“What is behind the rising price of butter”by Brigit Busicchia, The Conversation
Access the article at the URL given above and answer the questions in the spaces below. Use full sentences and show all necessary working but do not use more space than is given here.Other references are not necessary but, if you do use any (for example,online economics glossaries) please list at least the URL of your source.
According to the article as “some of Australia’s favourite baked goods, such as croissants and buttery biscuits, have been creeping up in price…”. Within the context of the article, use the simple demand and supply diagram below to explain what might happen to the price of croissants in Australia (explain why prices will most likely increase/decrease/remain the same). In answering this question, assume the demand curve is constant and discuss the two main supply side issues affecting the Australian market for butter. Identify and discuss what happens to the supply curve, prices and the potential impact on the end consumer. [5 marks]
The butter production in Australia has been decreased by 18% from 2016 to 2017. There are chiefly two reasons behind this falling production of butter. The first reason behind this is that milk fat is using more to produce cheese and cream due to their higher level of demand in Asian and U.S market (The Conversation. 2018). Moreover, due to some lower level of genetic and nutritional factors, the amount of milk fat percentage has been decreasing in this country. In Australia, cattle industry was facing poor grazing season since 2016. This further has reduced the nutrition level of those animals. Therefore, the amount of milk-fat contents and its quality has become low. As a result, total production of butter in Australia has been affected since 2016 (The Conversation. 2018). Hence, higher butter prices influence Australian bakeries to increase their product prices. Therefore, the price of croissant has increased.
To answering this situation more accurately, the above diagram will used to explain. In the above diagram, the demand curve (D) for croissant of Autralian citizens has been shown. The initial supply curve of croissant was S. After decreasing the production of butter, the price of this milk produced goods has increased. As a result, supply of croissant will be increased, that is, S1. Due to fixed demand curve but decreasing supply of croissant, the domestic price of this food item will be increased. Hence, final consumers of Australia will buy this food item with higher prices, that is, P1. As a consequence, the consumer will decrease their amount of croissant consumption from Q* to Q1.
When discussing the impacts of the EU dairy quotas, the article states, “The liberalisation of the EU dairy market drove farm-gate prices down and led farmers, across Europe, to scale back on production”.Use the simple demand and supply diagram below to explain why prices were artificially high when the EU set a price floor prior to market liberalisation: in your answer also discuss the impact on the famer, the purchasers/consumers, and the government. [5 marks]
Marks: 1.5 marks for correct graphical depiction with 0.5 marks for each element of explanation
Milk quota or dairy produce quota of the European Union (EU) had the purpose to control the rising milk production of this union. This milk quota restricted the amount of milk selling for a farmer for every year. Hence, before the market liberalisation, the prices of milk products were artificially high due to earn standard market revenue (Rosa, Weaver and Vasciaveo 2016). Moreover, a price floor was set to avoid price volatility in the world market. Hence, small scale milk producers were benefitted by this system.
This dairy quota has a direct impact on government expenditures as it subsidies export of those dairy products to maintain an unchanged domestic price. For a particular level of quota, policy makers can decrease the domestic prices. For this reduction, the government expenditure would not be affected for any subsidised export (Groeneveld, Peerlings, Bakker and Heijman 2016). Due to this lower price, consumers can purchase more products. On the other side, whether the farmers will gain or lose will completely depend on empirical question and the surplus share.
In the above diagram, the demand curve represents the international demand for dairy products. However, due to dairy quotas, the initial supply curve of EU dairy products will be S0. In this situation, the supply of milk would be restricted by the government. Moreover, the price level will be stable and high. Here, the dairy price level before liberalisation was P0. The price flooring can be seen to maintain the price volatility in the international market. In this situation, the entire dairy markets of the European Union will produce Q0 amount of milk. However, after liberalisation, the supply curve will be changed. Though, the world demand curve for milk products will remain same.
After liberalisation, dairy prices have faced volatility. Moreover, due to international business, dairy producers will face a competition with the world market (Beghin and Fuller 2015). On the other side, after liberalisation, large producers will produce can produce huge amount of productions. Hence, to export their dairy products in the world market, dairy prices will be decreased after liberalisation. This will be helpful for the large milk industries. However, small industries will face difficulties after liberalisation. In this situation, the government has provided subsidies. The government has helped these small industries so that they can produce large amount milks with good quality and can export them.
To illustrate this situation the above diagram of 2a can be used. In the above diagram, the supply curve will be shifted to the right, that is, S1 after liberalisation. As a result, the new dairy price will be P1, which is less than P0.
Diary quota restricted the amount of dairy production in EU. Hence, farmers could not produce milk beyond a certain amount to avoid levy. After removal of liberalisation, those farmers can enjoy free amount of productions (V?neki, Mándi-Nagy and Stark 2015). They can produce according to the global demand for their dairy products. Hence, they have scaled back their production level.
In the above figure, the supply curve of dairy products has been increased after liberalisation. In figure 2a, the initial amount of diary production was Q0. However, after liberalisation, the new amount f diary production becomes Q1. This implies that overall production will be increased in future. Moreover, by increasing their amount of milk production, producers can export more and there is no need to pay extra charges to produce more, as before.
The Australian market of butter can be considered as perfectly competitive after analysing the international scenario. The demand for butter is completely depend upon the international market. Moreover, the price of butter is determined by the international as well as domestic demand for butter and total butter produced within this country. The country cannot influence the price level of butter in world market. There are huge numbers of customers, worldwide.
The Australian dairy industry has faced strong competition in international market with other dairy producing countries. These are New Zealand, the U.S.A and the EU. Moreover, there are also some small countries who are well-known supplier of this product (Australiandairyfarmers.com.au, 2018). These countries are Ukraine, Argentina and Uruguay. Hence, due to large number of other dairy products producing countries, Australian products face a limited share in the global market.
On the other side, the Australian government does not restrict their dairy markets by imposing any trade barriers. The country has offered an open market for their dairy products (Australiandairyfarmers.com.au, 2018). On the other side, there are some countries, which have imposed trade barriers, like tariffs to protect their market of this product.
Recently, international price for dairy products has been increased due to its lower production and higher demand. As a result, butter price of Australia has also affected. This higher demand further influences the price of butter in Australia to increase. However, the country cannot influence solely the dairy price in the world market.
Hence, after analysing these whole affects, it can be concluded that the country is facing a perfectly competitive market for their dairy products in the world market. This market has almost all characteristics of a perfectly competitive market. There are large numbers of other competitors, who are selling same time of products (De Loecker and Van Biesebroeck 2016). Moreover, there are large numbers of customers who buy dairy products from Australia, like, butter, cheese and so on. As the county does not impose any trade barriers, there can be free entry and exit of other foreign industries. On the other hand, as the country does not possess any monopoly power in the world market, it cannot influence the world price of butter solely. Hence, these all arguments support the conclusion that the dairy market of Australia is perfectly competitive by nature.
References:
Australiandairyfarmers.com.au. (2018). Cite a Website – Cite This For Me. [online] Available at: https://www.australiandairyfarmers.com.au/_literature_155105/Trade_and_the_Australian_Dairy_Industry.
Beghin, J.C. and Fuller, F.H., 2015. Dairy policies around the world: What would we gain from getting rid of them?. Iowa Ag Review, 6(1), p.5.
De Loecker, J. and Van Biesebroeck, J., 2016. Effect of international competition on firm productivity and market power (No. w21994). National Bureau of Economic Research.
Groeneveld, A., Peerlings, J., Bakker, M. and Heijman, W., 2016. The effect of milk quota abolishment on farm intensity: shifts and stability. NJAS-Wageningen Journal of Life Sciences, 77, pp.25-37.
Rosa, F., Weaver, R. and Vasciaveo, M., 2016. Dairy Price commodity in Italy: volatility and forecast after milk quotas. Proceedings in Food System Dynamics, pp.112-115.
The Conversation., 2018. What is behind the rising price of butter?. [online] Available at: https://theconversation.com/what-is-behind-the-rising-price-of-butter-85968.
V?neki, É., Mándi-Nagy, D. and Stark, A., 2015. Prospects for the European Union and Hungarian dairy sectors after the abolition of the milk quota system. Studies in Agricultural Economics, 117(1), pp.1-9.
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