Discuss about the Case Study on Avocado Shortage in Australian Market.
Demand and supply of a product plays an important role in deciding the price of product in the market. Hence, the law of demand and supply is applicable on all commodities that are sold in the market (Raushenbush, 2012). The paper has been developed to discuss the current state of Avocado in the Australian market. In order to conduct the case study, an article has been chosen written by Han (2016). The articles show that the Avocado producers in the Australian market reject the claims of national shortage of the product in the market. Therefore, the paper has been developed to present a case study on current status of Avocado and explain how the rising demand and falling supply may impact the price of Avocado in the Australian market.
Furthermore, the paper discusses the main issues related to the shortage of Avocado in the Australian market and how the under supply impacts the price of the product. It can be seen that the aggregate demand for the commodity is rising at a higher pace as compared to the supply due to several weather issues and incidents of forest fire (Raushenbush, 2012). Hence, the paper will analyse the impacts of the incident s on the stakeholders and present the economic concepts related to the shortage of Avocado in the Australian market. Finally, the study presents various recommendations that can be used as alternatives to control the price of the commodity in the market.
Han (2016) in the article says that the shortage has occurred in the market due to higher supply during the Christmas that led the price fall in the Australian market (Han, 2016). Hence, the shortage occurred due to the wrong decision of the West Australian producers who shifted more amounts of fruits before Christmas in the previous years by reducing the price. The wrong decisions were taken due to the fear of fall in the aggregate demand in the market. Hence, a high bulk of supply within a certain period led to shortage of supply in the current market scenario. The shortage has occurred due to increase in demand due to fall in the price of the Avocado in the past years. Currently, it can be seen that the demand for Avocado has increased at a tremendous rate that has emerged to be a problem for the Avocado producers (Riggs and Bonk, 2008). The current supply in the market is not enough to meet the growing demands of the consumers.
Furthermore, it has been expected by the West Australian producers that the supply will decrease due to unfavourable weather conditions and forest fires that have become major challenges for the Avocado producers in the country (Cai, 2012). Hence, a fall in the supply can be expected in the upcoming years. Currently, the price of Avocado has increased to $7 per piece in the retail market due to growing demand and shortage in the supply. It can be seen that Avocado are sold at a black market price in some retail markets to maintain profitability (Conlon and Mortimer, 2013). Hence, there is a need of necessary economic reforms that will balance the price of Avocado in the market. The government of Australia needs to increase the supply of Avocado by promoting the production and control the price of the product in the market.
The shortage of avocado has already fuelled the price pushing up to $4 each in the supermarkets. The smaller retailers are selling avocado at $7 each as the demand has remained intact irrespective of shortage situation (Han, 2016). The retailers, supermarket dealers, farmers and consumers have been highly affected due to the certain shortage and high pricing of the products. Many of the avocado packers, marketers and distributors have expected that the shortage situation may become more complicated by the end of the year unless new supply chain from Queensland area can hit the market. Recent rainfall, weather worries and bushfires have significantly contributed to the price hike of avocado creating a shortage in production (Thompson, 2010). Although some allegations of market manipulation have been raised, the avocado producers of Western Australia have dismissed those claims announcing the issue as a national deficit. Earlier, former chief executives of Avocados Australia, Antony Allen has alleged that the shortage of avocado has been manipulated by the producers as they have sold out products at a lowered pricing to boost sales. In order to defend the allegation, Jannie Franceschi, one of the market controllers of avocado in Western Australia has clarified about the similar volumes placed on the market (Han, 2016).
Understandably, in the midst of the shortage of avocado, the wholesale price of each tray has revised to $80 whereas some of the vendors are selling the product at $120 per tray. As the wet weather has played a negative role in the harvesting of avocado, supply woes have not seemed to be decreased until and unless fresh supply chains introduce from Western Australia and Queensland (Han, 2016). Currently, the price hike of the product has raised the tensions of consumers in the Australian market (Mitka, 2010). At the same time, due to the shortage of supply and tremendous price hike of avocado, shops of the Gabba market area have enforced purchasing limit for each of consumers. Hence, a consumer can purchase a maximum of six avocados at $5.49 each in Brisbane market (Han, 2016). Meanwhile, the supply situation may have expected to be resolved before the end of the year as fresh supply chain will hit the market sooner than later.
It can be seen from the article that the demand for avocado has gradually increased in the Australian market. It is the primary reason for the rise in price of the commodity in the current market scenario. Along with that, the price of Avocado varies due to the size and quality of the commodity (Han, 2016). Along with that, it can be seen that the high supply made through the wrong decision of the West Australian producers have gradually increased the demand for Avocado with the fall in the price (Samuelson, 2007). Hence, a diagrammatic explanation is presented herein below:
Figure: Growing demand of Avocado
Source: (Chintapalli and Hazra, 2015)
It can be seen from the above diagram that the demand for Avocado has increased at a high rate in the recent years. Due to the increase in demand the demand curve has shifted rightward from D1 to D2. Furthermore, the control over supply to maintain a proper price has kept the supply curve constant at S1. Hence, it can be seen that the supply has increased due to shift in the demand with a minimum level (Samuelson and Nordhaus, 2009). But, the rise in the demand has impacted the price of the product that has made the price increase from one level to another. Hence, the rise in the demand was the primary factor for the rise in price of Avocado in the Australian market (Lee, Emmett and Park, 2010). A statistical analysis has been presented below for better understanding of the rise in the consumption of Avocado in the Australian market.
Figure: Australian Avocado Consumption
Source: (Chintapalli and Hazra, 2015)
It can be seen from the above figure that the per capita consumption of avocado has increase in the recent years to above 2kg per capita in the year 2014 from 1kg per capita in the year 1997. Hence, a rise in the consumption can be seen in the past years that have continued in the recent years (Samuelson and Nordhaus, 2009). Furthermore, it can be seen that the demand for the product is less than the supply that has led to a shortage in the market. A diagrammatic explanation is presented below for better understanding.
Figure: Excess of Demand over Supply leading to Shortage
Source: (Chintapalli and Hazra, 2015)
It can be seen from the above figure that the green line presents a higher demand for avocado as compared to a lower supply of the product. Hence, a shortage of Avocado can be seen in the market. The shortage of Avocado leads to a rise in the price to match the equilibrium point in the Australian market (Chambers, Echenique and Shmaya, 2011). Hence, the primary impact of shortage of Avocado is the rise in the price that highly impacts the business of Avocado dealers in Australia.
Conclusion
In the contemporary shortage condition, there is no point in blaming the producers. The shortage situation has been conclusively driven by wet weather and bushfires destroying the significant production volumes. At the same time, the recent pickup in demand of avocado in the Australian market has made the situation worst. Though some of the allegations of market manipulation have been posted, the major marketers have clarified themselves showing clear evidence of the scenario (Pinheiro, 2007). Meanwhile, the fundamental of supply and demand can be evenly applied to this situation contributing to the price hike.
As the shortage has restricted the supply, the price has picked up at a considerable pace. Also, due to demand, the product price has surged even more creating issues for the stakeholders as well as marketers. Undoubtedly, the summer avocado shortage in the Australian market has fuelled the pricing to a record high. Notably, if the demand side will be kept rising, the prices can surge a bit higher (Wright, Smith and Wright, 2007). Currently, major marketers and packers of Australian market have believed that such pricing will be sustainable for a long time as new supply chain will hit the market soon. According to the reports, by the end of the year, the pricing of avocado will be back to $2-3 each as the shortage of products will wind up.
In order to deal with current deficit situation and rising demand of avocado, the Marketers and Packers of the product must consider every possible resource to control the rising product pricing. Hence, price control measures and resource allocation will be evident. In the underlying section, some recommendations of alternate solutions have been given to control the issues due to the shortage of avocados.
Price Control: Due to the shortage situation, price hike of avocado is quite natural as per the fundamentals of demand supply concept. In such scenario, price control measures will be effective so that products cannot be black-marketed at a higher pricing. In this way, a number of issues of purchasing can be resolved to some extent.
Fresh Supply Chain: An introduction of the fresh supply chain from the markets of Queensland and Western Australia can be sufficient to put an end to the shortage in supply (Hendricks, Sorensen and Wiseman, 2012). Moreover, import of avocado from New Zealand can somewhat control the shortage contributing to restrict the price hike.
Stocking to control shortage: In order to manage deficit situation, stocking of product to a level of extent must be considered following government regulations (King, 2012). The marketers and Australian Avocado Association must look for such facilities to control such shortage situation.
Purchasing limit: Meanwhile, in the case of shortage in supply, purchasing limit can be identified one of the most efficient stance to control the demand of the target demographics. The government price controllers must set purchasing limits to each of the buyers so that most of the consumers can purchase the product at a controlled price rate (Karimi and Rahim, 2015).
References
Cai, W. (2012). Intertemporal pricing, supply chain design, and consumer behavior. Berkeley, CA.
Chambers, C., Echenique, F. and Shmaya, E. (2011). Testable Implications of Gross Substitutes in Demand for Two Goods. American Economic Journal: Microeconomics, 3(1), pp.129-136.
Chintapalli, P. and Hazra, J. (2015). Pricing and inventory management during new product introduction when shortage creates hype. Naval Research Logistics (NRL), 62(4), pp.304-320.
Conlon, C. and Mortimer, J. (2013). Demand Estimation Under Incomplete Product Availability.American Economic Journal: Microeconomics, 5(4), pp.1-30.
Han, E. (2016). Avocado growers reject market manipulation claims amid national shortage. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/retail/avocado-growers-reject-market-manipulation-claims-amid-national-shortage-20160126-gmem47.html [Accessed Sep. 2016].
Hendricks, K., Sorensen, A. and Wiseman, T. (2012). Observational Learning and Demand for Search Goods. American Economic Journal: Microeconomics, 4(1), pp.1-31.
Karimi, A. and Rahim, K. (2015). Classification of External Stakeholders Pressures in Green Supply Chain Management. Procedia Environmental Sciences, 30, pp.27-32.
King, D. (2012). Economics. Oxford: Oxford University Press.
Lee, H., Emmett, L. and Park, C. (2010). Decision models for a two-stage supply chain planning under uncertainty with time-sensitive shortages and real option approach.
Mitka, M. (2010). Price Hikes Probed. JAMA, 303(2), p.125.
Pinheiro, M. (2007). Demand shocks and market manipulation. Annals of Finance, 4(3), pp.269-298.
Raushenbush, S. (2012). The future of our natural resources. Philadelphia: The Academy.
Riggs, T. and Bonk, M. (2008). Everyday finance. Detroit: Gale Cengage Learning.
Samuelson, P. (2007). Economics. Cambridge: Cambridge University.
Samuelson, P. and Nordhaus, W. (2009). Economics. Boston, Ma.: McGraw-Hill.
Thompson, C. (2010). Stakeholders in supply chain discuss shortages. American Journal of Health-System Pharmacy, 68(1), pp.9-10.
Wright, C., Smith, M. and Wright, B. (2007). Hidden Costs Associated with Stakeholders in Supply Management. Academy of Management Perspectives, 21(3), pp.64-82.
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