Philippine economy

[New School] Hoarding is a symptom, not a cause

Julan Omir Aldover
[New School] Hoarding is a symptom, not a cause

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'The story goes that greedy or profiteering sugar traders are hoarding their sugar inventory to cause a shortage and jack up prices. This story, however, is flawed.'

Most people misunderstand hoarding and shortages. The assumption is that hoarding causes shortages, and just releasing hoarded supplies will alleviate the shortage. This is far from correct, and the actual relationship is reversed. Goods are hoarded because of an uncertainty of supply. When supply is not secured, people tend to stock up to be prepared for the future (for instance, drivers stock up on gas when a gas shortage is imminent). No reasonable seller will hoard when supply is normal, for they will just lose sales by hoarding instead of selling. Shortages cause hoarding.

This basic economic principle becomes important in today’s heated conversations regarding the country’s supply of sugar. Since there is a lack of knowledge amongst the populace of some basic economic precepts, it is easy to misattribute a market failure to some third party that is just reacting naturally to market conditions. Case in point, sugar traders are now being blamed for today’s egregiously high sugar prices. The story goes that “greedy” or “profiteering” sugar traders are hoarding their sugar inventory to cause a shortage and jack up prices. This story, however, is flawed.

As in most industries, competition in the sugar industry is competition for a greater share of the total sales of sugar in the country, referred to as market share. Traders slug with each other to sell more sugar compared to their competitors. Prices are brought down as much as possible to attract a bigger share of the market while still maintaining a profit margin. The extent to which prices are brought down is limited due to the government protecting the sugar industry from foreign competition, but no trader may jack up prices too high since it will risk losing its customers to competitors.

This brings us back to the sugar situation in the country. If the allegations are true that traders are hoarding sugar instead of selling them, that is ripe opportunity for some other trader to sell out his stock of sugar and gain a bigger market share. Because of its “greed”, such trader will definitely latch on to this opportunity to make a profit. Other traders will see this and also sell their sugar stock. Thus, there is an inherent contradiction between the terms “greedy” and “hoarding,” for no “greedy” trader will ever hoard instead of sell. There is no money in hoarding, only in selling.

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You cannot describe sugar traders as “greedy” or “profiteering” while also claiming that they purposefully hoarded their sugar stock instead of selling them at a time when they could have undercut competition and grab a bigger market share. That unmet segment of sugar demand is exploitable and profitable. Any “greedy” sugar trader would have jumped on that opportunity to provide for that unmet demand by selling their sugar stocks instead of keeping them in their warehouses.

Even if it is assumed that a sugar cartel is indeed hoarding to jack up sugar prices, that cartel members are not cheating each other by offering lower prices to take away business from their fellow cartel members, this cartel surely knows that hoarding risks exposing the protected local sugar industry to foreign competition. Causing a severe sugar shortage and rising prices intesifies calls for liberalizing the sugar industry. The increased price will also cause new budding traders to compete in the industry, weakening the power of the cartel to maintain high prices.

Under stable supply conditions, hoarding is an unprofitable action for sugar traders and a sugar cartel, if it exists. After all, they lose profit and government privileges by doing so. Pinning the blame of high sugar prices on them eludes reason. The explanation for the current sugar situation is more economically fundamental, that is, as a product of supply disruptions. Typhoon Odette and La Niña ravaged the country’s ability to produce enough sugar to meet demand, and government response to the shortfall has been lacking economic sense.

The Sugar Regulatory Administration estimates that local sugar production for 2022 will reach 1.8 million metric tons, short of the 2.03 million metric-ton demand. The Marcos administration has permitted the importation of 150,000 metric tons of sugar to meet supply, but it has delayed on this decision, and such delay has negative repercussions. It has also accepted, perhaps for political reasons, this idea that the shortage is artificial due to hoarding.

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The administration has also applied political pressure on big stores to cut sugar prices artificially, pushing prices down to P70 per kilogram. Superficially, the price drop will seem like a good thing. This rests on another economic misconception: that prices are the problem instead of the signal for the underlying problem. But you don’t put out a building on fire by turning off the fire alarm. You have to actually put out the fire to solve the problem.

Aside from the artificial price cut, the government has also limited the amount of sugar that consumers may purchase. All of this government tinkering in the economy will not lead to any good economic results. – Rappler.com

Julan Omir Aldover is a 4th year Political Science student from Leyte Normal University.

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