetable-prices-to-soar-because-of-queensland-floods/story-fn59niix-1225986500653 3 Brian Williams, “Fruit and vegetable prices fall despite flood and cyclone woes”, The Courier-Mail, 21st March 2011, http://www.couriermail.com.au/news/fruit-and-vegetable-prices-fall-despite-flood-and-cyclone-woes/story-e6freon6-1226025000813 4 David Begg, Stanley Fisher, Rudiger Dornbusch, Economics Fourth Edition (Maidenhead: McGraw-Hill Book Company International (UK) Limited, 1996), pages 76 - 97 5 Joe Kelly, “Fruit and vegetable prices to soar because of Queensland floods”, The Australian, 12th January 2011, 7th April 2011, http://www.theaustralian.com.au/national-affairs/fruit-and-vegetable-prices-to-soar-because-of-queensland-floods/story-fn59niix-1225986500653 6 “Australia’s fruit, vegetable exports could drop due to flooding”, FreshFruitPortal.com, 10th January 2011, 7th April 2011, http://www.freshfruitportal.com/2011/01/10/australia%E2%80%99s-fruit-vegetable-exports-could-drop-20-due-to-flooding/ 7 Mehmet Ulubasoglu, Debdulal Mallick, Mokhtarul Wadud, Phillip Hone, Henry Haszler, “Food demand Elasticities in Australia”, ECONOMICS SERIES SWP 2010/17, November 2010 8 “Price elasticity of demand”, Wikipedia, free encyclopedia, 29th March 2011, 7th April 2011, http://en.wikipedia.org/wiki/Price_elasticity_of_demand 9 Brian Williams, “Fruit and vegetable prices fall despite flood and cyclone woes”, The Courier-Mail, 21st March 2011, http://www.couriermail.com.au/news/fruit-and-vegetable-prices-fall-despite-flood-and-cyclone-woes/story-e6freon6-1226025000813 10 “Food and Vegetables Overview”, Australian Government Austrade, 6th August 2008, 7th April 2011, http://www.austrade.gov.au/Fruit-and-vegetables/default.aspx 11 “Australia’s fruit, vegetable exports could drop 20% due to flooding”, FreshFruitPortal.com, 10th January 2011, 7th April 2011, http://www.freshfruitportal.com/2011/01/10/australia%E2%80%99s-fruit-vegetable-exports-could-drop-20-due-to-flooding/ 12 Xiong Tong, “Australia's flood levy to pass parliament after independent declares support”, English.news.cn, 3rd March 2011, 7th April 2011, http://news.xinhuanet.com/english2010/world/2011-03/03/c_13759475.htm Sources of Graphs: 1. “Economics Basics: Demand and Supply”, Investopedia, 4th April 2011, 7th April 2011, http://www.investopedia.com/university/economics/economics3.asp 2. “Decrease in Supply”, Biz/ed, 4th April 2011, 7th April 2011, http://www.bized.co.uk/reference/diagrams/Decrease-in-Supply 3. “The impact of recent flood events on commodities” , Canberra : ABARES Special Report, January 4. “Price elasticity of demand “ University of North Carolina at Chapel Hill Economics Interactive. 3rd April 2008, 7th April 2011, http://www.unc.edu/depts/econ/byrns_web/EC101/TB_Principles/TestBank/test_bank/print-MC.php?id=TB_Principles-MC2-M2-05 Read More