Research Paper on Quinoa in Peru and Bolivia

Introduction

Bolivia and Peru are the leading producers of Quinoa in the world (Paz, Carpio, Malaga, & Wang, 2018). The history of quinoa production in the two countries can be traced back to seven hundred years ago when the crop was considered a sacred grain by the indigenous Inca community (Parker-Gibson, 2015). However, in the 1970's the locals, through the effects of the availability of cheap imported products, lost interest in the grain, in turn, branding it as a lower-class product (Capodistrias, 2013). Ten years later, the economic view of quinoa began shifting as the economists of the time started viewing quinoa as an opportunity of supporting economic growth and alleviating poverty (Capodistrias, 2013). Producers began reorganizing themselves, establishing organic standards and began using modernized production methods, which led to an increase in the production of quinoa (Carimentrand, 2010).

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Events Leading to the Rise and Fall of Quinoa Prices

Quinoa production levels, due to the reorganization of its producers and the use of modern technologies, increased sevenfold between the year 2005 and 2013 (Capodistrias, 2013). Similarly, the price of quinoa in Peru and Bolivia increased by 600% between 2005 and 2013 (McDonnell, 2018). Before 2005, quinoa was virtually unknown beyond the Andean areas (McDonnell, 2018).). However, quinoa took the market by surprised as it changed into a staple food in almost every dinner table in the US, Europe, and Asia.

Supply and Demand Theory

The rise of the prices of quinoa can be viewed through the laws of supply and demand. The law states that the price of goods and services are inversely related to supply and demand (Balasko, 2011). In this case, an increase in demand, such that demand becomes higher than the supply rates tend to increase the prices of goods and services, hence increasing the equilibrium prices in the market as represented in the figure below

Figure 1: Effects of increasing demand on the equilibrium price

Quinoa gained international attention, with major international news outlets running stories about the tremendous nutritious values that the food offers (McDonell, 2018). In turn, the global demand for the product became higher than the quantity that the local producers were producing. According to the demand-pull forces, the market needed to maintain equilibrium between demand and supply. Consequently, the buyers lost their bargaining powers, making it possible for the producers to charge higher prices (Balasko, 2011). Irrespective of the high prices, the demands for the product was still high, leading to a continuous increase in the prices of quinoa from 2005 to 2013. A diagram showing the increasing trend in the prices of quinoa in Bolivia is shown below for the FOB year between 1990 and 2010

Figure 2: Quinoa Prices between 1990 and 2010

Consequently, the increased demand led to the increase in the value of exports of quinoa in Bolivia as shown in the figure below from 1990 to 2010

Figure 3: Quinoa Exports (Volume) between 1990 and 2010

One of the reasons that led to the high demand of the quinoa is a change in consumer tastes and preferences. The shift in consumer preference was evident in industrialized countries, whereby consumers preferred organic products, as well as grains with no gluten (Gamboa, Schuster, Schrevens & Maertens, 2017). Consequently, there was excess demand for quinoa since it has no gluten. As a result, the buyers became price takers, whereas the sellers became the price setters (Balasko, 2011). The price increase attracted several players into the market, thereby further increasing the production level of quinoa (Gamboa et al., 2017). However, the high demand made farmers sell all their quinoa products, instead buying the substitutes like noodles and rice using the money earned from quinoa sales (NYT, 2011).

The Decline in Prices

The prices of quinoa reached its peak in 2013 as it sold at $4 per pound, as opposed to $0.25 per pound in 2000 (Collyns, 2013). The increase in the prices attracted several players into the market, as farmers benefitted from the proceeds gained from the sales of quinoa. However, in 2013, the prices of quinoa fell back to its $0.6 per pound. Factors which would have led to the fall in prices could be analyzed in economic perspective. First, the attractive price made several farmers stop producing other crops and concentrate on the production of quinoa in both Peru and Bolivia. This resulted in an increase in the national-level production of quinoa in Peru from 44,046 tons to 114,342 tons over the 2013-2014 period (AgroVision, 2014).

In 2013, The United Nations declared the year as the International Year of Quinoa by launching a yearlong series of events in more than 15 nations with the intention of promoting the production and consumption of quinoa globally (Paz et al., 2018). This further led to the increase in the production of quinoa, whose commercial production began in India, Italy and China (ITC, 2016). The law of supply and demand further comes into action.

The increase in demand led to a rise in prices. However, according to economic aggregates, the long-run effects of continually increasing prices attracts potential suppliers to enter the market to benefit from the high profits made (Leon, 2013). This was the case with the increase in commercial production of quinoa in both Bolivia, Peru and other countries that never produced quinoa before. The effect is the increase in supply from S1 to S2 in the following figure.

Figure 4: Effects of constant increase in prices of Quinoa leading to increased supply

If there is an increase in supply while the demand remains the same, prices tend to fall to reach a lower price equilibrium and higher equilibrium quantity. As shown in the following diagram

Figure 5: Demand and Supply Equilibrium

From the above diagram, there is an increase in demand for quinoa. However, the rise in demand has led to increasing supply. In the long-run (2013), the rise in supply had become higher than the increase in demand, thereby making the prices of quinoa to fall from P to the new P1 and the new equilibrium quantity to fall from E to E1.

Similarly, the new quinoa producers who were attracted to the market were entirely different from the small-scale highland farmers (Bellemare et al. 2018). Most of the new producers were market-oriented farmers who accessed capital and technology, in turn lowering their production costs as well as increasing their probabilities of accessing risky new markets (Leon, 2013). Lower costs of production is an essential factor that positively affects supply in the market. In turn, the quantity supplied in the market increases. According to the price theory, an increase in the quantity supplied has an effective result of decreasing the price charged in the market. Similarly, the low costs of supply further increase the producers surplus as shown below.

Figure 6: Price and Quantity

Irrespective of the worldwide popularity rise of quinoa, the production of quinoa in 2013 had become more than the increase in demand, thereby leading to the inevitable fall in the prices (ITC, 2016).

Economic Welfare of Local Consumers and Producers of Quinoa in 2013

2013 was the year in which the prices of quinoa were at its peak (McDonnel, 2018). Several producers in the nation enjoyed the high prices, with the international demand getting at its peak, making the local Bolivian and Peru producers to produce more of quinoa and earn more from the production of the crop (Paz et al., 2018). The effect of the 2013 sudden rise in prices can be analyzed from an economic welfare point of view. Economic welfare is a broad economic term, which refers to how good a society is (Bellemare et al., 2018). Notably, economic welfare is measured in terms of real income. Factors that are mainly considered in estimating economic well-being of a society are the real income, employment levels, job satisfaction, cost of living, education, leisure time, housing among other factors (Yoshida, 2010).

In the agricultural and development economics, it is expected for a positive welfare impact to existing for net sellers and negative welfare impacts to be experienced by net buyers (Bellemare et al., 2018). This is according to Deaton's theoretical framework for net benefit ratio for the increase of the price of a good on the household welfare (Bellemare et al., 2018). According to the theoretical framework, the rise or fall of a household's economic well-being in response to the increase in prices of a good majorly depend on whether the household is a net seller or a net buyer. In this regard, a net buyer is a household which consumes more than it produces, whereas a net seller is a household which produces more than what it consumes. Consequently, the theory suggests that the net buyer's economic welfare decreases when prices increase, whereas a net seller's economic health rises with an increase in prices of a good.

The impacts of 2013 rise can be viewed by reviewing the works of Bellemare, Fajardo-Gonzalez, and Gitter (2018) as well as the International Trade Center (ITC) (2016) report. Bellemare et al., (2013) used annual consumption (which is one of the proxies used in measuring welfare) level of quinoa-producing households in Peru to test if the producer households recorded faster consumption growth with the increase in prices. Their results showed that between 2004 and 2013, the consumption rates were similar for both producers and non-producers in Peru. However, in 2013, Bellemare et al. (2018)'s results showed that the consumption rate of quinoa for both the producer and consumer households increased with the increase in prices. According to the ICT (2016) report and Bellemare et al. (2018), the population of quinoa producing households in Peru was 3.5% of the total population in Peru and less than 5% in Bolivia.

In the case of Peru, the findings showed that only less than 0.5% of quinoa-producing households buy quinoa since they use some percentage for their consumption (Bellemare et al., 2018). In this case, quinoa producers in Bolivia and Peru are either autarkic or are net sellers. According to Bellemare et al. (2018) and the ITC (2016) report, the percentage of quinoa-producing households selling some of their production increased by 200% from 2010 to 2011, due to the increase in the real price more than threefold (ITC, 2016). The actual revenue for quinoa-producing households increased by five-fold in 2013 (ITC, 2016). In this case, the increase in real revenue is a measure of economic welfare, which indicates that the well-being of quinoa-producing households increased due to the rise in the prices of quinoa in 2013.

According to the study by Bellemare et al. (2018), quinoa consumers recorded a 0.7% increase in their economic welfare for every 10% price increase in 2013. This was measured in terms of the general equilibrium effect of the quinoa price increase. Specifically, as the price increase, the real income of farmers, both in Bolivia and Peru, increased.

The quinoa producers use their excess income to boost the other economic sectors where they spend their incomes. As a result, the entire economy is boosted, making both the local producers and consumers to have a resulting economic welfare increase. Besides, in 2013, the level of exports from both Bolivia and Peru increased, with more than 90% of Bolivian-produced quinoa being exported (ITC, 2016). The resulting economic effects of the quinoa price increase in Peru is shown in the following diagram according to ITC report (2016), in which the economic welfare is compared bet...