Standard supply and demand analysis is simple:
- when bad weather hits the production of an agricultural commodity, the supply drops [the supply curve shifts to the left].
- That drop in supply brings about a shortage of the product at the old price (an excess quantity demanded at Po in econ-speak).
- The shortage at the old price causes the price to rise.
- As the price rises, there is an incentive for producers to produce (and/or import) more (increase the quantity supplied along the new supply curve), and
- There is also an incentive for buyers to buy less (reduce the quantity demanded along the demand curve).
The recent shortage of onions in India is a textbook example [h/t Jack]:
Unseasonal rains are named as one reason for the current shortage, sparking floods that destroyed crops earlier in the year -- while others blame the summer monsoon for disrupting supply. ....
The cost of India's staple vegetable -- an essential ingredient in curries and eaten daily by almost everyone -- soared in August to an eyewatering 60 rupees (90 US cents) a kilo on wholesale markets, up from 25 rupees in June.
And so people adjust:
Traders say there are imports ordered from Pakistan, Afghanistan and Iran in the past few days to ease the strain on prices.... [EE: increase the quantity supplied by importing now when it wouldn't have paid to import so much at lower prices.]
Tarkeshwar Kumar, who owns a small restaurant in Patna, said the price rise had a "huge" impact on his business.
"I cannot pass on the price hike on to the consumers and I cannot do without onions," said Kumar, who has started using magaj, a paste made from cashew nut and poppy seeds to flavour curries, and serving cucumber salad instead of onion. ...
In ordinary kitchens too, the shortage of the commodity is acutely felt.
"I reduced the quantity of onions I buy to half a kilogram from one kilo," said Usha Gupta, a Bihar housewife and mother of six. [EE: buyers find substitutes. They don't like the substitutes so much but they make do, responding to the higher prices and sliding up and to the left along the demand curve.]
And of course the higher prices lead to allegations of hoarding:
"The state should have gone cracking down on the hoarders and released tonnes of onions that were kept out of the market." [EE: a standard refrain about speculators who actually helped keep the supply larger than it would have been if they hadn't stockpiled some onions].
and clamouring for political solutions:
"Onions tend to be sensitive as there has been a history of onion prices worrying governments," Shubhada Rao, chief economist at Yes Bank in Mumbai, told AFP.
"In 1998 they shot up and the (New Delhi) government lost power and since then, governments have become wiser in terms of proactively handling such crises and taking action."
While Modi's administration has moved to address the shortage, raising the minimum export price by 65 percent to $700 a tonne in August, some say it has not gone far enough.
Groan.
The best solution to agricultural commodity "shortages" is the following:
- teach people basic supply and demand analysis
- teach people that speculation and so-called hoarding when prices are low perform valuable services to the economy by providing larger inventories than we would otherwise have during periods of reduced supply. If you crack down on "hoarders" and "speculators" during this shortage, people will have much less incentive to build up contingent inventories for the future.
- elect politicians who say these things to the electorate.
Yeah, I know. I'm dreaming.