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04/15/2012

ASSESSMENT - BANANA PRICES


            Food products purchased by consumers generally only reach those consumers after a production process involving the agricultural, food industry, transport and distribution sectors. The whole process of production and trade from the agricultural commodities to the consumer products is called supply chain. There may be many actors in the chain: farmers, traders, food industry enterprises, retailers, etc. Each player combines a number of inputs, processes them into a number of outputs that are sold to other actors in the chain. In each step of the supply chain the products may change. The prices paid for the outputs in each step reflect the values of the inputs, including the payment for labor and other production factors in each step, and the profit margins made by the player. The supply chain may be relatively short and simple for some food products or more complex for others and may also differ across countries. One and the same consumer product in a single country can be produced through alternative production processes. Prices of each input in the supply chain may change over time. These changes prices for inputs may be passed through to the next player in the chain and change the prices of intermediate products or they may affect the profit margin of the players involved. Changes in the production process may influence production costs, prices and/or profit margins. Bananas occupy a unique position in the shopping basket of the British consumer. After petrol and National Lottery tickets, they are the third most valuable of all products sold by the major supermarkets. Like other staples such as bread, milk and baked beans, price-conscious consumers are likely to know how much bananas cost and to use them to judge the relative value for money offered by the different supermarket chains for other products. This means that these products are particularly vulnerable to being used in price-cutting battles between supermarkets in the competition to win the hearts and purses of the UK shopper. In recent, years short-term price-cutting has been a regular feature of spring marketing strategies designed to increase market share by enticing non-regular customers through the door. As a result of the series of price wars between the major supermarkets, the retail price of conventional loose bananas fell by a full 41percent from £1.10 a kilo to 64p. between 2002 and 2007.

            Banana prices have hit the news headlines in recent weeks. In the UK a ferocious ongoing price war between the leading supermarkets has stripped more than half the total value out of the banana chain. In the past, it was the big banana companies that more or less determined their selling price to importers and wholesale markets in the consumer countries. But with the rise in buying power of the supermarket chains, and the rapid concentration in the food retailer sector, wholesalers have become a residual market. Most fruit is now sold directly by importing/ripening companies to retailers.

            One of the reasons for the drop of the banana prices is intense competition. Competition policy was designed and implemented with the aim of preventing collaboration between suppliers over price. On various occasions in the last two decades, the big banana companies have fallen foul of competition authorities on both side of the Atlantic over price cartels. However, existing competition law has not yet evolved to contemplate abuses of buying power at the top of the supply chain. Because retailers’ prices are visible in-store to all consumers, supermarkets can adjust their prices at an hour’s notice in response to price moves by their competitors, without risking allegations of collusion. Bananas are used as a key promotional item by the large supermarkets in the battle to attract consumers into their stores. There is fierce competition to offer the cheapest bananas; so when one multiple cuts prices, the others will normally follow. The costs of low retail prices are passed down the supply chain – the multiples pressure their suppliers to cut wholesale prices, and the suppliers do the same to banana growers. The result is that many of the loose bananas on sale have been bought from the growers at a price that often does not cover the costs of production. Cheap fruit is available from low-cost dollar banana producers such as Ecuador because production is easier and cheaper on huge plantations located on level plains. But higher-cost producers such as those in the Windward Islands, whose small-scale farms are spread out across the hilly countryside, are either forced out of the market or have to sell at below the cost of production.

           

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