Supply and Demand of Quinoa Seeds

2461 words (10 pages) Business Assignment

17th Jun 2020 Business Assignment Reference this

Tags: Business AssignmentsFood and DrinkEconomicsAgricultureSupply and Demand

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Introduction:

Quinoa refers to an edible seed, that has been cultivated and grew in South America, especially in both Bolivia and Peru. In 1993, NASA released a study on the ‘superfood’ that stated that “while no single food can supply all of the essential life-sustaining nutrients, quinoa comes as close as any other in the plant or animal kingdom” (Clontz, 2018). Oprah Winfrey released similar approval statements regarding the quinoa seed, and even included it within her ‘cleanse’ diet, thus sparking interest and demand for the seed in countries that were foreign to the production of quinoa.

In 2017, it was estimated that Bolivia and Peru supplied more than 80% of the world’s quinoa, according to the Food and Agriculture Organization of the United Nations. Additionally, it is understood that markets were paying around 1,900 bolivianos (358AUD) per quintal (48.5kg) of quinoa in 2013 from the two major production countries (Logan, 2017). However, as stated the ‘superfood’ became widely popular in different regions of the world and the demand for the seed increased drastically to around 108,000 tonnes per year between 2012 and 2015 (Logan, 2017). Along with this drastic increase in supply, the market price for quinoa was around 600 bolivianos per quintal, demonstrating a difference of 1300 bolivianos, which caused severe problems to both the Bolivian and Peruvian economic state.

Analysis:

As mentioned previously, the demand for quinoa seeds increased exponentially between 2012 and 2015, and Figure 1 demonstrates the impacts the increased global demand has on the prices of quinoa. As can be seen in Figure 1, the increased demand is displayed through the shift of demand curve shift from D1 to D2, which subsequently causes for a new equilibrium to be met. At this new equilibrium, the price for the quinoa has increased from P1 to P2, due to the substantial increase in demand from international markets. Furthermore, the quantity needed to be supplied has also increased as a direct result of the demand curve shifting towards the shift, in accordance to the law of supply. Evidence found also states that the increasing in demand, caused for a direct increase in pricewith the Ministry of Agriculture reporting that the price of the seed rose by 500% between 2005 and 2014 (Sanchez, 2018).  Additionally, Figure 2 displays the tremendous increase in production of quinoa between 2013 to 2017, with production averaging over 100,000+ tones per year. In addition to this, opportunity cost is involved with the increased price, as an overall increased price will reduce the opportunity cost of producing and supplying additional quinoa.

Figure 1 – Impacts of Increase in Demand for Quinoa (2013)

Figure 2 – Quinoa Production Worldwide from 2010 to 2017 (Shahbandeh, 2019)

Figure 3 also demonstrates the impact an increased supply (over supply) has on the market for the quinoa seeds, in both the international and domestic market. The figure, which represents 2017, shows that the increase in supply causes for the supply curve to shift to the right, as demonstrated by S1 and S2. This shift causes for a new equilibrium in which the supply has increased to Q2, however in contrast the price has decreased to P2, thus indicating that the increased supply in the market causes for the price of quinoa to be brought down.

Figure 3 – Outcomes of Oversupply in 2017

Quinoa is a native seed/food to all of the countries of the Andean region, and has been for thousands of years, as such making the food a normal good for the people of Bolivia and Peru. As per the income effect, when a price of a good decreases and a consumer purchasing price increases, it causes for the quantity demanded to increase for normal goods. Similarly, the opportunity good of consuming a good also decreases when the price of a good decreases, as per the substitution effect, ultimately causing the quantity demanded to increase. Through this it can be inferred that both the increasing and decreasing of the quinoa’s prices are affected by the income and substitution effect.

Impact on Welfare

As has been mentioned prior, the use of quinoa seeds is extremely common in the Andean Region, as such exemplifying that locals could afford the price of quinoa seeds prior to the massive increase in demand for the superfood from international markets. Due to the increase in demand, the price for the food has also increased, as seen previously in Figure 1, thus impacting both the producers and local consumers.

Impact on Consumer and Producer Surplus

Prior to the mass increase in demand in 2013, the consumer and producer surplus in the local market were as seen in Figure 4. Consumer surplus refers to the area under the demand curve that represents the difference between what a consumer will be willing to pay and what the consumer actually pays for the product (Agarwal, 2019). Similar to this, producer surplus refers to the benefit that the producers will receive by selling a good more than the market price. Assuming the market is in an equilibrium at points Qe and Pe, prior to the increase in demand, then the consumer surplus is demonstrated through the blue portion and the producer surplus through the green portion in Figure 4. The equation to calculate the consumer surplus is ½ x Qe x (Pmax – Pe) and similarly, the equation for producer surplus is ½ x Qe x (Pe – Pmin).

Figure 4 – Economic Welfare Prior to Global Expansion

The total economic welfare for the market in 2013 (prior to global expansion) can be illustrated through the sum of the producer and consumer surplus. However, as discussed previously several different factors have led to quinoa seeds being exported internationally, which has increased the global demand for the superfood, and thus the supply would have increased too, to match this increased demand. Due to this, it is reasonable to assume that supply in the local market would have decreased to facilitate and meet this new demand in the global market, as there would have been less opportunity cost in the global market due to the increased price discussed previously. This shortage in supply is illustrated in Figure 5, in which the supply curve shifted left from SC1 to SC2.

As can be seen in Figure 5, the shift in the supply curve causes for a new equilibrium, in which the price for the seeds has increased significantly. Due to this increase in price, the consumer surplus decreases as the consumers do not gain as great as an advantage as previously due to the price of the seeds being closer to what they are willing to pay. The new consumer surplus is illustrated through the blue portion, and the loss of consumer surplus is portrayed through the new red portion. Likewise, the producer surplus has also decreased drastically, despite a small gain, as can be seen in Figure 6. After analysis of both the consumer and producer surplus, it can be determined that at the new market equilibrium there is a drop in both consumer and producer welfare.

Figure 5 – Loss of Consumer Surplus

Figure 6 – Loss of Producer Surplus

Deadweight Loss and Social Welfare

In addition, the loss of consumer and producer surplus, there was also deadweight loss caused in the market due to the increase in price of quinoa seeds. Deadweight loss refers to a cost to society that is caused and created due to market inefficiency, thus causing a loss ins social welfare. As stated by several sources, the increasing prices in quinoa seeds led several local Andean people in both Bolivia and Peru to turn to other staple foods such as rice and pasta as they could no longer afford to consume this ‘staple food of theirs due to surging food prices’ (Yu, 2019). The deadweight loss and impact on social welfare can be seen in Figure below, displaying that the deadweight loss occurred due to the price of quinoa being higher than the market equilibrium.

Positive Impact on Welfare

Despite the loss in social welfare, there is also a gain due to the expansion into the international market. The tremendous increase in global demand for the superfood is extremely beneficial to the economies of both Peru and Bolivia. Figure 7 provides a detailed household consumption evolution between 2004 – 2013. The graph shows the evolution for three different groups, and despite the producers of quinoa seeds being the poorest of the three groups, they witnessed the greatest increase in household consumption, with an increase of 46%, thus showing the positive social impacts the market boom had on locals. Additionally, the boom in demand would have drastically decreased the opportunity cost of producing quinoa seeds.

Figure 7 – Peruvian Household Consumption Evolution, 2004 – 2013

Recommendations

Price Ceiling

There are many economic policies that can be introduced to help curb the future rise in price of the quinoa seeds. One of these policies is introducing a price ceiling to the quinoa market. This solution would involve the government setting a legal limit on how high the price of the quinoa seeds would be, and the price ceiling would be under the natural market equilibrium as demonstrated in Figure 8.

As the price ceiling is set below the market equilibrium, the new price is lower than the equilibrium, thus causing in an increase in demand as local consumers will find the grain more affordable and find less reason to purchase more expensive and less healthy substitutes. However, due to this increase in demand there is a shortage, as there is less supply than at the equilibrium. Ultimately, this means there is more quantity demanded than quantity supplied. Due to this, an inefficiency occurs as at the price ceiling, the marginal benefit exceeds the marginal cost, this inefficiency is illustrated in Figure 8 as the dead weight loss. Due to the presence of the deadweight loss, it can be determined that setting a price ceiling will result in a loss of total economic welfare. Thus, the introduction of a price ceiling into the market could cause for several producers of quinoa seeds to become unemployed as the opportunity cost of producing the superfood would continue to increase due to low prices.

DWL

Figure 8 – Impacts of Price Ceiling

Tax/Tariffs on Exports

The second strategy to curb the future rise in price, would be to introduce an export tariff on international demand, which would ultimately reduce the demand of the superfood on the international market as the price would be increased for international consumers. Implementing export tariffs will not only assist in curbing the prices of the market, but also create a revenue stream for the governments. The demand curve and supply curve in the quinoa market can be seen below in Figure 9, in which the international market is in an equilibrium at points Pe and Qe when there is no export tariff. Introducing an export tariff will cause for the price to increase in the market, and subsequently cause for a decrease in quantity, as per the law of demand (illustrated by Pne and Qne). Due to this decreased demand, the international market would be pressured to slow price growth.

Additionally, with the introduction of this policy into the market, the governments would increase their tax revenue, with the segments A and B in Figure 9 demonstrating this. Producer surplus of exports would also be decreased by areas B and C as a direct result of implementing this policy. A net welfare gain refers to the impact of a government policy – in this case the tariffs – on total economic welfare, by taking into account the gains minus any losses. Thus, the net welfare gain for the Andean region would be the increased tax revenue (A+B), less the loss of producer surplus (B+C), resulting in A-C. Finally, a decrease in demand in the international market would allow for the local market to flourish as the additional supply could be re-introduced into the market at cheaper prices.

Figure 9 – Imposing a Tariff on Exports

References

  • Agarwal, P. (2019, April 10 ). Consumer Surplus and Producer Surplus . Retrieved from Intelligent Economist : https://www.intelligenteconomist.com/consumer-surplus-producer-surplus/
  • Clontz, C. (2018, August 8). The Production of Quinoa in Peru and Bolivia. Retrieved from Panormas: https://www.panoramas.pitt.edu/economy-and-development/production-quinoa-peru-and-bolivia
  • Logan, T. (2017, June 29). Quinoa price falls dramatically, but industry hopes it will help long term. Retrieved from ABCNews : https://www.abc.net.au/news/rural/2017-06-29/quinoa-prices-fall-good-thing-industry/8663458
  • Sanchez, E. (2018, August 21). This Crop Is Transforming Livelihoods in Peru. Retrieved from https://www.globalcitizen.org/en/content/peru-farmers-livelihoods-quinoa-crop/
  • Shahbandeh, M. (2019, February 1). uinoa production worldwide from 2010 to 2017 (in metric tons)*. Retrieved from Statista: https://www.statista.com/statistics/486442/global-quinoa-production/
  • Yu, L. (2019, January 22). Superfoods’ Dark Side: Increasing Vulnerability of Quinoa Farmers in Bolivia. Retrieved from http://web.colby.edu/st297-global18/2019/01/22/superfoods-dark-side-increasing-vulnerability-of-quinoa-farmers-in-bolivia/

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