Friday, April 07, 2006

Banana price dynamics

Economists focus on how dramatic events impact on prices. When Cyclone Larry hit North Queensland wiping out 80% of the Australian banana crop there were forecasts that banana prices would hit ultra-high levels. They didn't. Before the Cyclone of March 20 they were $3 per kilogram and a week after it around $4-50. Nearly 3 weeks later they are still about that. Not much reaction. I couldn't figure it out.

Tonight I asked Mr D, who sells fruit to large supermarkets what was happening. He told me that when the Cyclone hits it flattens the trees and growers immediately cut and remove the felled bananas. The market gets effectively 'flooded' with bananas. There is a short-term price surge that reflects expectations but the glut tends to keep prices moderate until the initial surge in supply peters out. But then the price goes through the ceiling.

Indeed, he said that these events had happened at least 3 times over the past 50 years. He also suggested that the demand for bananas was quite price inelastic and tipped a medium term equilibrium price of around $10 per kilogram. In fact he suggested from about next week.

Update: Mr G who has been in the business of retailing fruit for about as long as Mr D as been in wholesaling it flatly rejected Mr D's explanation when I asked him this morning. He said there was a significant lag between harvesting fruit and selling it because of significant storage-ripening delays. Thus the plentiful supply in the couple of weeks after the cyclone. As time passes an absolute supply constraint will be hit and prices would rise strongly. He also said that harvesting of the type suggested by Mr D was physically impossible. Actual shipments of bananas to markets have fallen drastically over the last three weeks so maybe there shipment of bananas is being met by drawing on stored fruit.

These two guys know each other though I talked to them independently. After they talk I'll talk to them again. Wait for the next fruity and gripping episode. By the way prices today were about $1 higher so there is evidence of an upward move.


Anonymous said...

i wonder what percentage of bananas are eaten fresh, what is processed (dried, put in cake mixes etc) and what is wasted? there were probably sufficient stores of the processed stuff and the waste could be reduced...

hc said...

I think there is a three week lag between harvest and delivery to market while the green bananas are ripened. Checking the stats new deliveries fell off markedly after the cyclone so I think it is just an issue of lags in supply.

Its fun to try to apply basic economics to the everyday events around you.

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