I’m sure you’ve heard of the “evil” OPEC. They decrease the amount of oil supplied and when you go to fill up your car, gas prices are higher. Or, they supply more and as the price decreases stories of domestic oil producers being hurt splatter across the newspaper. Want to understand how their control works? Let’s talk about maple syrup. Yes, maple syrup.
Did you know that Canada has a maple syrup cartel? Cartel – another word you might have heard of – is a group of firms that come together to control the amount sold in the market. Cartels are illegal in the U.S., but not in other countries, such as Canada. The maple syrup cartel is called “Federation of Quebec Maple Syrup Producers.” Producers in the cartel work together to control the supply of maple syrup coming out of Canada. The supply of maple syrup in the market then directly affects the price of maple syrup. Let’s dig a little deeper.
How does supply affect the price? Let’s first imagine that maple syrup producers are able to tap a large amount of maple syrup from their trees one year because of ideal weather conditions. They turn around and put their maple syrup on the market and try to sell it at the same price as the previous year where there was less supply in the market. Well some people will want to buy it at that price (probably about the same as the previous year – depending on the latest preferences for maple syrup), but there is going to be maple syrup left on the shelf because of the large supply. As the seller of maple syrup, what are you going to do? Put it on sale, of course! And let’s say you are a savvy consumer, you might bargain for a lower price. Both of these actions cause the price to decrease. More people will buy maple syrup as the price falls, until we reach a point (an equilibrium) where there is no pressure for prices to fall any more. The opposite will happen if quantity produced is low one year. Prices will rise as there is less maple syrup than the amount of maple syrup people want to buy. High quantity -> low prices. Low Quantity -> high prices.
Maple syrup comes from the sap in maple trees. It is tapped in the springtime when temperatures are freezing at night and above freezing during the day – this increases the flow of maple syrup throughout the tree and allows it to be tapped. The sap that comes out tastes like lightly sweetened water. It is then boiled down to get to maple syrup. Variation in weather can affect the amount of maple syrup tapped. Some years there was a high amount of maple syrup (low prices), and some years there was a low amount of maple syrup (high prices).
This variation in prices depending on whether there was a lot or a little maple syrup produced in a year lead Canadian maple syrup producers to come together to form this cartel. By forming a cartel, the supply of maple syrup can be fixed to maintain high prices. Producers are given a quota (fixed amount) that they can sell in the market, thus leveling off quantity sold – and in turn prices.
Presumably, as a cartel, the price will be higher than it would be if all firms were competing against each other. Why is the price higher? Well it goes back to supply. Low quantity –> high prices.
What do they do with the extra maple not sold? They store it! That’s where the beauty of maple syrup comes in. Maple syrup has a long shelf life. If maple syrup isn’t on the market one year, it can go on the market the next year. If it is an especially productive year to tap maple syrup, then more will be stored. If production is slow one year, they can go into their reserves to meet their quota.
How can Canada maintain this control when cartels (and quantity control) is illegal in countries like the U.S.? Well, Canada produces 70-80% of the world’s maple syrup, while the rest is produced in the northeast of the U.S. With such a large control over production, any changes by the cartel will affect the overall price of syrup. Yes, U.S. firms will compete with the cartel by increasing the world’s supply, but their quantity won’t be high enough to really affect the price.
Ok, let’s go back to OPEC. How is it the same as maple syrup? OPEC is a group of countries working together to control the supply of oil (Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela). Oil doesn’t perish, so, just like maple syrup, if it is not sold one year, it can be sold the next year. Also, while OPEC is not the only producer of oil, it does produce around 60% of internationally traded oil. OPEC works together to control the price of oil through the quantity, just like “Federation of Quebec Maple Syrup Producers.”