How a good growing season in Australia made New Zealand avocado growers worse off

RNZ reported earlier this week:

It had been tough going, New Zealand Avocado chief executive Brad Siebert said, but the new season which is just getting started looks good...

The glut of avocados last season was in part because Australia, a key market for NZ exports, had grown more of its own.

"Over the last decade Australia has taken around 85 percent of our exports but in the last three years that's dropped below 50 percent."...

Many growers have had two seasons in a row without any profit, he said.

"It's been really tough so there is a bit riding on this season."

According to New Zealand Avocado, Australia is New Zealand's largest export market for avocados, taking about 80 percent of our exports. A good growing season for avocados in Australia will therefore make life difficult for New Zealand avocado growers.

To see why, first consider the Australian avocado market, as shown in the diagram below. The domestic supply of avocados in Australia is S0, and demand is D. If there was no trade, the market would operate in equilibrium, where supply meets demand. The equilibrium quantity would be Q0, and the equilibrium price would be PD. However, Australia is an importer of avocados, which means that the domestic equilibrium price in Australia is higher than the world price (PW) - Australia is less efficient at producing avocados than the rest of the world, because they do so at a higher price than the world market. Since Australia can trade for avocados on the world market, and Australian consumers have the choice, they would not pay more than PW for avocados. At the world price PW, the domestic suppliers of avocados are willing to supply just QS avocados. However, domestic consumers demand Q1 avocados. The difference between QD and QS is the quantity of avocados imported (equal to M0). So, the effective supply of avocados to the Australian market is shown by the red line, where the domestic sellers sell up to QS avocados, and then the rest of the supply comes from the world market at the price of PW. 

Now consider what happens when there is a good growing season in Australia. This increases the domestic supply of avocados from S0 to S1. Now, at the price PW, Australian avocado growers are willing to supply Q0 avocados [*], while domestic consumers still demand QD avocados. The difference between QD and Q0 is the quantity of avocados imported now (equal to M1, and smaller than M0). The quantity of avocados imported into Australia declines.

Obviously, since New Zealand is a major contributor to Australian imports of avocados, this will make New Zealand avocado growers worse off, at least initially. To see why, consumer the New Zealand avocado market, shown in the diagram below. In this case, New Zealand is an exporting country, so the world price (PW) is higher than the domestic price (PA) - New Zealand is more efficient at producing avocados than the rest of the world, because they can do so at a lower price than the world market. Avocado growers in New Zealand would prefer to sell avocados to the world market for PW rather than locally at the price of PA. So, New Zealand consumers must also pay the world price for avocados. At that price, the domestic suppliers of avocados are willing to supply QSA avocados, but domestic consumers are only willing to buy QDA avocados. The difference between QSA and QDA is the quantity of avocados exported (equal to XA). The effective demand for New Zealand avocados, including exports, is shown by the blue line, where the domestic consumers buy up to QDA, and then the rest of the demand comes from the world market at the price of PW.

Now consider what happens when Australia reduces imports of avocados. In the short run, New Zealand can't easily divert those exports to other destinations in the world market. So, those avocados would now be supplied to the domestic market instead. So, instead of XA exports, there can only be XB exports. [**] If domestic consumers only bought QDA avocados, and growers could only export XB avocados, then not all of the growers' avocados are being sold. The growers produced QSA avocados, but are only able to sell QA (which is QDA plus XB). To sell those leftover avocados, the growers must go back to the New Zealand market. This is shown by the dotted blue line DC (incl. exports). Equilibrium in this market now occurs where that new demand curve meets the supply curve, which is at the quantity QC. The domestic price of avocados would increase to PC.

Now, to show that the domestic producers are made worse off, we need to consider the areas of economic welfare. Before the decrease in exports, the consumer surplus (the gains to domestic avocado consumers) is the area ABPW, the producer surplus (the gains to domestic avocado growers) is the area PWCE), and total welfare (the sum of consumer surplus and producer surplus, or the gains to society overall) would be the area ABCE. After the decrease in exports, the consumer surplus increases to the area AFPC. Domestic consumers are made better off. The producer surplus decreases to the areas PCGE and HJGF combined [***]. Domestic growers are made worse off. Total welfare decreases to the areas AFGE and HJGF combined. Society as a whole is worse off. However, the key point of relevance to this post is that the growers are worse off.

Now, in the long run, New Zealand growers might be able to find other export markets, so that when Australian demand for imported avocados decreases, New Zealand isn't as badly affected. As the RNZ article notes:

Siebert said the industry had worked hard to diversify markets and is exporting to more countries this season than ever before.

"We're going back into Canada and North America, we haven't exported there in a number of years, we're also going into Asia.

That way at least, less avocados would need to be dumped on the domestic market in future, making the avocado growers better off (but, sadly, New Zealand avocado consumers would be made worse off). 

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[*] For simplicity in the diagram, I've assumed that the quantity supplied at the world price after the supply increase is exactly equal to Q0. It wouldn't be exactly that, but it makes the diagram a bit simpler.

[**] Again, I've assumed that the quantity of New Zealand exports is reduced by half. This just makes the diagram a bit simpler.

[***] This requires a bit of explanation. The sales of QE avocados to the domestic market generates producer surplus equal to the area PCFKE. Where does QE come from? It is the initial sales to domestic consumers of QDA, plus the extra sales from QA to QC (shifted over to the left so that the domestic sales are merged together - notice this just moves the two parts of the domestic demand curve, D and DC, together). Then the sales of export avocados (form QE to QC) generates additional producer surplus equal to the area HJGK. Combining those two areas gives PCGE + HJGF.