Avocado Economics

Avocados were going for 80 cents each, or 3 for $4. That might be unremarkable, but rewind 5 years and they were more like $2-$3 each. It was now cheaper to have avocado on toast than tomato. Big woop, sure, but something must have changed, and as it turns out there is a glut in supply, driving down prices. Good for consumers, not necessarily for avocado growers.

This article was originally published by Byte Size Economics.

You also need to understand a little bit of the culture around avocados. In 2017, Aussie Tim Gurner notoriously advised millennials to stop eating avocado on toast at ‘$22 a pop’ to save money to buy a house. Historically in New Zealand avocados have been an affordable luxury. So the statement had some impact. The statement certainly wouldn’t have had the same impact if Tim Gurner was talking about tomato on toast – which should now be cheaper.

Admittedly I don’t fully understand the context within which Tim Gurner made that statement – but it has become a cultural lexicon.

It’s ironic in the years since that the price of avocados has more than halved, becoming much more affordable as a standard part of our diets, while house prices have continued to explode. Millennials can afford more avocado on toast than in 2017, but much less house.

Sustained growth in capacity is a prerequisite for lower prices and broader access to goods and services, all else equal

The key learning in this article regarding growth in capacity set out above is super simple, but not always understood and applied.

Granted that my avocado example is a bit of a stretch. It’s avocado season meaning avos are cheaper. Also yesterday they were 4 for $5, which is a bit of an increase. But there is some truth to it.

The supply of avocados has been ramping up in recent years both in New Zealand and Australia. The amount of land used for horticultural purposes (including avocados) has grown considerably. This increase creates greater volume and translates into more avocados in stores.

Economics 101 tells us that as supply increases prices fall. This isn’t always true but is a useful starting point for further consideration.

Capacity development is a useful starting point for policy aimed at doing “more of a good thing”

Our collective experience and newfound avocado riches are a case study of how wellbeing can improve. Imagine that the Government decided to subsidize avocados to the tune of $1 billion in 2017. Putting money in the pockets of hard-working families to buy more avocados.

Would we expect the total avocado price (including the subsidy) to reduce? Probably not, in fact, it would likely go up as demand for avocados increased. Intuitively it is the new supply, developed over the course of several years that improved avocado affordability, not throwing money at the problem.

Creamy green fruit aside, it’s surprising how often policymakers throw money at issues without regard for notions of supply and capacity development, and are then surprised when they have nothing to show. Two recent examples that stand out:

1. The 2019 Labour government’s $1.9 billion spend on mental health services: Labour proposed an additional investment in mental health services. Effectively throwing money at a system which has limited flexible capacity in the short term. Who was going to provide this $1.9 billion in services? Behold and lo, Te Huringa, a 2022 report on mental health service levels, found no increase in access to services over 5 years.

2. The 2017 Labour government’s KiwiBuild programme: KiwiBuild promised an extra 100,000 houses over 10 years. 5-years later, there are about 1,300, with the target scrapped in Sept 2019. Were there ever numerous builders sitting idle to develop these 100,000 homes? It’s also become apparent in recent months that rising interest rates (which controls demand for houses by raising the rates on mortgages) was also required to help make housing more affordable.

These examples are easy targets, but this stuff is actually intuitive. Markets shift slowly at first and require more capacity, which could mean technology, for more output. It would have been more sensible to develop policy to build capacity first for potential inputs e.g. more workforce or materials. This is more reasonable, but also a prerequisite to a net increase in output anyway.

Markets can work magic, but not without the right spells. Avo great day!