Author: Rendell de Kort, Economist
Local shoppers expressed disbelief at finding that the price of eggs has tripled in 3 weeks after corona virus panic shopping in the United States lead to a similar steep price increase in local supermarkets in Aruba.
The Government of Aruba quickly reacted by reminding that it imposes price controls on basic good, including on eggs. However, while in normal times it issued a maximum price for eggs, it now switched to communicating a maximum margin on top of the imported price. I would argue that this case of egg price increase offers a good opportunity to learn about mechanisms at play and shows the necessity of good foresight for small islands to be resilient to import price shocks.
Small islands like Aruba have not exactly focused on food security as an economic strategy before. While there are a few local egg farms, the reality is that in recent times Aruba has imported most of its eggs from abroad. With a booming tourism industry, its hard to allocate productive capacity to the production of eggs when there are higher paying employment options in the tourism industry.
Why devote the energy to produce eggs locally when you can earn a decent wage elsewhere and save yourself the trouble by importing eggs cheaply from the United States? That’s the kind of argument, which in Economics is formalized by the Ricardian theory of Comparative Advantage, that underpins much of the free-trade dynamics that small islands have embraced.
A familiar reaction since ancient times is for governments to resort to imposing price controls. Despite the frequent use of price controls, however, and despite their appeal, economists are generally opposed to them for their potential to distort markets, causing shortages of supply and alienating suppliers. To make it concrete, its easy to blame the supermarket for expensive eggs but its considerations can be quite rational. If it purchases eggs at a higher price, it has little option but to pass it on to consumers. If its impeded in doing so, there is no point in selling eggs and consumers face an empty shelve.
It’s telling that in Aruba, the authorities adapted the price control from imposing a maximum price on the import of eggs to a maximum margin on top of the price of imported eggs. This signals the realization that small islands dependent on imports have no control over the prices of imported goods, especially not when there are global shortages. Yet a maximum price still applies on eggs that are locally produced as well as other imported products in the basket of goods tracked by the department of economic affairs.
Of course, apart from eggs, much of the content of the basket of goods is also imported and it’s quite plausible that price increases due to global supply shortages will affect these as well.
For the local supply this basically creates an incentive to push the production to the informal sector while for the other imports it could create scarcity. The whole exercise of price controls feels like a well-intended initiative that works as well as pushing on a string. To make matters worse: It’s not the only price pressure on the price of goods in supermarket shelves. The price of transportation and an expensive dollar could further aggravate matters in ways that go beyond the scope of this article.
What about local egg production?
Local egg producers have an incentive to increase their supply of eggs. This means raising more chickens, which would take a couple of months to lead to an increase in egg output. There are some added complications with scaling local supply. Local egg producers usually purchase their chicks from the United States. The recently hatched chicks come vaccinated to prevent common transferable diseases and are flown in from the United States by air. Mind you the islands usually have excellent airlift that can accommodate these shipments, but with no commercials flights for the foreseeable future it might not be commercially viable for a private sector party to arrange a shipment of chicks. Besides, hatcheries in the U.S. are reported to be swamped with orders as the corona pandemic heightened the demand for their services. Here again supply seems to be struggling to keep up with demand.
It’s not that local producers can’t hatch chicks, but to do so requires incubation equipment and vaccination for them is not available locally. So, capacity to do so would be limited, and the risk of disease would be larger.
Given the unusual circumstances we are in, it is also not out of the question that increased import prices would also affect the cost or availability of chicken feed. Commercial egg producers that breed thousands of chickens at any given point would be hard-pressed to find alternative ways of keeping large volumes of chickens alive and producing should issues arise in such a scenario.
What to do
In my opinion the most viable alternative is for households to take matter into their own hands and keep a few chickens themselves for personal consumption. This also goes for food consumption by gardening. From a production standpoint decentralized production might be more viable to avoid shortages in chicken feed (it’s easier for households to grow or reserve small portions of feed) and mitigating the risk of diseases affecting the chickens. Not to mention it empowers households to put food on the table and have the ability to support each other. But this requires households to act fast and could require the government to step in to facilitate an air shipment of chicks to be flown in if the private sector alone can not get this done in the near future.
But if you're feeling cooped up at home and the idea of having food in your backyard appeals to you, consider growing fruits and vegetables as well. Like the so called “guerrilla gardener’ Ron Finly famously declared during his TED-talk: “Growing food is like printing your own money”.
With the prospect of more food products raising in price, households should find this an increasingly interesting proposition.
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