Your matcha fix is going to cost you more

The New Zealand Herald reported last month:

At a minimalist Los Angeles matcha bar, powdered Japanese tea is prepared with precision, despite a global shortage driven by the bright green drink’s social media stardom.

Of the 25 types of matcha on the menu at Kettl Tea, which opened on Hollywood Boulevard this year, all but four were out of stock, the shop’s founder Zach Mangan told AFP.

“One of the things we struggle with is telling customers that, unfortunately, we don’t have” what they want, he said.

With its deep grassy aroma, intense colour and pick-me-up effects, the popularity of matcha “has grown just exponentially over the last decade, but much more so in the last two to three years”, the 40-year-old explained.

It is now “a cultural touchpoint in the Western world” - found everywhere from ice cream flavour boards to Starbucks.

This has caused matcha’s market to nearly double over a year, Mangan said.

“No matter what we try, there’s just not more to buy.”

Thousands of kilometres away in Sayama, northwest of Tokyo, Masahiro Okutomi - the 15th generation to run his family’s tea business - is overwhelmed by demand.

“I had to put on our website that we are not accepting any more matcha orders,” he said.

Producing the powder is an intensive process: the leaves, called “tencha”, are shaded for several weeks before harvest, to concentrate the taste and nutrients.

They are then carefully deveined by hand, dried and finely ground in a machine...

“It takes years of training” to make matcha properly, Okutomi said. “It’s a long-term endeavour requiring equipment, labour, and investment.”

What has happened in the market for matcha is explained in the diagram below. The market started at equilibrium, where the supply curve S0 met the demand curve D0. The equilibrium price of matcha was P0, and the quantity of matcha traded was Q0. Demand increases to D1. If prices don't adjust and remain at the original price of P0, then the quantity of matcha supplied remains at Q0, but the quantity of matcha demanded increases to QD. There will be a shortage of matcha.

However, when there is a shortage the market will eventually adjust, and the price will increase to the new equilibrium price of P1 (where the supply curve S0 meets the new demand curve D1), while the quantity of matcha traded increases to Q1. But notice that, even if the market adjusts to a new equilibrium, the quantity of matcha increases only slightly. That's because the supply curve is very inelastic (very steep). That's because the matcha producers cannot adjust quickly to the change in price by producing more - it takes a lot of time to add productive capacity in matcha.

Finally, the price of matcha drinks is also going to increase. To see why, consider the market for matcha drinks, shown below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of matcha drinks traded of Q0. The cost of matcha increases, so tea sellers face higher costs of production. This decreases the supply of matcha drinks to S1. This increases the equilibrium price of matcha drinks to P1, and reduces the quantity of matcha drinks traded to Q1.

Be prepared to pay more for your favourite matcha drinks.