Although this new demand will attract potential producers into the market as they see a greater potential for making profit, during the process of adjustment, the new supply may not come fast. Currently, the milk industry is operating at optimum capacity to meet demands. There is a lack of spare capacity due to a shortage of cows and limited time to adjust to the rise in demand. “The sheep farmers…are trying to convert to dairy, but there is a two-year waiting list,” thus the relatively inelastic supply curve S1 as seen in Figure 2 will only become more elastic to S2 as time goes by, since investment takes time to convert into actual supply, as in the case of China and Argentina. Combined with the fact that “…only about 7 percent of all the milk produced globally is traded across borders,” this would also cause the readjustment phase to be delayed as the supply curve will remain inelastic until other sources of supply can be found.
However, finding new sources in the short term will be hard. “Australia, a major exporter, is suffering a multi-year drought that has devastated its milk production…” and Australia’s problem may be a permanent one due to global warming. Its situation won’t be helpful to the problems occurring in China and Argentina, for even if the price is good, the Australian producers would no longer be able to produce the same quantity they would have wanted to before. This would ultimately lead to a shift to the left for the supply curve, which will cause disequilibrium as it leads to a shortage (Qe – Q2), since the supply can’t keep up with the current demand of Qe. Again, this shortage drives up the price of milk, for at the originally supplied quantity Qe, people only had to pay Pe, but due to the shortage, now they will have to pay Pe2 once the market moves back to the new equilibrium Qe2, Ceteris Paribus.
The New Zealand dollar appreciation contributes to shifting the supply curve to the left. The New Zealand dollar appreciation causes the country’s “earnings from milk sold abroad to decline when converted back to local currency,” meaning that at the same price in the export market, producers are now willing to produce less. Similarly, government intervention has led to shortages and surging prices; “rising prices has prompted governments to step in to control prices”, and this means producers will be less willing to produce more milk as they may not earn as much. Both of these factors means that the producers’ profit margin will narrow, and thus they will be willing to produce less quantity than before. As seen in Figure 3, all these factors causes a shift in the supply curve to the left, thus leading to disequilibrium. Again, over a period of time, Ceteris Paribus, the market will move back to the new equilibrium Qe2 with a new price Pe2.
As seen from all the above reasons, both supply and demand factors have contributed to the shortage of milk, thus leading to disequilibrium and creating a serious shortage situation and pushing up the prices. Though the markets are quick to react to the booming demand, due to the shortage of time, the supply curve will remain relatively inelastic until more producers come into the market. However, due to climate changes, inflation and government intervention, this could ultimately delay the production, thus causing higher prices of milk to last, or increase even further.
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