Gov’t on price hikes: Clueless?

Amid the rise in the prices of basic commodities, the citizens’ impatience has considerably grown as well.  In fact, some sectors, probably, out of frustration, have filed a petition for “the government to impose price ceilings on rice, garlic and other basic and prime commodities. ”

Generally, granting everything is above board, market price is a function of supply and demand.  Or, it is simply a consequence of the interplay between supply and demand.  So that, when thesupply of a particular commodity goes up and the demand remains constant, prices will go down.  Inversely, when demand goes up and supply remains constant then prices will go up as well.  Or, we may say, if the demand goes down and supply remains constant then prices will go down.  On the other hand, when supply goes down and demand remains constant then prices go up. 

Supposedly, therefore, as far as market prices are concerned, there are only two aspects that we may have to look into, the supply and demand.  We can even further narrow our discussion focus by limiting ourselves on the possible reasons that may result in the rise in prices.  These are, as discussed earlier, situations where demand goes up and supply remains constant and when supply goes down and demand remains constant.  Or, in a very undesirable scenario, the supply went down and, simultaneously demand went up.

On the inadequacies of the supply side, what are the possible scenarios?   As has always been, the supply side (basic commodities like farm products) is a domestic issue.  Weather, therefore, is a big factor.  Knowing fully well that not long ago the country was in the receiving end of several natural calamities and long dry spell, farm production must have been severely affected.  Thus, the supply chain must have been short.  Moreover, the land areas that were devoted for agriculture must have reduced.  Therefore, if there is no corresponding increase in the yield per hectare, then, supply will again be short.  To recall, we have had the land reform program for six decades now.  Yes, it is a fact that some liberated farmers have succeeded and have increased their produce.  However, it is equally a known fact that some have abandoned their lands and have settled in the urban areas.  Therefore, cultivated areas must have considerably decreased, thus, the dwindling supply of these agricultural products. 

Furthermore, with the growing number of farmers into organic farming, supply must have slowed down a bit.  While it is true that organic farming has its many positives, it is still a fact that using such method will somehow reduce the yield.  On the other hand, on the demand side, it could only be associated with the country’s population growth.

However, price increases could also be a result of the “Kitchin cycle”.  This is a cycle discovered in the 1920s by Joseph Kitchin.  It is a short cycle of about 40 months or three years.  This cycle is simply reaction-driven.  It is accounted by certain time lags in information affecting the decision making processes of business firms.  As we all know, firms normally react to the improvement or any betterment of a commercial situation by increasing production output through optimization of the capacity of their capital assets.  Consequently, in a given duration (say, from a few months to about two years) the market gets swamped with goods or commodities with quantities that are becoming gradually excessive.   As a result, supply exceeds demand.  Naturally, prices drop as the produced commodities get accumulated in inventories.  Therefore, as a normal reaction, entrepreneurs will find the necessity of reducing output.

This entire process, however, takes some time. It takes some time for the information that the supply exceeds significantly the demand to get to the businessmen. Moreover, it takes business decision makers some time to check this information and to make the decision to reduce production.  More time is also necessary for their decisions to materialize.  Yet, after this period of reduced production, a new phase of growth of demand, prices and output follow.

Other factors may also include increases in processing/freight costs.  With increasing global prices in basic commodities like diesel (which are largely imported) coupled with our peso’s weakness at times, these costs have gone up as well.

But then again, price manipulation must have prevailed too.  Some unscrupulous businessmen must have engaged in such unlawful acts as hoarding (which is the undue accumulation by a person or combination of persons of any basic commodity beyond his or their normal inventory levels or the unreasonable limitation); profiteering (which is the sale or offering for sale of any basic necessity or prime commodity at a price grossly in excess of its true worth); and cartel (which is an agreement between two or more persons to artificially and unreasonably increase or manipulate its price).

On the other hand though, if we have to entertain the idea that some disgruntled sectors maybe at it to distract our citizens’ attention from the ongoing incarcerations of some lawmakers, then, price manipulation was a perfect diversion trick.  Why? It affects all of us. They can always buy in bulk and hide or dump or let these perishable items rot somewhere.  They are filthy rich, remember?  Consequently, shortages happen and prices go up. It is a no-brainer. 

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