It is easy to produce conspiracy theories on the U.S. dollar and interest rates. If you say: “All these are the works of foreign powers and those who are jealous of us,” someone who has no idea about the balance of payments may buy this story. But it is difficult to write such a story on potatoes and onions.
The increase in the prices of potatoes and onions has been widely debated recently. The economic reasons can be found to explain this. So, let us talk about those reasons, but the main issue here is the future price increases that have been held back through tax reductions and price hikes that have been delayed temporarily until the elections. Taking into account that the local currency has depreciated by 20 percent over the past three months and only a fraction of this depreciation has been passed onto the retail prices. We can say that we have not seen anything yet.
Consumers have seen the first signs of this in the markets and their kitchens. More importantly, the price of the cheapest potato, a basic foodstuff, has risen some 80 percent. According to the daily data regarding the lowest and highest prices from the Istanbul Food Market, the prices of potatoes, white onions, and onions increased by 52-79 percent, 400 percent, and 135-150 percent respectively on June 21 compared to the same day of last year.
Since domestic demand or foreign demand through export has not soared then there must be cost side or supply side – or both – problems. Under normal circumstances, a politician must be aware of the situation or should say “we are working on it.”
However, regarding the increase in the prices of potatoes and onions, Prime Minister Binali Yıldırım said “This is nothing but speculations. You’ll see, a few days later we won’t be talking about it.” According to a report on daily Hürriyet’s website published on the very same day, deputy chair of the Ödemiş Chamber of Agriculture, Mehmet Dinlemez, who noted that they provide some 25 percent of the country’s potato supply, underlined that producers have given up growing potatoes because of the price fluctuations and the cultivated areas shrank this year because growers were unhappy about last year’s prices. He also said “potato did not like the weather this year” and that potato crop declined because potatoes had planted earlier than usual due to weather conditions but this early move causes diseases.
This is what is known as “the Cobweb Theorem” in economics. Some producers choose not to grow plants when prices are low. Thus the output and supply declines and the prices rise in the next season. Having seen this, some producers decide to grow plants and prices decline because of abundance of the product. And this circle goes on and on.
So what happened for the producers to decide not to plant potatoes?
People look at the current prices and potential costs when they decide to grow plants. If production cost that is to be financed personally is very close to the final price at the sowing time, some producers chose not to grow the vegetable. This must be the underlying reason for the high price of potato today.
Producers’ costs soared because of the economic policy approach that “let the currency rate lose, it will eventually stabilize by itself.” This approach was embraced just to avoid a one-point rate hike.
Producers whose costs have soared will either cut the output or pass the rising costs onto consumers. When the output is reduced at a time when costs rise, the price of the final product skyrockets and supply declines.
If the authorities, who claim that this is the work of “some speculators,” see import as a “magical formula” then some producers may completely give up on growing plants then the “Cobweb Theorem” will turn into a vicious circle of “import-lower production-higher prices.” Thus your agricultural policies will become a “hot potato.”
What happened to bank deposits?
It is striking that the lira deposits and FX deposits declined by 686 million and $977 million over a time span of 9 weeks between April 20, when the early polls were called, and June 15. Under normal circumstances, over this nine-week period bank deposits must have increased. Thus the declines in two types of deposits suggest that people are withdrawing their savings from the banking system.
Some 40 billion liras entered the system because of the salary and bonus payments in the public sector thus the magnitude of the withdrawal of deposits from the system becomes more significant.
Probably, this development explains the calls for channeling the under-the-mattress savings into the banks and “ending the state of emergency.”