From feast to famine. Before cyclone Yasi came roaring inland, levelling three-quarters of Australia’s banana crop, the nation had been experiencing a banana glut.
Market commentary by the Australian Banana Wholesalers group, posted on the Australian Banana Growers’ Council’s website in the week before Christmas, complained of massive oversupply of bananas in the five major banana retailing markets.
In Adelaide: ‘‘Market is massively overloaded with fruit. Growers should only pack their absolute best because anything else than that will be worth nothing.’’ In Melbourne, market demand for bananas was ‘‘poor’’, but: ‘‘Demand becomes irrelevant with this much fruit to cope with. 198,000 cartons says it all. It’s a joke.’’ In Sydney, a record number of cartons of bananas – 247,143 – had arrived from growers: ‘‘Why are growers sending so much just before Christmas? Market has no chance of clearing for the next few weeks. Call your agent before you send is best advice.’’
That, of course, was before the floods in early January and now cyclone Yasi. Now banana growers outside cyclone-affected areas are looking forward to bumper prices as demand outstrips supply.
Strict banana quarantine laws mean growers are sheltered from international competition. Hence banana prices respond sharply to interruptions in supply, particularly from far north Queensland, which accounts for 85per cent of Australia’s banana production.
For other tropical fruits grown in the area, such as mangos, rambutans and pawpaws, supermarkets can supplement supply through imports. Sugar prices, for example, are not predicted to rise strongly, despite widespread destruction of sugar cane, because the market is global.
That’s the thing about prices – where competition is strong, a producer’s ability to lift prices is limited by consumer’s ability to switch to alternative suppliers. Where demand for a particular good is ‘‘inelastic’’ – that is, consumers can’t simply reduce their consumption in response to higher prices – prices can indeed rise sharply.
Remember Westpac’s banana smoothie explanation for why interest rates just had to rise after the global financial crisis? Costs had indeed risen for banks but, more importantly, lack of competition meant they were not forced to absorb those increased costs but rather could pass them on to customers. Home owners were hardly about to go switching banks when all of them were jacking up rates.
As for bananas, lack of other sources will limit supply and put upward pressure on prices. But people may start eating fewer bananas, limiting that pressure.
Such a change in consumption patterns, however, will elude the Bureau of Statistics when it measures inflation. The bureau does not change the basket of goods and services it measures each quarter, which is based on a five-yearly survey of household purchases. It will assume people keep buying bananas at the current rate.
The Reserve Bank, however, seems quite sanguine about the impact of recent natural disasters on inflation. Before Yasi hit, it described the floods as ‘‘unlikely to have a major impact on the medium-term outlook for inflation’’. It is still too early to assess the exact damage wrought by Yasi but we can expect the Reserve to look through the spike in banana prices, as it did after cyclone Larry in 2006.
THE IRVINE INDEX 05/02/2011
75% Portion of Australia’s banana crop destroyed by cyclone Yasi.
$400 million Value of banana industry.
$500 million Value of sugar cane destroyed by the cyclone, in addition to the $500million destroyed by the floods.
30% Portion of sugar cane crop grown north of Townsville.
73% Increase in raw sugar prices on global markets over the past five months as demand outpaced supply.
$1 billion Tourism industry’s estimated lost revenue and property damage due to the cyclone.
$2.96 Price of a kilogram of bananas earlier this week.
$15 Top-end forecasts for where banana prices are heading now.
$12 Banana prices hovered at this level for the best part of a year after cyclone Larry in 2006.
$99 million Insurance group QBE’s preliminary estimate of its costs from cyclone Yasi, on top of $100million in claims from recent flooding.
$10 million Total costs for Suncorp of cyclone Yasi insurance claims — smaller than you might think thanks to reinsurance policies.
0.5 Percentage points by which the government predicts the floods — not including the cyclone — will reduce economic growth this financial year.
0.25 Percentage points by which it predicts the floods will boost consumer price inflation this quarter.