Avocado Prices Are High but a Glut Will Save Guacamole Lovers
(Bloomberg) -- The much-Instagrammed avocado is getting more exclusive by the day. And soon enough, more affordable.
Farmers in both California and Mexico have collected meager harvests this year, precisely as demand surges for that fancy green toast. In California, where growers pick from February through August, the trees were having an off year. South of the border, a dry growing season crimped the fruit. A renegotiation of the North American Free Trade Agreement may well make it worse. Avocado prices are hovering at record highs.
Demand has surged and remains high. Americans ate 1.9 billion of the little green pods last year, up 57 percent from five years ago, according to the Hass Avocado Board, an industry trade group. Brooklyn now has an “avocado bar,” California growers are pushing avocado pie, and Americans are paying close to $1 million a month on avocado toast at restaurants that use Square, the credit-card processor said.
Yet, for all the talk of the American avocado addiction, the nation appears to be in control of its craving.
We crunched five years of retail data from the Hass people, comparing changes in price to changes in purchasing. The correlation, it turns out, is almost exactly inverse (-.91 to be exact). When prices go up, Americans, collectively, buy fewer avocados, and vice-versa. Nor are avocados keeping us from buying homes, as some suggest. If anything, we’re behaving a little too rationally—all those healthy fats for just a couple of bucks!
There’s a good reason this price-demand relationship is so tidy. Nobody needs an avocado. Demand for such staples as eggs, milk, wheat and even coffee is less elastic than that for avocados because those things are considered household necessities, Marc Bellemare, an economist at the University of Minnesota, said. “I don’t want to say that avocados are a luxury good … but you can kind of think of them as such,” Bellemare said.
At the same time, if you do want an avocado, there’s no real substitute for it, so the price is unlikely to be affected by price swings in similar foods. Demand for peanuts may surge when almonds get expensive, as nut eaters shift their spending. The same dynamic holds for a lot of produce pairs, such as plums and pears, and cherries and berries. The avocado is isolated, its own little leathery pod of commerce.
In short, as avocado prices surge, the kids are going to be all right. They’ll just order acai bowls and treat their toast with artisanal honey. They’ll still figure out a way to buy houses and big SUVs. The only people left eating avocados will be the flush gourmands splurging on the guacamole at Chipotle like finance bros in bonus season. Avocado insanity has never been a problem. Avocado inequality is about to be.
But here’s another great thing about the avoconomy: It functions on a long growth cycle, which eventually constrains prices.
When a new tree is planted, it won’t bear much fruit until its third year. At the moment, that stings consumers. Supply can’t catch up with demand in a manner of months, as it can with a product such as the tomato. All the while, though, farmers are watching the price, ready to plant where they can and cash in. This fall’s expensive avocados may trigger a glut in two or three years. That’s what happened with quinoa in 2015, according to Bellemare. After doubling to record highs, prices for the trendy grain swooned.
“When you see this kind of crazy demand, there are a lot of people sitting on the margins that decide to get in and plant,” he said. “Eventually, all those extra-normal profits get competed away.”
And once the supply is there, it’s there for quite a while. Since avocado trees take so long to grow and become productive, farmers are reluctant to shift strategy to a different crop, said David Widmar, a principal at Agricultural Economic Insights. “It’s just really difficult to justify removing the trees … as the large, fixed expense of planting is already sunk,” he said.
In that sense, avocados are a little like houses, after all.