Commodity Recalls: A Reversal of Fortune.

The standard (and far too familiar) Scenario #1: I learn that the infant car seat I just bought has a safety defect. I return my defective unit to the store and get a brand new, safer version. The consumer wins and the manufacturer loses. Fair-mindedness prevails.

Now think about what happens when a commodity food item is recalled.

• Products like hamburger, spinach, eggs, chicken, fish, produce, fruit, etc. are undifferentiated – i.e., consumers don’t necessarily associate them with a brand or particular company.
• On top of being ubiquitous, they are also perishable.
• And - they don’t cost much.

This combination of perishability, interchangability and low cost creates quite a different equation for the consumer.

Scenario #2: I learn about a hamburger recall. I don’t bother to find out whose hamburger, or which retailer, or what dates, I just toss my hamburger in the trash and buy more next time I go to the grocery store.

Here’s the micro-economics of what just happened: My demand for hamburger just doubled. (I bought twice as much this week as I normally would because I tossed the first round last week.) At the same time, the supply of hamburger can’t increase quickly. (Commodity food supplies react slowly because they have to be grown, which takes time.) In addition, in some cases, whole producers are taken out of the market, reducing the supply even further.

The Law of Supply and Demand says “Increased demand in the face of reduced supply causes prices to rise.” (This assumes price elasticity, of which commodities are a classic example.)

This is, in fact, exactly what often happens with commodity markets: prices can take an unprecedented rise right after a major recall. We saw this recently as a result of the egg recall for salmonella contamination: The recall was first announced on August 13th. By September 1st, egg prices had risen 40% and prices eventually almost doubled by November.

Unlike the first scenario this causes a reversal of fortune - one not in the consumer’s favor. You buy more and pay more while the manufacturer enjoys a period of windfall profits.

Just food for thought…