Question

The price of Melbourne's croissants could rise amid world butter shortage

You can't have croissants without butter. Lots and lots of it.  



But Melbourne's bakers are now contemplating a world sans the crescent-shaped pastry's principal ingredient, as fears of a global butter shortage continue to churn.  
In France – home of the flaky breakfast staple and its equally delectable cousin, the pain au chocolat — they're describing it as the worst butter shortage since World War II. Butter has disappeared from supermarket shelves and prices continue to skyrocket, jumping from €2500 a tonne to €6500 ($9900) in 18 months.

At Lune Croissanterie in Fitzroy, described as among the world's best by The New York Times, butter is a big deal. They go through about 310 kilograms a week in the production of more than 8500 croissants.  
Founder Kate Reid said the shortage was a hot topic among Melbourne's butter-fingered pastry community.  
"It's our biggest outlay. Two-thirds of our coolroom is butter," she said.  
"When the shortage does start to affect us, it will be in a big way. We don't just rely on Australian dairy – we also rely on Europe, specifically France."
The butter used by Lune for laminating – the process of folding dough and butter together to make each layer of a croissant – is Beurre d'Isigny, which comes from Isigny-sur-Mer in northern France.
Ms Reid said her butter supplier was yet to pass on any price rises, but she was expecting them.  
She vowed not to switch butter just to keep prices low (which, at $5.50 for a standard croissant and $6 for a pain au chocolat, are already at the top end).
"I'm not prepared to compromise the quality of our ingredients because of cost," she said. "Lune isn't a business that is based on mass output, it's based on quality."
So what's the reason for the butter shortage? A change in consumer habits has been identified as one reason, with less concern around the health risks of dairy fats.  
This has translated to the consumption of full cream milk as well, which has risen by 8.3 per cent in the past year. The preference for skim milk has fallen, which has reduced the supply of fat available for butter.  
Tony Smith, executive officer of the Baking Association of Australia, said he was baffled by the dearth.  
"That's the million-dollar question," he said. "Where is the butter? We don't understand why there is a shortage."
He said bakers would either be forced to pass on price rises to customers or stop producing their more butter-heavy baked goods.
"The ones making croissants or Danish pastries, their recipes carry a high volume of butter. There's no substitute really. You're never going to get the right standard. You need butter."  
Dairy Australia senior analyst John Droppert said there had been a 60 per cent rise in commodity prices for butter globally in the past year.  
"Consumers are looking to get salt and sugar out of their diet rather than fat," Mr Droppert said.
He also said that market intervention in Europe had created a situation where it was not that attractive to produce more butter, despite the high prices.  
"The sharpest impact in Australia is the small to medium-sized bakers, as their pricing agreements aren't as long as the supermarkets," he said.  
While demand will continue to rise in the lead-up to Christmas, Mr Droppert said some relief could be expected in the new year as increased milk production has an effect.  


http://www.smh.com.au/victoria/the-price-of-melbournes-croissants-could-rise-amid-worldbutter-shortage-20171026-gz8tpj.html

Answer the following questions:

1. In relation to croissant producers, is demand for butter price elastic or inelastic? Provide 3 reasons with explanation to support your answer. Based on your conclusion, will butter producers be better off now or when the price is lower in the future? Explain your answer by relating total revenue to elasticity concept. [6 marks] 2. Suppose the government has decided to impose a tax on butter, explain how this tax will be split among producers and consumers. In your answer you need to also clearly explain who will gain and who will lose as a result of the tax.

Answer 1

"That's the million-dollar question," he said. "Where is the butter? We don't understand why there is a shortage."

He said bakers would either be forced to pass on price rises to customers or stop producing their more butter-heavy baked goods.

"The ones making croissants or Danish pastries, their recipes carry a high volume of butter. There's no substitute really. You're never going to get the right standard. You need butter."

Dairy Australia senior analyst John Droppert said there had been a 60 per cent rise in commodity prices for butter globally in the past year.

"Consumers are looking to get salt and sugar out of their diet rather than fat," Mr Droppert said.

He also said that market intervention in Europe had created a situation where it was not that attractive to produce more butter, despite the high prices.

"The sharpest impact in Australia is the small to medium-sized bakers, as their pricing agreements aren't as long as the supermarkets," he said.

While demand will continue to rise in the lead-up to Christmas, Mr Droppert said some relief could be expected in the new year as increased milk production has an effect.