Figure 1 indicates there was a sudden demand increase for butter due to the Christmas season, which universally signifies an increase in butter consumption. In Norway, butter is a staple food which is used heavily in native cuisine. To add to the demand boom during the Christmas month (December), a popular Norwegian Chef had been emphasizing the movement to make proper food with real butter. Norway’s largest dairy co-operative Tine, blames a combination of bad weather and higher demand arising from the popularity of the low-carbohydrate diet craze. This “low carb” diet fad caused people to eat fewer carbohydrates and more trans-fat foods, which include butter. This changed people’s preferences, which leads to an upward shift in the demand curve, as indicated by Figure 1. Demand for butter rose by 30% that year and prices of over $100 per pound of butter. However, the problem was not so much excess demand for butter, but more about its shortage in the market.
As shown in Figure 1, the supply of butter was affected negatively and dramatically. The graph shows a shift in the supply curve upward and to the left, indicating a decrease in the quantity of butter supplied. The dairy farmers (who raise cows for milk, the main ingredient in butter) blamed Norway’s largest dairy co-operative Tine, for not informing them early enough about higher demand quotas, and for sending product overseas even as a domestic shortage loomed. Tine had a monopoly on the domestic market and deliberately sheltered it from foreign competition as a matter of public policy. Additionally, the Norwegian government imposed high taxes on butter imported to Norway, thus countries like Denmark had been unwilling to supply the country with the butter it needed. Coupling the failure of Norway’s market structure that allowed such a shortage to occur, Norwegian cows were not producing enough milk to domestically supply the market. Compared with the previous year, Norway’s cows produced 20 million fewer litres of milk that year. The wet summer resulted in poor-quality and low quantities of animal feed, which adversely affected milk production. Milk is the most important and substantial raw material required for the production of butter, and without it, there was no way the market could cope with the high demand. So, a combination of natural determinants, monopolies and taxes led to this crisis.
As shown in Figure 2, the shortage was immense; almost an entire nation was without butter. With butter prices reaching as high as $100 per pound, Norwegian citizens looked to alternative sources for their cherished butter. This created black markets within the country and people began smuggling butter across the borders illegally and selling it to the highest bidders. As Figure 2 shows, because the demand for butter was so high and the supply almost non-existent due to the shortage, those who were able to sell butter, sold it at exorbitant prices that far exceeded the market price. Many creative and intuitive foreigners figured there was much profit to be had selling butter to the Norwegian people for lower prices than what the black market and natural market had to offer in Norway. For example, two Swedes were apprehended with nearly a half-ton (550 lbs.) of butter smuggled across the border from Sweden with an estimated value of about $95per pound; that’s about $52,000 dollars (€ 39,536) of profit. Additionally, the shortage led to long queues of people outside of supermarkets, waiting for their chance to buy butter.
Fortunately, Norway represents a happy economic story. Endowed with immense oil wealth, they used the proceeds wisely by establishing a Government Pension Fund to invest in the future. Recognizing the possibility that the value of their currency would soar because of oil demand, they discouraged people from buying relatively cheap imports by protecting domestic industries. One result was a dairy cooperative monopoly. So, when the butter crisis hit, there was no way to get extra butter until tariffs were lowered. Until then, supply contracted and demand soared. Norway was able to escape the turbulent situation and lower its import tariffs on butter. The government also removed quotas on milk production for Dairy Farmers. This opened up the market once again, allowing for the shortage to dissipate. As you can see, Norway’s butter crisis is an economic tale of oil wealth, monopoly, tariffs, supply and demand.
Miller, Nathan. “Black Markets (my thoughts on the Norwegian Butter Crisis).” L’histoire de sa vie (blog), December 21, 2011. http://www.nathan-miller.com/black-markets-my-thoughts-on-the-norwegian-butter-crisis/ (accessed April 18, 2012).
Unknown, . “The Norwegian Butter Crisis.” Econlife (blog), March 25, 2012. http://www.econlife.com/2012/03/25/the-norwegian-butter-crisis/ (accessed April 15, 2012).
[ 1 ]. Miller, Nathan. “Black Markets (my thoughts on the Norwegian Butter Crisis).” L’histoire de sa vie (blog), December 21, 2011. http://www.nathan-miller.com/black-markets-my-thoughts-on-the-norwegian-butter-crisis/ (accessed April 18, 2012). [ 2 ]. unknown, . “The Norwegian Butter Crisis.” Econlife (blog), March 25, 2012. http://www.econlife.com/2012/03/25/the-norwegian-butter-crisis/ (accessed April 15, 2012).