Business Studies Paper on How Suppliers Avoid Overstocking Their Products

In a market scenario, most warehouses constantly stock basic products, such as food, yet it is almost certain that the commodities will be consumed without the risk of undersupply or oversupply. There seems to be an unwritten balance between the rate at which goods are supplied to the market and what is actually consumed by buyers. As such, the question of how suppliers manage to maintain that balance without necessarily over-stocking or under-stocking products needs to be addressed. Market equilibrium is a major determinant in this case. Market equilibrium can best be defined as a situation whereby there is a balance between market supply and demand. For instance, if sellers of sugar are willing to sell 1000 units at $5 per unit and buyers are willing to buy the units at the given price, then there will be market equilibrium or balance. When there is market balance, prices of commodities tend to be rigid. Thus, suppliers can meet the demand of the market while considering that consumers will constantly be demanding the products that they can afford to buy.

There also exists market disequilibrium that can occur for some time before a balance is attained in a market. Using rice as a point of reference, certain determinants, both for the suppliers and consumers, can affect market equilibrium. In this regard, suppliers can be affected by factors such as climate change, production cost, and technology. Changes in climate can cause drought, which, in turn, leads to rice shortage. On the other hand, the cost of producing rice can be affected by the cost of seeds, fertilizer, and labor. The secondary factors of production can increase the production cost, which, in turn, stretches market price. Similarly, technology can be intertwined with automation and the use of advanced machinery, which lowers production costs. However, irrespective of the mentioned factors, changes in equilibrium only occur after unspecified time, and thereafter, a new equilibrium shall be attained. Therefore, irrespective of whether there is a surplus or shortage in the market, there will be a subsequent adjustment of the price, which creates a new equilibrium. Hence, this explains why suppliers can identify the most appropriate quantities of products to supply without over-stocking or under-stocking. Therefore, market forces dictate the equilibrium position for a given commodity.

Task B: The Fluctuation of Indonesian Coconut Oil

            Fluctuations in prices are a multifaceted challenge associated with various factors that, when combined, can lead to dangerous outcomes. Although price increases are beneficial for manufacturers and producers of commodities, fluctuations pose a high risk of loss, especially for investors. Agricultural products are especially prone to price fluctuations. Market fundamentals, such as demand, supply, and other external factors, are major causes of price fluctuations of the Indonesian Coconut Oil.

The Health Challenge of Coconut Oil

            The demand of the product fell because of health concerns that have been attributed to it. Between 2015 and 2017, Indonesian Coconut Oil had been preferred in kitchens and factories; thus, it has had a high demand, which explains the stable rise in the price of the commodity. However, at the end of 2017, the American Heart Organization and other healthcare bodies challenged the health benefits of coconut oil. According to the American Heart Organization, the oil contributes to cardiovascular disease because it has saturated fats, which cause obstruction and inflammation of the arterial wall (American Heart Association, 2017). Furthermore, an independent report from Brierley Horton, a nutrition director for World Health Organization, suggests that apart from the saturated fats, the low-density lipoproteins, commonly known as bad cholesterol, contained in the product, cause heart failure (O’ Holohan, 2017). Horton also suggests alternatives to coconut oil, such as canola oil, as the best replacements for the commodity. The publications by the health bodies led to a sharp decrease in the price of the commodity. The situation was worsened by the move by health bodies to name healthy alternatives at the expense of the coconut oil. Consequently, coconut oil became a less attractive ingredient in home use, beauty products, and biodiesel. Thus, there has been an approximate 58% decline from its peak of $1869 in 2017. The decline was the worst in as many years, and there are fears that the price of coconut oil will plunge in the coming years as home cooks abandon the product for alternatives and industries discern cheaper replacements.

Fall in Price of Substitute Vegetable Oil

            The fall in the price of substitute vegetable oils has driven many firms to shift from coconut oil as a raw material for biodiesel. Initially, industrial coconut oil was extracted with chemicals and used in biodiesel products (Sugiyanto, 2018). However, vegetable oils have overtaken the Indonesian coconut oil. Indeed, they are now mostly preferred by most manufacturers because of the low-cost implications of the substitutes. The trend has led to the price of the Indonesian coconut oil falling by a big margin to compete with alternative products. It has been predicted that coconut oil may never recover to its initial prices as the cost of the substitutes continue to fall with time (O’ Holohan, 2017). There seems to be inadequacy in the number of available options to initiate the recovery of the coconut oil’s prices.

Low Consumption in the Overseas Market

Another reason for the fall of the price of coconut oil is America and the European markets reducing their purchase of the product. America had been one of the largest markets for coconut oil for a long time. According to the United States data, in 2018, America imported 562,000 tons of Indonesian Coconut oil (United States, 2018). However, in 2019, there was a significant drop in purchases by 125,000 tons (Roehner, 2018). The United States Department of Agriculture has confirmed that coconut oil is not widely used as it once was in the United States (United States, 2018). There has been a similar drop in the European markets, with Germany, Italy, and Spain recording an approximate 30 percent reduction in industrial consumption of the Indonesian Coconut Oil (Commonwealth Economic Committee. 2017). Indeed, the reduced demand for the product led to the decline of its price. There is no clear indication that the trend of the overseas market will change, creating uncertainty on the future prices of the Indonesian coconut oil.

Change of Taste in Beauty Products

Customer feedback is a major determinant in a competitive market, and there have been several complaints from customers on the suitability of the Indonesian coconut oil. According to reports by the United Coconut Association, there have been numerous complaints about the workability of the product (United Coconut Association, 2017). An Indonesian Coconut Oil user who has been using the product as an eye make-up moisturizer, hair food, and body moisturizer recently reported that her hair suddenly “began to break out everywhere” (Labys & Maizels, 2018). The negative impression painted by once-loyal customers is a major deterrent for the competitiveness of the commodity. Usually, customers resort to alternative products when the item of their choice stops working for them. Losing clients of coconut oil led to the reduction of its competitiveness, thus a drop in its prices.

Declining Local Consumption

            Local communities reduced their intake of coconut oil. Southeast Asia was a major consumer of the Indonesian Coconut Oil between 2015 and 2017 and at least 10 million people were regular consumers of the product in the mentioned years; this explains the constant rise in the price of the commodity within the period (Roehner, 2018). However, as of 2019, there was a drop in local consumption by 20 percent (Roehner, 2018). The mentioned trend led to a drop in the cost of the product to try to spark an increase in sales. The paradigm shift can be associated with the increase in the number of local alternatives, such as olive oil. As such, the price of coconut is steadily declining, owing to the decreasing local consumption and the threatening olive oil market.

Indonesian Coconut Oil and Trade Disputes

Trade disputes have also contributed to the fluctuation of prices. Before the end of 2017, the Indonesian Coconut Oil had been flourishing. However, towards the end of 2017, the European authorities began to push for the coconut oil ban not only in the food industry but also in biofuels (Labys & Maizels, 2018). The situation further escalated when India raised the import duty of the product amid trade wars between China and the United States. The mentioned move has made the prices of coconut oil to continue to be unstable with time. Trade disputes can be devastating and have a negative influence on the demand and supply of a product. As such, there is no guarantee that the coconut oil prices will be better, given the continual escalation of disputes in the global market.

Farming Methods and Technology

Indonesia’s weak technological muscle and the advent of cutting-edge farming advancements around the world have lowered the Indonesian Coconut Oil price. Countries, such as the Philippines and Vietnam, have been at the forefront of embracing technology in their farming processes, thus outpacing the old-fashioned Indonesia. Notably, in 2019, there was a massive drop in the price of Indonesian Coconut Oil due to the low quality. According to a report by the United Coconut Association (2017), Indonesian farmers are lurking behind in technology because of the weaker farming financial institutions that are supposed to bridge the gap with other nations in terms of offering financial assistance to enable farmers to get the most advanced equipment. The association further points out that a massive 98.4% of the Indonesian farmers are using their limited capital to purchase fertilizer, pesticides, and farming equipment, which is inadequate, inefficient, and not focused on quality. Thus, most of the other coconut-producing nations are gaining the upper hand as they invest in technology not only in the production of equipment but also on other farming inputs. Most of the farmers in Indonesia aim at reducing the use of fertilizer and are prone to old-fashioned farming equipment; this is because of the worrying financial status of most farmers, which has a negative implication on the quality of coconuts.

In contrast to the insignificant number of financially capable farmers, those with a questionable financial position have to get loans at high-interest rates; thus, most of them have opted for alternative means. Thus, there is a clear indication that Indonesia’s comparative advantage in terms of quality coconut oil production is still at its low. Indonesia’s woes have continued as the country’s workforce is becoming less skilled as most farmers shift to alternatives. There is a need for the active involvement of the government to strengthen farmers if there is any hope of gaining control in coconut oil production.

Conclusion

            Price fluctuations are a common trend, especially for agricultural products. The Indonesian Coconut Oil saw both an increase and a decrease in price between 2015 and 2019. Several factors have led to the mentioned trend. These include health challenges, fall in the price of substitute vegetable oil, low consumption in the overseas market, change in taste of beauty products, declining local consumption, and trade disputes. Health organizations are partly responsible for the reduction in the price of the product since they have advised the public that the product is not healthy. Moreover, vegetable oil, which is a suitable substitute for coconut oil in industries, has discouraged the use of the product since 2017, hence promoted the drop in its price. The steep decrease in consumption levels in overseas markets has also reduced the price of coconut oil. Market forces and externalities contribute significantly to price patterns of commodities not only in the local market but also in international markets.

 

 

Reference List

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