MBS686 Economics and Business Strategy
INDIVIDUAL PROJECT – Economic Concepts (20%):
An Application of Basic Economics Concepts to the supply, demand and production of various types of oils in the global marketplace.
Using the following press release as a starting point show how the economics concepts can be applied to a contemporary economics issue.
ABC News Just In
“Cooking oil shortages pushing up food prices and creating headaches for manufacturers”
Posted Tue 9 Aug 2022 at 5:08amTuesday 9 Aug 2022 at 5:08am, updated Tue 9 Aug 2022 at 6:08amTuesday 9 Aug 2022 at 6:08am
Accessed on 25th August 2022 from: https://www.abc.net.au/news/2022-08-09/cooking-oil-shortages-pushing-up-food-prices/101299696
The prices of edible oils have been surging on the global market. (ABC Rural: Jessica Hayes)
We've all heard about the skyrocketing price of petrol at the pump, but did you know there's another oil crisis?
At the helm of a deep fryer, Teresa Paolini is right across this issue.
A few years ago, her family-owned takeaway shop in Melbourne used to be able to buy her preferred cottonseed oil blend for less than $40 a drum.
-Now it's up to $60,- Ms Paolini says.
The latest consumer price index (CPI) data just showed a 14 per cent rise in the price of cooking oil in the past year. The only other sector of food that's gone up by more is fruit and vegetables.
Indirectly, analysts say, the cooking oil crunch is now likely hitting many other parts of the food chain.
That's because it is such a fundamental staple ingredient. Edible oil is in everything from margarine through to hummus and baked goods, and there is only so much of a price hike that manufacturers through to takeaway shops can absorb.
-We've had to put our prices up about 50 cents on each item,- Ms Paolini says.
And it's not just fried chips.
Teresa Paolini has bumped prices at her takeaway shop in Melbourne because cooking oil has gone up. (ABC News: Chris Le Page)
In bad news for beauty, vegetable oils are a core ingredient in moisturiser and lipstick.
The latest CPI data shows personal care items already went up almost 5 per cent in a year. One company that develops and manufactures cosmetics is tipping that inflation will escalate by up to 15 per cent by 2023, due to vegetable oil prices.
As well as price hikes, the situation is also creating headaches for food labelling.
One of Australia's biggest food manufacturers, Goodman Fielder, has just announced that it is having to replace some of the sunflower oil in its well-known mayonnaise Praise with canola oil.
That's how far-reaching the issue has become.
What's driving the cooking oil crunch?
Just like petroleum and gas, vegetable oil is a globally traded commodity that follows international pricing.
Most of this year's headlines about the cooking oil crunch have centred around the war in Ukraine. Both it and Russia are some of the biggest producers of sunflower oil, and the war has seen their exports largely curtailed.
-[Edible oil] prices really escalated very quickly this year as a result of the invasion,- Rabobank's senior commodities analyst Cheryl Kalisch Gordon told ABC News.
However, sunflower oil is not one of the most-consumed edible oils globally, and the price pressures go far beyond the war in Ukraine.
-Prior to that, we were already seeing prices that were double the five-year average,- Ms Kalisch Gordon said.
The three most-widely consumed oils globally are canola, palm and soybean.
Before the war, Ms Kalisch Gordon said, canola supply was already being hit by drought in key producers, including Canada.
Meanwhile, soybean saw extra demand from China, which bought up beans to rebuild its pig herds after an outbreak of swine fever.
-On top of that, we had a disappointing harvest of soybeans out of Brazil and more broadly across South America, including Paraguay,- Ms Kalisch Gordon said.
Then there were issues during the pandemic with worker shortages in Indonesia and Malaysia, which produce much of the world's palm oil.
-They just weren't able to get the harvest out of the plantations,- Ms Kalisch Gordon said.
The other oil crisis, petroleum, didn't help.
Ms Kalisch Gordon said fossil fuels were now so expensive, that markets were turning to edible oils to make biodiesel instead.
-We've had production increasing at a slower rate than consumption increase. We've got a strong biodiesel market that is growing internationally,- she said.
As this all happened, some countries — including Turkey, Indonesia and Argentina — put export bans on their edible oils to ensure their own populations had enough of these vital ingredients.
-Really, we have found ourselves with a litany of issues feeding into this that wouldn't be expected normally,- Ms Kalisch Gordon said.
-The higher prices for soybean, palm oil and canola has led to higher prices or costs across the entire complex, including for olive oil and cottonseed.-
Peter FItzgerald has never seen price hikes on edible oil like those he is currently dealing with at Cookers.(ABC News: Chris Le Page)
Cookers is one of Australia's biggest vegetable oil distributors.
The national company buys canola and olive oil from refineries across Australia and overseas, including recently from Ukraine until the invasion. It is subject to whatever prices its suppliers pass on.
-We've seen prices in the last two years virtually double,- the company's managing director Peter Fitzgerald said.
-It's something we've never seen in our industry.
-And we don't know where that's going to end up-
Cookers is pushing these price hikes onto its customers, which include takeaway chains and major food manufacturers that use vegetable oil in everything from hummus to margarine.
-They're all addressing this with the supermarkets currently,- Mr Fitzgerald said.
-If you look at a lot of packaging, oil is such a large component in so many foods.
-I think that you'll see that as this flushes through, that it's going to continue price increases at the customer level.-
As well as food staples, vegetable oil is also a core ingredient in many of life's little luxuries, including makeup.
The price of cosmetics is also set to rise due to the vegetable oil crisis.(Getty Images: Andreas Rentz)
Rohan Widdison runs local cosmetics developer and manufacturer New Laboratories.
He's forecasting price hikes on everything from moisturiser to lipstick, largely in part due to the extreme increases he is seeing on oils such as almond.
-We've held off passing pricing on to a lot of clients. But now what we're seeing is elements where it's just impossible to hold off,- Mr Widdison said.
-I wouldn't be surprised if you don't see increases [at the consumer level] that are going to range from 8 to 15 per cent in the coming year.-
Mr Widdison isn't so sure the global price rises all come down to supply and demand, either.
-At a certain point in time, then the question really becomes: Is it the market price? Or is it really just profit-taking?- he asked.
He said the issue was bigger than just moisturiser.
-There's no question that we should be looking at food security before cosmetics,- he said.
-If you use palm oil, for example, I'm fully supportive of the Indonesian government protecting that essential commodity for domestic use.-
The impact of oil prices in poorer nations is something the World Food Programme and the World Bank are concerned about too.
In good news, the price spikes on soybean and palm oil do appear to have gone past their peak.
Ms Kalisch Gordon said that improvement had come as growing conditions improve in the regions hit by drought.
Most of the markets such as Indonesia — that put temporary export bans on their oils — have now lifted them.
And global markets also appear to be pricing in decreases after the resumption of Black Sea exports.
However, the situation remains volatile.
For instance, just this month, there has been fresh talk of olive oil shortages after another drought in Spain.
-We don't expect prices to drop or reduce in their volatility substantially in the near term,- Ms Kalisch Gordon said.
-So this isn't going to play out quickly.-
-I don't see [prices] returning to the five year-averages of pricing across this complex that we saw prior to COVID.-
Australian canola market booms
Australian oilseed growers are optimistic off the back of a record harvest as global prices boom amid worldwide supply issues.
As the new normal hits, New Laboratories is looking into substituting some edible oils for synthetics in their cosmetics.
-That's probably taking the ethical and responsible approach in this situation, rather than complaining about price,- Mr Widdison said.
Meanwhile, Peter Fitzgerald at Cookers is also calling for edible oils to be prioritised for food ahead of biodiesel.
-I think we've got to be careful,- Mr Fitzgerald said.
-For me, there's a moral dilemma about food versus fuel.-
And Ms Paolini is stocking up on olive oil for her takeaway shop, just in case.
-My husband and I just went and bought a few vats,- she said. -I like my olive oil.
The following economics concepts may be considered in your analyses:
• Substitutes, complements
• Production costs
• Budget constraint
• Supply and Demand
• Opportunity Cost
• Indifference curves
• Consumer equilibrium
• Marginal rates of substitution
In your analyses consider, for example, ranking of the importance of these concepts to the present problem, measurement issues associated with the concepts, and intemporal stability or variation with the concepts e.g., preferences, budget constraints. It is not necessary to consider all the above economics concepts, but their exclusion needs to be justified.
Develop logical and coherent responses to the issues raised above. The opinions or decisions that are presented should be supported by references to appropriate texts, articles, websites, and current economic practices. It is recommended that at least five (5) more articles be reviewed.
The following lists of deadline and requirements should be adhered to. Failure to do so will result in a lower grade on the project.
SUBMISSION DATE: Friday 7th October 10.00pm
The paper should
• be typed and double spaced;
• flow as a well documented coherent, committee paper;
• cite all sources;
• have correct formats for the bibliography, footnotes, and references;
• have on the first page of the paper, the title of the paper, the author’s names; and
• have an executive summary.
Quality is the most appropriate determinant of the grade awarded but it is suggested that approximately 2,000 words be a suitable length.
Dr Dominic Gasbarro
5th September 2022