Category: Economics: Ch 03

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Higher tea prices brewing?

Six of the major tea producing countries – India, Kenya, Sri Lanka, Indonesia, Rwanda and Malawi – have formed an International Tea Producers’ Forum (ITPF). Together these countries produce slightly more than the world’s tea. The hope of the members of the new ITPF is that their cartel will allow them to increase the price of tea to the growers and to create greater price stability.

According to the Assam Tribune article below:

ITPF’s main objectives include – safeguarding the interests of the tea-producing countries, evolving collective solutions for the problems facing the producers, providing technical cooperation, sharing of technology and expertise by the member countries, undertaking market studies and research projects to address any specific issues concerning tea in general or any variety of tea, among others.

And according to the article from Sri Lanka’s Daily News:

Chairman of the Planters’ Association of Ceylon, which represents the interests of 23 Regional Plantation Companies, Lalith Obeyesekere said this was a landmark occasion. Sri Lanka particularly looks to the forum to provide long-term sustainability to the tea industry in maintaining price stability and quality standards, among the other objectives set out in the mandate… The Planters’ Association said they were confident that Sri Lanka could use the ITPF to re-look at the industry in order that local tea producers realize their full potential.

Sri Lanka’s plantation industries minister Mahinda Samarasinghe said:

The bulk of production is in the hands of smallholders. So there’s a need to increase their incomes. Price stability is definitely important.

The main aim of the ITPF over the longer term is likely to be to raise tea prices. The chart shows international tea prices from 1983 to the present day. As you can see, they have fluctuated considerably. Note that these are prices in nominal terms and hence do not take inflation into account. Click here for a PowerPoint of the chart.

But if the main aim is to increase prices to tea growers, how could this be achieved? One objective of the ITPF is to stimulate demand for tea by ‘promoting tea consumption through generic promotional campaigns’. The aim would be to encourage people to switch from coffee and soft drinks.

But to take advantage of its market power, the cartel might also want to reduce tea production, thereby pushing up the price. This, of course, would be more feasible if it had a larger than 50% share of the market.

Although production quotas are not currently part of the agreement, these are likely to be considered at future meetings, especially if the three other large producers – China, Vietnam and Iran – can be persuaded to join.

China, with some 38% of the market, is the world’s largest tea producer. Although it sent an observer to the meeting (as did Iran), it was not one of the signatories. If it could be persuaded to join the cartel, this would increase its power. Nevertheless, China specialises in different types of tea, mainly green teas, and is not the world’s biggest exporter – that is Kenya.

Articles

Tea nations join forces Radio New Zealand (25/1/13)
International Tea Producers’ Forum formed Assam Tribune, Ajit Patowary (23/1/13)
Planters’ Association upbeat on newly formed International Tea Producer’s Forum Daily News (Sri Lanka) (26/1/13)
Leaf Lobby: Sri Lanka hosts tea producer forum Lanka Business Online (24/1/13)
‘Tea cartel’ formed by biggest producing nation BBC News (23/1/13)
Tea producers brew up plan to raise prices Emirates 24/7 (23/1/13)

Data

Tea Monthly Price – US cents per Kilogram Index Mundi

Questions

  1. What are the stated aims of the newly formed ITPF? How realistic are they?
  2. What conditions are necessary for a cartel to be successful in raising prices over the long term?
  3. With reference to the chart, what can you say about the real price of tea over the period 1983 to 2013?
  4. To what extent are these conditions met by the ITPF?
  5. Why may a rise in tea prices in the supermarkets not result in a rise in prices to tea growers?
  6. How may tea growers benefit from the ITPF even if the Forum does not result directly in a rise in prices to growers?
  7. How can game theory help to explain the possible behaviour of members of a cartel and producers outside the cartel?
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The end of bargain booze?

Ministers are considering introducing a minimum price of 45p per unit of alcohol on all drinks sold in England and Wales. The Scottish government has already passed legislation for a minimum price of 50p per unit in Scotland. This, however, is being challenged in the Scottish courts and is being examined by the European Commission.

As we saw in a previous blog, Alcohol minimum price, the aim is to prevent the sale of really cheap drinks in supermarkets and other outlets. Sometimes supermarkets sell alcoholic drinks at less than average cost as a ‘loss leader’ in order to encourage people to shop there. Two-litre bottles of strong cider can be sold for as little as £2. Sometimes they offer multibuys which are heavily discounted. The idea of minimum pricing is to stop these practices without affecting ‘normal’ prices.

The effect of a 45p minimum price per unit would give the following typical minimum prices (depending on strength):

Strength Size Minimum price
Wine 12.5% 750ml £4.22
Beer/lager (normal) 4.5% pint (568ml) £1.15
Beer/lager (strong) 7.5% pint (568ml) £1.92
Beer/lager (normal) 4.5% 2 litres £4.05
Beer/lager (strong) 7.5% 2 litres £6.75
Cider (normal) 5% pint (568ml) £1.28
Cider (strong) 8% pint (568ml) £2.04
Cider (normal) 5% 2 litres £4.50
Cider (strong) 8% 2 litres £7.20
Whisky 40% 700ml £12.60
Vodka 37.5% 700ml £11.81

The hope is that by preventing the sale of really cheap drinks in supermarkets, people will no longer be encouraged to ‘pre-load’ so that when they go out for the evening they are already drunk.

But how successful will such a policy be in cutting down drunkenness and the associated anti-social behaviour in many towns and cities, especially on Friday and Saturday nights? The following articles discuss the issue and look at some of the evidence on price elasticity of demand.

Articles
Alcohol minimum price plan to be unveiled BBC News, Dominic Hughes (28/11/12)
Multi-buy alcohol deals face ban under minimum price plans The Telegraph, James Kirkup (28/11/12)
Alcohol at 40p, 45p or 50p a unit to be Cameron choices for minimum price The Guardian, Juliette Jowit (25/11/12)
Minimum price plan to end cheap alcohol sales BBC News, Nick Triggle (28/11/12)
Minimum pricing having a difficult birth in Scotland BBC News, James Cook (28/11/12)
Cameron to set minimum price for alcohol Independent, Brian Brady (25/11/12)
Minimum Alcohol Price: Doubts Measures Will Cut Binge Drinking Huffington Post (25/11/12)
An industry divided: Pubs set against brewers and retailers in battle for cheap booze This is Money, Rupert Steiner (26/11/12)
A minimum price per unit of alcohol BMC Public Health, Adam J Lonsdale, Sarah J Hardcastle and Martin S Hagger (23/11/12)

Home Office alcohol policy
Alcohol strategy (23/3/12)

Questions

  1. Draw a diagram to illustrate the effect of a minimum price per unit of alcohol on (a) cheap cider; (b) good quality wine.
  2. How is the price elasticity of demand for alcoholic drinks relevant to determining the success of minimum pricing?
  3. Compare the effects of imposing a minimum unit price of alcohol with raising the duty on alcoholic drinks? What are the revenue implications of the two policies for the government?
  4. What externalities are involved in the consumption of alcohol? How could a socially efficient price for alcohol be determined?
  5. Is imposing a minimum price for alcohol fair? How will it effect the distribution of income?
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A 3p delay?

Increases in the cost of living over the past few years have put many families under financial pressure. One of the main factors that has been hurting households is the price of petrol and diesel. Road fuel duty was due to be increased last August, but the Chancellor delayed it in June. However, a planned 3p rise in duty by the Coalition, which has faced rebellion from numerous MPs may now be delayed further, following a hint from the Treasury.

The government has said that it will do everything it can to support struggling families with the cost of living and this has led many to conclude that in the Autumn Statement, the Chancellor will delay the planned 3p rise. Labour was defeated in its efforts to force a delay of the proposed 3p duty rise, as Tory bankbenchers were given this hint that the Treasury would decide to delay the increase anyway. The Economic Secretary to the Treasury said that fuel duty is part of the government’s strategy to help cut the cost of living. He commented that fuel duty was 20% lower in real terms compared to March 2000, when it was at its peak.

If we had continued with the policies of the previous government, quite simply prices would be higher, fuel would be 10p more expensive per litre. I know some will call for a further freeze in fuel duty today. I can assure them this government understands the financial pressures hard-working families are facing. Subject to the constraints of the public finances, this government is determined to help families with the cost of living.

A key economic question to consider is why is fuel one of the products that is frequently taxed? When a tax is imposed on a product, its price will rise and as the law of demand tells us, this will cause people to purchase less of it. But, what is so special about petrol? Why do people continue to purchase petrol even when its price rises? The following articles consider the concerns surrounding the 3p fuel duty rise.

Treasury to defer planned increase in fuel duty The Guardian, Nicholas Watt (13/11/12)
Asda chief Andy Clarke urges scrapping fuel duty rise BBC News (15/11/12)
Fuel Duty: Labour to force vote to delay 3p rise The Guardian, Helene Mulholland (12/11/12)
Fuel duty delay called for by Which? BBC News (11/11/12)
Fuel Duty: Government may still axe increase Sky News (13/11/12)
Chancellor heads off fuel duty rebellion Financial Times, George Parker (12/11/12)
Osborne pressed to shelve fuel duty rise Financial Times, George Parker (8/11/12)
Planned 3p petrol increase could be abandonedThe Telegraph, Christopher Hope (11/11/12)

Questions

  1. Why is petrol a good that is taxed so heavily?
  2. Illustrate the impact of a tax on petrol using a demand and supply diagram. Explain what happens to the equilibrium price and quantity.
  3. Which factors will make the change in price and quantity relatively larger or smaller? Think about how elasticity is relevant here.
  4. What other factors have contributed towards the increased cost of living over the past few years?
  5. Which factors in particular would make a January rise in fuel duty especially painful for many families?
  6. What are the arguments both for and against delaying the 3p rise in duty?
  7. According to the Economic Secretary to the Treasury, fuel duty is 20% lower in real terms. What does this actually mean?
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Taxing fatty products

The problem of obesity and healthy eating is a growing problem in many countries and governments have long been looking into designing policy to tackle this issue.

Some have gone for healthy eating campaigns and policies to encourage pregnant women to eat better, but one government took it a step further and introduced a Fat Tax. In October 2011, the Danish government introduced a tax on foods that are high in saturated fat in a bid to reduce consumption of these goods. However, this policy is now to be abolished.

The Fat Tax introduced by the government imposed a surcharge on foods that contained more than 2.3% saturated fat. Numerous products were affected, including meats, dairy and as expected – processed foods. The policy was criticised by scientists who said that saturated fat was the wrong target and perhaps they were proved right, but the government’s u-turn, which will now see the tax being abolished. The tax had gradually increased food prices throughout the country and authorities said that it had even put Danish jobs at risk.

With food prices much higher in Denmark with the tax, consumers switched from buying domestically produced goods to crossing the border into Germany and purchasing their cheaper food. This undoubtedly had an adverse effect on the Danish economy, as it represented a cut in consumer expenditure. Perhaps it also helps to explain Germany’s strong economy – it was feeding 2 nations! The Danish tax ministry said:

‘The fat tax and the extension of the chocolate tax — the so-called sugar tax — has been criticised for increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk … At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes travelling across the border to make purchases … Against this background, the government and the (far-left) Red Green Party have agreed to abolish the fat tax and cancel the planned sugar tax’

Once the tax is abolished, other policies will need implementing to tackle the problem of obesity and encourage healthy eating, as it continues to be a big problem in this and many other countries. The following articles consider this problem.

Denmark to scrap world’s first fat tax Associated Press (10/11/12)
Denmark to abolish tax on high-fat foods BBC News (10/11/12)
Fat tax repealed The Copenhagen Post (10/11/12)
Businesses call fat tax a failure on all fronts The Copenhagen Post, Ray Weaver (10/11/12)

Questions

  1. Illustrate the effect of a tax being imposed on a diagram. What happens to equilibrium price and quantity?
  2. According to Danish authorities, consumers didn’t change their consumption habits with the tax. What does this suggest about the PED of these products?
  3. How does the amount of tax revenue generated vary with the price elasticity of demand and supply?
  4. What other policies could be implemented to encourage healthy eating?
  5. Why did this fat tax lead to higher food prices?
  6. Explain the way in which such a tax could adversely affect the Danish economy. Does this justify its removal?
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A glass half empty or half full?

European wine producers have seen one of the worst grape harvests for decades. With exceptionally wet weather in the northern European growing areas and exceptionally hot and dry weather in the southern ones, yields are well down in most countries.

In France, the world’s largest wine producer, wine production is forecast to be 19% down on the previous year. In Italy and Spain, Europe’s second and third largest producers, production is forecast to be 3% and 6% down respectively. Production in the EU as a whole, which produces some 57% of world output, is expected to be 9% down and at a historically low level. What is more, the past five years in the EU have all seen modest harvests.

And the poor harvests are not confined to Europe. Argentina’s production is some 24% down on 2011, with New Zealand’s 17% down. And despite a few countries expecting an increase, including the USA and Chile, overall world production is expected to be 6% down on 2011 and more than 7% down on the average for 2008–11.

So is this good news or bad? At first sight it would seem to be bad, especially for the countries with large falls in output. It would also seem to be bad news for the consumer, with prices set to rise.

But for some it’s good news. If prices rise, then producers experiencing an increase in output will have a double gain. And a fall in output is only part of the story. For some producers, the smaller yield has been accompanied by an increase in quality. And then there’s the question of stocks. For several years, global production of wine has exceeded consumption. Indeed the gap widened after the financial crisis and recession of 2007–9 as consumption of wine fell. This year’s poor global harvest should help to slow down the increase in stocks or may even lead to a reduction in stocks, depending on the extent to which demand recovers.

Articles
World Wine Output to Fall to 37-Year Low, Depleting Stocks BloombergBusinessweek, Rudy Ruitenberg (30/10/12)
World wine drought after weather ruins harvests The Telegraph, John-Paul Ford Rojas (31/10/12)
Wine Experts: Drought, Cold Bring Worst Harvest in 50 Years Skye (30/10/12)
Wine experts: worst grape harvest in half century Washington Examiner (17/10/12)
Small 2012 harvest sparks supply fears thedrinksbusiness.com, Gabriel Savage (30/10/12)
Wine shortage to follow poor 2012 grape harvest BBC News (31/10/12)
Hot summer cools business prospects for Madrid vintners BBC News, Jaime Gonzales (24/9/12)
World awash in wine, so Europe’s poor grape harvest won’t hit Edmonton goblets just yet Edmonton Journal, Dan Barnes (17/10/12)

Data
Wine in figures Wines from Spain
2012 global economic vitiviniculture data Wines from Spain (Note that the countries in Table 1 have been entered in the wrong order.)

Questions

  1. Illustrate the effect of the global wine harvest on a demand and supply diagram.
  2. Will a fall in grape production of x per cent lead to a rise in the price of wine of more or less than x percent? How is the price elasticity of demand relevant to your answer?
  3. What elements are there in the supply chain from planting vines to consuming wine?
  4. How does the holding of stocks affect (a) the profitability of wine production; (b) the price volatility of wine?
  5. The Greek grape harvest is predicted to be higher in 2012 than in 2011. How will this affect the prices of Greek wines in (a) Greece; (b) outside Greece?
  6. How is the fallacy of composition relevant in assessing the benefits to owners of vineyards of a good grape harvest?