Croissants in crisis

French supermarkets have experienced a mini-shortage in butter due to the soaring popularity of the dairy product and pastries abroad.

The price of butter rose 60% in a year, reaching €6.70 (£5.97) per kilogram in August, according to official data. The increase has created problems for pastry exporters in France and fears of a shortage of Christmas delicacies such as the traditional Yule log dessert. 

The threat of a shortage was reported in the summer, when prices were expected to increase sharply.

According to The Independent, Matthieu Labbé, of French baking industry body Federation des Entrepreneurs de la Boulangerie, said in June: “Last April, we were paying €2,500 (£2,200) a tonne. Now it’s €5,300 (£4,700). At best, consumers are going to have to pay more. At worst, we may no longer be able to get butter.” 

The shortage—the worst since World War II—is a result of falling milk yields throughout Europe, but especially in France. And since most milk goes to making cream or cheese, and not butter, the effect is especially crippling. Additionally, Eater reported that powdered milk prices have dropped in France, meaning less of it is being produced—and butter production depends on the fats that are siphoned from powdered milk. Now, supermarket shelves across France are growing increasingly bare as butter becomes harder to obtain.

As shown on the diagram the shortage of croissants, indicated by the shaded area, is expected to increase the prices of croissants in the market from Pe to P1.

Price here will act as a signalling device: the initial equilibrium is at Pe and Qe. The increase in the cost of producing croissants has reduced the available supply of croissants at the price Pe, which created a decrease in supply to Q2 but demand remains at Qe. As a result producers expect a price increase to clear the market. The shortage has sent a strong signal that the market is in disequilibrium.

Price will act as an incentive device: Producers of croissant will have to increase the price if they wish to increase production since butter has become more expensive and it is a key ingredient in the production of croissants. This offers a profit motive and therefore an incentive to increase production from Q2 to Q1.

Price acts as a rationing device: The increase in price will ration croissants to those able and willing to pay the higher price therefore demand will contract and supply will expand to reach a new equilibrium P1,Q1.

Will the price mechanism solve the croissant crisis?

Well, it is not certain that the increase in the price will solve the shortage that currently exists. Since butter is short in supply, it makes key raw materials in making croissants hard to find. This reduces availability of raw materials and the PES of croissants becomes inelastic at the moment which implies that the forces of supply and demand will experience a time-lag before they satisfy the increasing demand for croissants in the market, even at higher prices.