Sugar price increment has been a significant trend in most regions of the world due to some economic subjections that have necessitated the trends. According to business perspectives, product prices vary because of the operating costs that the producers must meet, which go all the way to the end-user (Banton and Estevez, 2020). In the BBC article, the price of sugar has been affected by the deficit in sugar supplies and the high demand for turning sugar into ethanol in Brazil. This paper aims to analyze the increasing sugar prices by applying relevant theories and diagrams to justify the main ideas discussed.
Relevant Economic Theories
The resource-based view (RBV) theory can be one of the fitting models to explain why there is a sugar price increase globally. The theory identifies profit persistence by arguing that many firms have rare resources and capabilities to imitate. Through the theory, one can understand that profits derived in manufacturing enterprises result from firm-specific resources instead of industry membership. Therefore, it means that the equilibrium in profit realization differs from one enterprise to another. Hence, the companies may target different prices. In this case, Brazil, being one of the major producers of exportable sugar, has integrated some factions, such as demand from other areas, such as ethanol use, whereby there are increasing requests to supply the same (CZ, 2021). Due to the competitive norm in the industry, every company wants to segment its product. The efforts to produce according to the expectations go high to meet the new operations costs.
The other economic theory that can be applicable in this case is what is referred to as a theory of price. The theory suggests that the cost of any given product or service is based on the relationship between its supply and demand. As shown in Figure 1 above, the trends in sugar unit prices show a difference between 2020 and 2021 (Shabadeh, 2021). The curve shows that the price of sugar has been going high by the month. As the article has suggested, the low supply issues have made the retailers hike the prices for sugar and make the only available quantities to sell at high prices (Shabadeh, 2021). The other sensitive issue is the demand; the varying use of sugar in different areas can be why the price goes high (CZ, 2021). When many buyers are willing and afford to buy, the product’s price increases in neutralizing the supply. According to the trend shown in the diagram, at equilibrium, the curve will shift upward, which means the demand will increase, but supply remains steady; thus, the price and quantity at equivalent both increase.
The Supply and Demand of Sugar
By factoring in the production of sugar and consumption, the price remains inelastic, considering the price in the short term. For example, sugar price elasticity is -0.12 in the UK, -0.81 in the Asian region, and -0.11 in the US (Martínez-López and Gázquez Abad, 2021). The increasing sugar production due to the high prices might require a significant long-term capital investment. It is important to note that sugar is produced in high quantities, and its usage is also high. Therefore, it concerns the total capacity productivity and spread of fixed costs that alter the price. For developing countries, sugar production is one of the critical incomes and, therefore, may have few trade barriers than countries that have developed for a long while. As shown in Figure 2 below, if the price of sugar increases, there will be a minor change in the demand, which shows the inelasticity of the demand (Musa, 2019). For example, when the price is at 10 dollars and shifts to 14, it means that if the initial quantity that was consumed in the market was 88, at the new price, it would shift to 80.
The price fluctuations can be majorly visible when stock prices change daily due to market forces. This means there must be a drastic change in supply and demand. For instance, if many suppliers in the market avail sugar, the competitive advantage will make different firms start lowering the prices. Additionally, suppose the supply is limited due to the given reasons. In that case, the price shall be high, and therefore, the two factions can be used to show how to price fluctuation is affected by a change in demand and supply in the market (Sun, Xu, and Zhao, 2019). The ideas presented in this paragraph can be justified using Figure 3 below. As one can see, the curve is apparent that the unit price will increase with sufficient supply and vice versa. If more people are willing to stock the sugar than sell it, the demand rises simultaneously with the price.
On the price fluctuation, some reasons may drive the latter. As an agricultural product, sugar must be affected by the seasonality of production due to the rain patterns and the emergence of particular challenges, such as the outbreak of some components limiting the yields (Sun, Xu and Zhao, 2019). The costs are not necessarily what makes the prices go high but the organization of the factors that facilitate exports and imports. When there is impunity in the governing bodies, farmers can be manipulated to sell sugar at lower prices, and cartels resell it, later gaining extraordinary profits. These issues can result from a lack of internal coordination and bargaining power of farmers to sellers.
Impact of the Ethanol Market on Sugar
It is true to say that most countries obtain ethanol from the fermentation of sugar, which is referred to as glucose during the process. During the procedure, sugar from plant material is converted to ethanol and carbon dioxide, raising temperatures. In answering the question of the impact of the ethanol market on sugar, it is essential to know the demand and the possible supply of the item (Vaz et al., 2019). First, if there is high demand in the market for ethanol, sugar’s demand will go high, and so does the price. Secondly, if the order in the market lowers, sugar demand shall decrease hence, dropping prices (Vaz et al., 2019). However, the trends in demand for ethanol, more so in Brazil, have gone high, and it is expected that prices may take a long while before getting low in the market.
When the market for ethanol shows high demand for quantity, the prices tend to increase. The ethanol market will determine the sugar market. Therefore, as Figure 4 shows, there is direct proportionality when it comes to the consideration of the two variables. If the ethanol in the market is not doing well, it means sugar demand that uses shall also be a lower demand (Vaz et al., 2019). In that case, the curve shall go downwards, as shown in figure 5 below.
Reaction Chocolate Bars Producing Companies on Increase in Sugar Prices
Companies that produce sugar may be impacted negatively when sugar price increases. It means that the companies will be forced to increase the price to meet the operations costs. In the long-term run, the companies will adjust the price to be at a high level. However, due to competitive issues, some of the key players must lower their profit. There are two potential outcomes of this situation (Han, Chung, and Surathkal, 2016). First, the demand for chocolate might go low due to the increased prices prevailing in the market. Therefore, when the demand lowers, the companies will take a long duration before achieving the targeted returns on revenue, commonly known as ROR. Secondly, if competition makes a company lower the price of the chocolate bars, profit realization will be a challenge as there will be increased sales but minimal profits generated.
Chocolate-producing companies require sugar in quantities to make the end product. Therefore, if the price goes low in the short run, there is a possibility that the company may take some months before adjusting its financial elements in the long run. During that duration, the company must compress its resources to stabilize the business, and, in that case, the number of chocolates produced will decrease due to low demand. When demand is low, the company shall have financial challenges. Under the constraints, it will be possible to have economic disparity issues (Banton and Estevez, 2020). Other reactions will be to limit the amount of supply brought to the premises by various key suppliers.
This paper has critically discussed four concepts regarding the price, demand, and supply of sugar. Sugar in the market is an important product as it helps in the production of chocolate and ethanol. Brazil is the leading producer of sugar in most parts of the world, where it acts as the key exporter. On this note, the demand and supply of sugar will be determined by the production and the quantities required. RBV is an example of a theory that explains why the sugar price is increasing. The theory is based on the resource acquisition and unique production of an item supplied in the market.
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