Tuesday, February 2, 2016

A cauliflower bubble?

Probably not:  prices of up to $8/head seem to reflect fundamentals of increased demand from carb counters and reduced supply from cold weather in California.

3 comments:

  1. This certainly makes me feel glutinous about the whole head of cauliflower my wife and I ate last weekend.

    There are a couple of points that I’d like to add to the article which may put the price spike into perspective.

    First, the reason demand is so high is due to dietary constraints of customers who are pursuing a diet low in carbohydrates. Although I don’t want to be as bold as to call this a fad, it is certainly not a prevailing thought for the majority of Americans. In fact, according to healthresearchfunding.org, in 2010, 54% of adults in the U.S. said that they were currently on a diet. That’s not to say that all were on a low carb diet, but the amount of people “on a diet” is staggering. If tomorrow, researchers discovered that carbs weren’t the enemy, the low carb trend would simply go away, and with it the heightened demand for cauliflower.

    Second, demand is tied to price. Although some consumers pay pay $6.99 for cauliflower, not all will. And as the price rises, the number of consumer falls. Those consumers, like the ones mentioned in the article, will move onto another option, at least for the time being.

    http://healthresearchfunding.org/23-exceptional-fad-diet-statistics/

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  2. For cauliflower, increase in market demands will likely directly result in price increases due to the lack of options to increase the supply. This is because Cauliflower is difficult to grow and requires very specific growing conditions.

    According to Oregon State Department of Agriculture, cauliflower is a cool season vegetable that is highly sensitive to extreme temperature Cauliflower, 2010). Its mean growing temperature of 50-60 degrees Fahrenheit creates an almost exclusive environment like the coastal valleys of California and the Pacific Northwest where nearly 75% of the world’s supply is grown (“Growing Cauliflower”).

    It also has specific irrigation. Harvesting, handling and storage requirements that contribute to its high barrier to entry in the market. As a result, the ability to increase supply to meet demand and bring pricing down is very difficult. With a low elasticity of supply, the ability to offset price increases is difficult and therefore can drive up prices.

    However, the demand for cauliflower is elastic as pointed out by Linden in his article “Hot Cauliflower Market Cooling Down” (Linden, 2014). In his article he speaks to how unsustainable the demand for cauliflower is when prices get too high because consumers can lean towards other vegetables (Linden, 2014). Recognizing that consumers can “substitute” cauliflower for some other vegetable adds to the complexity of understanding the market demand and finding the market equilibrium.

    References:

    Barriers to Entry and Exit. (n.d.). Retrieved March 12, 2016, from http://www.agmrc.org/business-development/getting-prepared/business-and-economic-concepts-and-principles/barriers-to-entry-and-exit/

    Cauliflower. (n.d.). Retrieved March 12, 2016, from http://horticulture.oregonstate.edu/content/cauliflower-0

    Growing Cauliflower - Bonnie Plants. (n.d.). Retrieved March 12, 2016, from https://bonnieplants.com/growing/growing-cauliflower/

    Linden, T. (2014). Hot cauliflower market cooling down. Retrieved March 12, 2016, from http://www.theproducenews.com/markets-and-trends/12859-hot-cauliflower-market-cooling-down

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  3. The perfect storm of market conditions has caused the prices of cauliflower to increase. A reduction of supply drives the prices up. Bad weather conditions can impact how well the crops do and if there is an bad season the crop supply could come out much lower than anticipated. With new fad dieters driving up demand by eating more vegetables and trying not to consume carbs, it can also increase the price. Both of these factors have led to a significant price increase for cauliflower. I do not see this situation as a bubble at this time. While $8.00 a head is above the products fundamental value, it is more due to the market conditions over the last year. If it was strictly due to increase market demand as well as the increased perceived value of cauliflower then I would lean more towards it being a bubble. With a bubble investor’s unwarranted expectations of the performance of the product continue to push prices up to unsustainable levels. Eventually the market corrects itself when the bubble bursts and prices correct themselves.

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