Last Updated on November 10, 2023 by Hina Rubab
It is a known fact that market demand affects product pricing in that increased demand results in increased prices. The organic food market has experienced increased demand in recent years. This paper evaluates the impact of changing demand on product prices, and the far-reaching impact on the change in product supply.
Table of Contents
Organic Food Products
Organic products refer to foods grown without synthetic pesticides or genetically modified seeds. The organic market originated in the ninety-nineties following food scares in the conventional sector. The organic market has grown over time, from a global value of $18 billion in 2000 to $50 billion in 2008. Currently, the global organic food market is valued at $124.76 billion as of 2017. It is estimated that the value will increase to $323.56 billion by 2014.
Economics Experts state that an increase in the demand for organic food products has led to an increase in price due to the forces of demand and supply. Demand has been fuelled by increased consumer awareness on the harmful effects of fertilizers, pesticides, and growth hormones. Another reason that has led to increased demand for organic products is increased income. Consumer income has increased due to improved economic conditions. As a result, consumers have more disposable income to purchase organic products, which are higher in price than other conventional products.
Illustration through Charts
The increased demand has led the demand curve to shift to the right as shown below. Due to increased quantity demand from Q1 to Q2, the demand curve has shifted to the right. Due to increased demand, price has also increased from P1 to P2. A new equilibrium has been created due to the increased price and quantity demand.
Figure 1: Shift in demand curve due to increased demand for organic food products.
The increase in demand and the resulting increase in price have motivated suppliers to increase quantity supply so that they can benefit from increased pricing. In addition to the movement of the supply curve, farmers have shifted from the production of conventional food products to the production of organic food products. The increased supply of organic food products has led to a rightward shift of the supply curve. The figure below displays changes in the supply curve due to increased supply as well as changes in quantity demand.
Figure 2: Shift is supply curve due to increased supply of organic products
As displayed by the graph above, quantity supplied increased, resulting in a shift of the supply curve from S to S1. A simultaneous increase in demand and supply causes an increase in the equilibrium quantity. As a result, the equilibrium quantity has shifted from E to E1. Willer, Lernoud, and Kemper (2018) states that sales of organic products have increased by 20% annually. Although the demand of organic food products has increased, the supply of organic product has also increased.
Food production organizations have changed their strategies by venturing into organic production. Up to 10,000 American farmers have made the transition to organic food production, which has increased the amount of organic imports. The U.S has increased its exportation of organic food products, most of which are sourced from the European Union.
The shift has increased the cost of production, leading to high organic food prices. For instance, farmers growing organic food products have to shun inorganic inputs, which greatly undermine production. Farmers report reductions in production hence the high costs of organic produce to boot revenues.
Aid Services have stated that Companies prefer global sourcing to exploit global efficiencies. Although global sourcing has immense benefits, it also has its cons that a wholesaler such as Kole Imports should consider before commencing transactions with offshore parties. Following are the pros and cons of global sourcing for an U.S-based wholesaler such as Kole Imports.
A company gets to learn how to transact business successfully in a foreign market. Global sourcing also enables a wholesaler like Kole Imports to reduce reliance on a few domestic retailers who may be supplying goods and services at a premium. By sourcing for similar goods in the global market, a company is able to establish alternate sources which help the company reduce costs and thus improve its competitiveness in the market.
Kole Company Example
For example, by sourcing general merchandise globally, Kole Imports is able to charge a competitive price which improves its competitiveness. As a result, Kole Imports has been able to obtain favorable business terms with the leading retailers such as Walmart, Staples, and Groupon. Also, due to immense opportunities and diversity in the global market, a company can locate scarce resources and skills that are not available in the domestic market, which enables the company to increase its product portfolio as well as other technical capabilities.
The first disadvantage of global outsourcing is the high costs incurred in monitoring to ensure the goods and services acquired are of the required quality. There are also hidden costs incurred in learning new cultures to deal with foreign parties effectively. By dealing in the global market where laws and regulations may be different from those in the U.S., a company like Kole Imports may expose itself to political, financial and legal risks, particularly when sourcing from emerging economies.
There is also a long supply chain when souring manufactured goods from another country. The supply chain is usually fragmented, resulting in the risk of disruptions in shipping and transportation, long lead times and it is also difficult to ascertain the specific quality of products sourced.
How Kole Imports might improve its global sourcing process
According to Handfield & McCormack (2007), to effectively source finished goods in the global market, a company like Kole Imports has to factor in lead times costs into its selling price as they can be very significant. The company should also practice prudent financial management, particularly regarding currency management as currencies fluctuate daily. HelpinHomework points out that a company must also consider specific parameters that make global sourcing a wise business decision.
Parameters to be considered include payment terms, delivery costs, the flexibility of the global suppliers, quality of products and the alignment between the company and global suppliers. A company should also consider geopolitical assumptions and macroeconomic factors that could affect sourcing such as forecasted inflation rates, state of affairs between the U.S. and the supplier’s country, supply chain risks and other government requirements.
Organic food production is slated to increase over time due to changing consumer tastes and preferences. The increased production is aligned with increased demand for the product. Organic food products are profitable for producers due to increased demand for the products. During the last few decades, businesses have been expanding their operations globally to take advantage of the benefits brought about by globalization.
As a result, networks of manufacturers, suppliers, intermediaries, and customers are now spread worldwide. This has brought about various challenges, which companies with global operations must now deal with. However, the high production costs may deter producers from venturing into organic production.
It is recommended that organic food producers should venture into organic food production due to its high potential for success in the market in addition, organic food product should charge premium pricing to make up for the increased production prices.