Analysis of Banana market in USA

In a recent article written by IFAS I found out that banana is the number one fresh fruit consumed in United States. The volume of banana imports have steadily increased at its peak in 1999, and after that year, continued to fluctuate between 3,800 to 4,100 thousand tons annually. US banana production is very limited in 2009; US total banana production reached at 7000 million metric tons or 0.01% of the total world production. Hawaii is by far the biggest US producer of bananas, followed by Florida.

Recently production of bananas in Hawaii has followed a downward trend; in 2010 from 13,181 million metric tons to 8,090 million metric tons. As I learned in ‘demand and supply’ chapter, two determinants that could result in decrease of banana production are bad weather (supply determinant) and low average income of population (demand determinant). The effects are shown in Fig.1 and Fig.2. 

Fig. 1

As you can see in Fig.1, due to bad weather the supply curve has shifted to the left from S1 to S2. This has probably occurred because of low fruit yield; therefore quantity has decreased from Qd1 to Qd2 - as a result, increasing price from P1 to P2.

US Market for Fresh Bananas

The US banana market is free of tariff unlike the EU market, therefore making it a very competitive market. In 2000, the total value of bananas was at $1.02 billion, representing 32% the total value of fresh fruits imported that year. By 2010, the import value had risen to $1.64 billion, that’s a 64 percent increase over the year 2000 figure. The increase in import value is mainly due to the increase in unit price stemming from weak US dollar and was not a result of increased volume. As shown in Fig.2, total supply of fresh bananas remained relatively constant. This implies in general the US fresh banana market has become saturated. This point is further solidified by the evidence of slight decline in consumption per capita, down from 12.9 kg in 2000 to 11.2 kg per capita in 2009.

US fresh market fruit value of imports, 2000–2010 [Source: USDA/FAS (United States Department of Agriculture Foreign Agricultural Service)]

Price analysis of Fresh Bananas in United States

As I read in the Dole Food Company annual report (it’s in their website), it analyzed the price of conventional bananas among New York City (East Coast) and San Francisco (West Coast), because data on wholesale prices for conventional bananas were limited in Agricultural Marketing Service (AMS) of United States Department of Agriculture (USDA) as mentioned in the report .

I found out that the price of bananas in general increased, significantly in 2008. I suspect this could be because of lower supplies from major producing countries and higher transportation cost due to increase in fuel price. During 2007 to 2010 the price of conventional bananas fluctuated between $12.55 and $24.50 per box, a difference of almost $12 dollar per box. In general prices tend to be higher in the earlier months of the year and then decline in latter parts of the year. This could be because in earlier months of the year weather conditions are too cold across United States, therefore less volume of fresh bananas are yielded from plantation. In later months the climate tends to be relatively warmer, providing an environment to stimulate growth, therefore increasing the yield of fresh bananas harvested.

Demand of Fresh bananas in United States

In a recent journal article I found the retail purchase data of conventional fruits and organic fruits. The study included five major organic fruits and five major conventional fruits including apple, banana, grapes, oranges and strawberries. It was found that demand for both organic and conventional fruits were price inelastic.

The estimated elasticities for organic bananas and conventional bananas were -3.19 and -0.70 respectively. These elasticities are negative, which means, according to economics literature, bananas are inferior goods. Usually low income earners spend a higher proportion of their income buying inferior goods; as income of an individual increases the amount spent on inferior goods decreases. Furthermore, disregarding the negative sign I could conclude that demand for organic bananas is price inelastic, which means demand for organic bananas is very responsive to change in price. A possible reason for this could be that there are many “marginal” consumers. That means if the price of organic bananas rose by 1 percent, quantity demanded will fall significantly more than 1 percent.  On the other hand demand for conventional bananas is price inelastic. So a 1 percent fall in price will have relatively low impact on quantity demanded for conventional bananas.  

Cigarette Market Around the World

In a recent article from Romania-insider.com, I read that Romanians have cut down on cigarette consumption and spend 10 times less than Slovenians. It was expected that tobacco market in Romania could grow to EUR 4.2 billion in 2012. However the retail value of Romanian market would cover less than 10 percent of the total Eastern Europe tobacco market in 2012.

One possible reason for this could be that Romanian government may have set campaigns to build awareness of the harmful impacts of smoking. The effects of this are shown in Fig.1.

As you can see from Fig.1, increasing awareness of health issue regarding smoking would shift the demand curve from D₁ to D₂. Since less quantity will be demanded, supplier’s cost of production is likely to increase. As you can see, due to fall in demand, an excess supply has resulted between Q1 and Q3. In the short run producers may not be able to sell large quantities of packs due to increase in health awareness. This could eventually push the price of cigarettes higher, maybe resulting a further fall in consumption of cigarettes.

In another news article called thestaronline.com, I read that Malaysia will be banning discounts on all cigarettes and only 20- stick cigarette packs will be allowed for sale in Malaysia. Furthermore a price floor of RM7 had been introduced by the Health Ministry. The standardized price was introduced in 2011 but this year the number of sticks per pack has also been standardized to 20 sticks per pack. This had been done to further strengthen the enforcement of the Control of Tobacco Product Regulations 2004.

So basically what the government has done this year is with the imposition of a minimum price it has also limited the quota per pack.

This how the graph for looks for minimum price in Fig.2.

As you can see in Fig.2, introducing a floor price of RM7 results to excess supply between Qd and Qs. This excess supply could be purchased by the government for later purposes. Perhaps if demand for cigarettes increase later, government could sell the cigarette back into the market to ensure that price stays at floor price. Furthermore Malaysian government has also limited the number of sticks allowed in a pack i.e. 20 sticks and the number of packs allowed in one box (10 packs per box).

All this is well good, but the problem with limiting the amount of cigarettes is that it could potentially create a black market for cigarettes selling more number of sticks per pack. If this happens Malaysia will be losing out on a lot of tax revenue.  The article suggests that government plans on reducing the excess demand by promoting campaign awareness through various mediums like Facebook, Twitter, and press conferences. This could help reduce the excess demand, but I think that increasing awareness will only reduce only a small proportion of the population. So maybe all this investment in campaign and regulations may not have that big of an impact on consumption in the long run.  

Minimum Wage Effective On Jan 1 Next Year

According to a news on The Star Online, 16th July 2012, the Minimum Wage Order 2012, which was gazetted Monday, effective on Jan 1 in 2013 for employers who employ six workers or more. According to the gazette, the minimum wage rate is fixed at RM 900 per month or RM 4.33 per hour for the peninsular and RM 800 per month or RM 3.85 per hour for Sabah and Sarawak.

The effort of government trying to increase the minimum wage is to secure the income of employees in the country, consider the low-pay working class especially the blue-collar. Therefore, they establish a price floor that makes it illegal to the employers to pay lower for their employees. A price floor is the minimum price fixed by the government. A price at or above the price floor is legal; a price below is not allowed. In the labor market, the floor is called the minimum wage. Simply put, minimum wage implemented to set the price higher than the equilibrium price. Apply the definition of equilibrium price stated early above, we can see that the government is trying to set a minimum wage to the labor market in which to set the price floor above the equilibrium price. Now, the economic effects occur where when the price set above the equilibrium price, the quantity of labor supplied exceeds the quantity of labor demanded thus there is a surplus of labor in the market. When the effect of surplus applied to a labor market, it is called an unemployment. In other words, minimum wage policy will encourage unemployment rate in the country. Consequently, the minimum wage is considered inefficient in an economic point of view. The minimum wage increase the unemployment rate and thus increase the job search. To explain, at the quantity of labor employed, the marginal social benefit of labor exceeds its marginal social cost of labor and a deadweight loss shrinks the firms' surplus and the workers' surplus.

Cheaper House for Selangor Folk

According to the news on The Sun on 21st September 2012, the price of affordable houses in Selangor will not exceed RM 120,000, Mentari Besar Tan Sri Abdul Khalid Ibrahim pledged yesterday. Abdul Khalid said the ceiling price is set in light of studies revealing that about 40% of Selangor households have an income of between RM 2500 and RM 5000. As an initial step, the state has set the price for affordable houses (800 - 1000 square feet) for middle income earners at between RM 85,000 and RM 120,000.

The government intervention in the housing market is to control the soaring prices of the houses in today's housing market and to ensure the low-income earners can afford buying houses in the states. So, they come up with price ceiling that makes it illegal to the seller to charge higher price than it is allowed. A price ceiling or price cap sets the maximum legal prices a seller may charge for a product or service. A price at or below the ceiling is legal; a price above is illegal. In the housing market, the ceiling is called a rent ceiling. In other words, rent ceiling tend to set the price lower than the market equilibrium price. Market equilibrium price (or equilibrium price) is the price where the intentions of buyers and sellers match. Theoretically, at the equilibrium price, the quantity demanded equals to the quantity supplied. Now we refer to the excerpt of the news above, we can see that the government is trying to impose a rent ceiling to set a maximum selling price for houses. The economic effects occur now: when the rent set below the equilibrium price, the quantity of housing demanded exceeds the quantity of housing supplied, thus there is a shortage of housing in the market. When shortage exists, the unit of the cheaper houses intended to sell the poor will be misallocated. This is because more and more lower income families are in search of those cheaper houses and the quantity of housing demanded increases at a lower price. Thus, people who really poor and in need of theses cheaper houses cannot buy it since there is a shortage in the market. At the end of the day, they will want to look for other alternatives in the market. Consequently, they will need to spend a lot of time in order to look for other cheaper houses available in the housing market. In the context of economics, anything that incurred the usage of time is considered a cost. Such cost is called the opportunity cost. The opportunity cost is spent when they in search of advertisements in the newspaper, browsing property websites through internet, making call to friends and agents for houses and the time consumed to visit houses. Hence, the opportunity cost is increased and all other resources such as car petrol, electricity bill, phone bill, and transportation fare is relatively increased. Another economic effects for imposing the rent ceiling will also encourages the illegal trading - a black market; an illegal market in which the equilibrium price exceeds the rent ceiling. When people still cannot find cheaper houses to reside, they will become frustrated and tend to find alternatives, for example to rent a house instead of buying a house. Now the landlord who is also frustrated due to the law imposed by the government to control house prices will start to run a black market. They do this because of unprofitable renting business due to cheaper houses are available in the market before and people are willing to buy those houses instead of to rent one. Since the shortage exists, the landlords tend to increase rental for the frustrated people who unable to seek cheaper houses.

CPO Prices to Stay Around RM 3,000 This Year: MPOB

Based on the excerpt of news from The Sun on 13th September 2012 saying that, crude palm oil (CPO) prices are expected to hover around RM 3000 per tonne for the rest of the year as demand for the commodity is still sustainable, said Malaysian Palm Oil Board (MPOB) chairman Tan Sri Shahrir Abdul Samad. CPO prices are currently below RM 3000 per tonne, but Shahrir believes that prices will strengthen in the near future. In fact, there are expectations that the price of CPO will surpass the RM 3000 level. There is sustainable demand for palm oil as it is the most efficient vegetable oil and very affordable.

Crude palm oil is one of an important and valuable resources in the market. It is greatly used to produce cooking oil, vegetable oil, margarine, vitamin supplement, soap, moisturizing lotion, candles, and lubricants. Therefore, when any factor that influences buying plan changes, other than the price of the good, there is a change in demand. In this case, there is a change in demand instead of change in quantity demanded because there is a factor other than the price of the good (price remain constant) - an expected future price of the crude palm oil. Let us assume the price of crude palm oil is expected to increase in next month (we can see better demand effect if we assume a month later instead of a few years later), say, from RM 2000 to RM 3800 per tonne, the current demand for people to purchase more vegetable oil and margarine will increase dramatically whereas the future demand will decrease since people can expect the price of crude palm oil will increase after a month later. Simply put, people will want to buy more before price rises and to buy less after the price rises. The change in demand will cause the shifting in the demand curve. Thus, when demand for vegetable oil and margarine increase, the demand curve will shift to the right. For such, a demand curve is the best tool to show the effect of change in demand. FIGURE 1.1 below shows the change in demand of crude palm oil:

---

FIGURE 1.1: An Increase in Demand

Based on FIGURE 1.1 we can see that if the price of crude palm oil is expected to increase in the next month, the demand for palm-oil related goods such as vegetable oil and margarine will increase today. The consumer will start to buy more cooking oil and store it in the kitchen before the price rises. Thus the demand curve will shift rightwards, in other words, there is an increase in demand when the expected price in future is going to increase. Conversely, if the expected future price of the palm oil decrease in next month, the demand will decrease resulting in the demand curve shift to the left.

In contrast, the supply will decrease today but increase in the future. This is because producers or sellers are greedy in making profits, some of them will withhold the supply now in order to push up the price and then sell to the buyers in the future when the price is increased. Thus, the palm oil market will experience a change in supply. The change in supply is defined as 'when any factor that influences selling plans other than the price of the good changes, there is a change in supply' (Parkin 2012, p.63). Price remain as a constant determinant while the other factor that affect the selling plans is the expected future prices of the crude palm oil. The supply implies in the whole relationship between the price of a good and the quantity supplied of it.

Supply can be demonstrated in the supply curve whereas the term quantity supplied refers to a point on a supply curve - the quantity supplied at a particular price. As similar as the statement made early above, when the market experience a change in supply - the supply curve will shift to the left, i.e. a decrease in supply. Also, the effect of change in supply can be illustrated in a supply curve, refer to FIGURE 1.2 below:

---

FIGURE 1.2: An Decrease in Supply

The illustration of the graph above shows the supply curve of supplier or producers behavior when there is an expected future price rises of the crude palm oil. The sellers intend to decrease the supply today and to increase the supply after the price of palm oil has increase in the future. Hence, the supply curve will shift from the original position to the left, which means there is a decrease in supply. Conversely, if the expected future value is going to fall next month, the supply curve will shift to the right which implies an increase in supply.

The overview of the study of an increasing price of the crude palm oil is based on the justification on the model of change in demand and change in supply - it is a two edged argument. To conclude, when the price is at ceteris paribus and all other determinants are changing; in this case - the expected future price of a good, the change in supply and demand will occur. When the price is expected to rise in future, the demand curve will shift to the right which means the demand is increased. At the same time, the supply curve will shift to the left which implies the supply is decreased. To contrast, if price is expected to fall in the future, the demand will decrease and the demand curve will shift to the left. Similarly, the supply will increase and the supply curve will shift to the left.

Selangor Folk to Face Water Woes and Firm Feels the Heat to Meet Rising Demand

I have read an article from the Star newspaper title ‘Selangor folk to face water woes and firm feels the heat to meet rising demand’ by Loshana K. Shagar and Shaun Ho. The conflicts over natural resources will grow in times. It is an interesting headline over the title regarding the natural resources that are scarce. Economists view things from a unique perspective. They view the world through the lens of scarcity.
Scarcity means a situation in which the amount of something available is insufficient to satisfy the desire for it. It limits options and demands choices. Sources can be categorized into four. There are labor, capital, land or natural resources and entrepreneurship. Land or natural resources are the preexisting “gifts of nature” in a country. This includes land, as well as useful materials found under it or on it, such as crude oil, iron, coal and petroleum.

In the article, the main argument is about water demand is increasing due to a hot weather. In that case, it causes Syarikat Bekalan Air Selangor (SYABAS) to increase the supply of water to the maximum level of 466 million litres per day in Sg Langat treatment plant and 688 million litres per day in the Sg Semenyih treatment plant. According to SYABAS corporate affairs executive director Abdul Halem Mat Som, the problem was not a shortage of supply but an increase in demand. However, the issue should not be problems as SYABAS has to be ready of any consequences especially the weather. We are aware of Malaysia’s weather that sometimes it can reach up maximum to 33 degree celsius based on World Weather Information Service. They can refer to a forecast of climate change from time to time. In terms of climate change, Malaysia is not the only country that is having an extremely hot weather. There is other country that is having a higher degree than us. For example, United Arab Emirates, Somalia and even United States of America is suffering from drought. It is not affecting the water supply but also on agriculture terms and food supply.

In my economic point of view, SYABAS should invest and focus on research and development for the future mankind. Water management has to be systematic, futuristic and economistic. For example, in Singapore, they runs the water reclamation programme, which uses advanced membrane technologies involving microfiltration, reverse osmosis and ultraviolet disinfection, to recycle used water, has been particularly successful. With the water industry projected to be worth about US$400 billion by 2015, the Singapore government has identified it as a new growth sector for the country’s economy. As such, about S$330 million will be invested in water R&D over the next five years to develop Singapore into a hub for water technologies. Mr Khoo Teng Chye, the Chief Executive of PUB, attributed Singapore’s success to several factors. He said, “We believe that innovation is important and have always placed emphasis on R&D and investing in technology”. In order to achieve such succession, SYABAS should be innovative and dare to take the risk. Bringing in more water will only alleviate the problem in the short term but lifestyle change is the long-term solution.

This scarcity will lead to wise decision making in supplying clean water to every state in Malaysia especially Selangor. Of course consumers do not want any shortage of water in 5 years times and rising in price of water. In a 2008 study conducted with the Energy, Green Technology and Water Ministry, Malaysians were found to be the highest water users in the Selangor. “We use over 200 litres per person each day and 70% of those surveyed admitted they were not likely to change their lifestyle”. In my opinion, in order for us to conserve and preserve the clean water, both the firms and consumers have to play an important role. Water is a part of Mother Nature given to us and we have to appreciate it before it is gone. There are few steps that can be taken in our daily life in order to save water. Cut down shower, off the tap water while brushing the teeth and save 25 gallons a month. Clean water is a finite natural resource. Saving the water should be something practical in our life. Besides that, taking care of our river by not throwing trash or garbage in it also important. River can be a source of clean water in need of the hard times. But unfortunately, rivers in Malaysia are not clean enough and most of it clogged by unwanted trash.

Economically, the increase in demand will eventually increase the price of water since water is a natural resource that is scarce. All consumers are affected to the price change. The law of demand states, other things remaining the same, the higher the price of a good, the smaller is quantity demanded. Assume that the good is water. By this time when consumers receive a higher bill of water, they start to realize and reduce the wastage of water. Abdul Halem Mat Som also added that in the last ten years, the increasing of developments in the district causes the demand for water supply to increase. In 10 years times, the size of the population will increase. Demand also depends on the size and the age structure of the population. The bigger the population, the higher the demand for water. As for instance, increasing the amount of citizens will increase the amount of residential area; hence the demand for water supply is also higher. For the benefit of our future generation, we should start to save water from today.

As for the conclusion, Malaysia has to work on improving their water management system. Improving the system will make efficient supply of water even in 100 years times. Water is a basic thing of life and it is use every single day in our life. Organizations and individuals have to work on it together for the sake of our water. May this water issue won’t become a problem in the future.