May seem like a simple question, but I think it’s actually more complex.
Lets use a tomato as an example as I have real world insight on the prices.
You have the chain of distribution as:
Grower
Broker (optional)
Truckload Wholesaler (optional)
Case wholesaler
Restaurant/store
End User
In the summer I was buying Roma tomatos for as low as $5/case
Now they are around $40
My question is, who actually sets these price fluctuations?
The grower is usually in Mexico so seemingly they have a growing season that lasts all year, but I could be wrong.
Broker is in charge of connecting the grower with distributors, so he may be the one te set prices.
Truckload wholesaler, what would be the rational for gouging prices? They want to get rid of it as fast as possible. But maybe a price is raised to kick out some smaller customers when supply gets tight?
Case wholesaler, same story as truckload wholesaler.
The broker has the most effect. The rest of the supply line doesn’t respond that fast to external factors. The farmer may have a fixed return from his crop, the shippers don’t change the cost of tomatoes, they just change the cost of shipping which is factored in over time. The grocer may avoid large changes in pricing. The consumer just pays the price. Unless there’s a huge change in price the consumer has little effect.
The price you pay is set by the supermarket. They set their price, in part, based on the price they pay to their wholesaler. That price is set by the wholesaler, based in part on the price they pay, and so on all the way down the line.
A bit of googling shows that tomato production is down in California because of the drought and down considerably in Florida. U.S. production is four times that of Mexico, so presumably most of our tomatoes nationally are domestically-grown.
If the demand for tomatoes has stayed constant and the supply has dropped, then the price will increase starting at the bottom, the grower, working its way up through the levels to the consumer. It doesn’t take much of a change. Oil is doing the reverse, with consumption steady and production inching ahead, thereby causing a huge reduction in price from the bottom up.
I have exactly zero info on tomatoes specifically. But generally speaking, the esteemed Exapno nailed it.
You’re seeing the effect of “price elasticity of demand”. Or more precisely, you’re seeing the results on an inelastic price/demand curve. IOW, a tiny percentage change in availability can (not will) produce a huge change in end-user price. See Price elasticity of demand - Wikipedia and related.
Power dynamics within the supply chain determine who gets to keep the extra margin created when supply shrinks and demand remains constant. It’s a pretty good bet that different product categories have different layers of the supply chain enjoying the high-powered position. At the same time, all else equal, power tends to flow to the largest players at the least competitive level of the supply chain. Whichever that may be.
And whoever is in the power position is generally the one to drive prices either upwards or downwards.
Actually, there is a fair amount of elasticity in the price of tomatoes. Because in most recipes, cooks, restaurants, etc. can easily substitute canned tomatoes for fresh ones, without significant damage to the cooked dish. That’s an example of the consumer’s response to price rises, which reduces demand, thus tending to counter the price increase.
Oddly enough, canned tomatoes are an advertised sale item right now in about 1/3rd of the local grocery stores!
There was a freeze in Mexico a few weeks ago, (Mexican) produce prices are up. Farmers are setting those prices, kinda.
In general, WRT this kind of question, you might be better off not asking about commodities. For example there can be a freeze in Florida and the orange price will go up the next week. The oranges that were ruined won’t (wouldn’t) be available for months but because of the way the market (futures?) work they’re already working on recouping their money for losses they’re expecting next year by raising the prices on oranges that were harvested months ago.
In general I’d agree with you that tomatoes are a pretty optional ingredient. Certainly consumers can adjust their weekly menus; Italian restaurants and pizza joints, not so much.
At the same time we have the OP stating prices have fluctuated from $5 to $40. If in fact the exact same goods are selling for 8x what they had been recently I’d call that pretty strong empirical evidence of inelasticity of demand.
It may in fact be that tomato prices have increased from all-but-free to merely still pretty cheap. Not knowing what actual quantity the OP is buying for $5.
Price is set by supply and demand. If the change is coming from a decreased supply then the price changes would start with the farmer and work forward, if the change is due to increased demand then the price change would start with the restaurant and work back. In your example the broker would be the one most likely to change prices in the event of a supply change because they are most likely best able to know the entire market. Likewise, if the change is due to demand then the case wholesaler would most likely be positioned to know that and change the prices.
I don’t see why that is a quirk of the futures market. Even in the absence of a central market, a holder of a commodity who knows that there will certainly be a shortage of that commodity in the near future will be more likely to hold onto their supply instead of offering it for sale. The futures market makes this fact visible, but doesn’t cause it.
The thing that tempers that is that storage costs money, and the in case of oranges, the commodity is perishable (but you can certainly store zombie orange juice for a few months).
Seems to me that anyone along the way can charge whatever the next person is willing to pay, or conversely, pay as little as the seller/provider will accept. Each individual chain from origin to consumer will be subject to this series of links, with agreements struck on a day-to-day basis, and there may even be participants along the way willing to sustain a single-order loss in order to retain a working relationship, or be bound by a prior contract… There isn’t any particular link to which a price fluctuation can be attributed.
For many commodities like basic food items, prices are set through traders at the Chicago Board of Trade or Chicago Mercantile Exchange (soon to merge). That wouldn’t be the final retail price, but it’s where prices go up and down to reflect the market as a whole.
When you google* the issue a huge number of articles complaining about the giant rise of prices of tomatoes in India appear. Apparently the hike is worldwide, suggesting strongly that the demand is inelastic.
*Yeah, I lower-cased it. Take that, giant international billionaire-sprouting powerhouse: you’ve been genericized.