Recently, my lemons have been less juicy and more expensive. The reason is a classic supply and demand story.
The Lemon Story
On the supply side, we can focus on California. The source of 92% of the lemons grown in the U.S., California has had drought problems and a freeze that struck some lemon growers during December and January. As a result, production dipped 8.8%.
Meanwhile, demand has soared. Think lemon soda, citrus salad dressing, lemony sauces and lemon dishwashing liquid. Always, lemons are more popular during the summer but now, consumers, beverage makers and restaurants all say people are clamoring for lemons. At the same time, tripling lime prices created a switch to lemons.
We could say the result has been a zesty lemon rally. Currently averaging $34.20 a box, lemon prices are 80% higher than last year. Restaurants report paying $50 for a case of 165 lemons, up from $30 or $35 a year ago. Correspondingly, the retail price of lemons has reached its highest since 1980, up 36% to $2.33 a pound in August.
Three years of lemon supply and demand history:
With supply decreasing and demand up (below), you can see why lemon growers are smiling.
Our Bottom Line: The Invisible Hand
When Adam Smith explained how consumers and businesses interact in his Wealth of Nations (1776), he transformed a seemingly chaotic market into an orderly process. First, as with the lemon market, when supply decreases and demand goes up, prices rise. Then though, nudged by an invisible hand, businesses decide to produce more while consumers are willing and able to buy less. With only the invisible hand influencing how consumers and producers behave, the market adjusts.Read More