The ‘spider's web model’ applied to Chilean cherries in the Chinese market

Reviewing my notes from those study times at the University of Chile, I grasped with the Web Theorem*, a concept that we also exemplify in class with agriculture. Today, reflecting on the current situation, it is incredibly relevant to analyze and understand these dynamics.

This web theorem can explain the fluctuations in prices and production in the Chilean cherry market, especially in its relationship with the demand from the Chinese market. This model is relevant because cherries have an annual production cycle and are subject to factors such as seasonality, limited supply, and variations in demand.

How the model applies

1. Initial year: high prices and strong demand in China

• In a given year, Chilean cherries reach record prices in China due to their high quality, positioning as a luxury gift, and the growing Chinese middle class.
• Chilean producers, motivated by these profits, decide to expand their crops.

2. The following year: Excess supply

• With more producers entering the market and increased cherry production, the Chinese market becomes saturated.
• This excess supply leads to a price drop, affecting the profitability of farmers.

3. Adjustment in production

• After a year of low prices, many producers reduce investments or production volume, creating scarcity in the market the following year.
• The more limited supply causes a new price increase, restarting the cycle.

Image 1: Claudio Araya, Technical Manager at Frusan, Chile.

Factors that intensify the model

Highly seasonal demand

• Chilean cherries are popular in China during Chinese New Year (January 29 this year), concentrating sales in a very short period.
• A small imbalance between supply and demand at this time can generate extreme price fluctuations. This year we also shipped about 90% before Chinese New Year, whereas the previous years were between 68% and 75%.

Export and logistics costs

• Transporting fresh cherries requires speed and care, adding pressure on prices during peak demand periods.

External factors

• Changes in China's import policies, issues like the 2021 box with Covid1, weather events in Chile, or even shifts in Chinese consumer preferences.

Strategies to mitigate the model's effect

1. Market diversification

• Exporting to countries other than China to reduce dependence on a single market seems essential. Along with the strategy of expanding the market within China itself by exploring other cities.

2. Improved planning

• Using demand and forecast data to adjust production and avoid oversupply. Something very difficult but not impossible. At the time, something similar happened with Uvas to the USA. I remember finding a number that the United States consumed 3 million boxes per week, while we in Chile were sending about 6 million boxes per week. I mean, we know it. We need to find a way to control/plan.

3. Commercial agreements and future contracts

• Setting prices in advance to protect producers from extreme fluctuations. Maybe easy in theory, but complex from a commercial perspective. But without a doubt, it is an alternative among the many we need to seek.

4. Promotion of off-season consumption

• Encouraging the sale of cherries beyond the lunar new year to stabilize demand throughout the year. This is exactly what is happening today, and a lot. Many exporters are walking the entire larger plan down there in China, working at all and more points here seen. This is one of the ways.

Image 2: The web model applied to Chilean cherries.

Conclusions - 1

The web model illustrates how Chilean cherries face price cycles in the Chinese market due to the interaction between supply and demand. Better planning and diversification strategies can help producers reduce risks and stabilize long-term profitability.

What happens if production increases or remains the same next season?

If the following year the production of Chilean cherries does not decrease, but remains constant or increases, the effect of the web model intensifies and the market could enter a cycle of chronic overproduction. Here's what would happen:

1. Prolonged excess supply

• When production does not decrease after a year of low prices, the Chinese market will face an even greater supply the following season.
• This causes a more drastic drop in prices, as the market's absorption capacity (demand) does not grow at the same rate as supply.
• Cherries lose their exclusivity value, which can affect their perception as a premium product in China. One of the major problems that must be managed to avoid reaching this point.

2. Impact on producers

Small producers

• They are the most affected, as their profit margins are lower and they have less ability to withstand low prices. Many could exit the market. Let us remember that many must cover investment costs. A huge task in these critical periods.

Large producers

• They may survive due to economies of scale, but still face challenges related to storage, transport, and reduced margins. Also consider that large producers tend to "put their eggs in different baskets," meaning they don't just grow cherries in large field areas.

3. Market consequences

Wear and tear on the "Chilean cherries" brand

• If prices fall too much, Chilean cherries may stop being perceived as a premium product and shift to competing in the low-cost product segment. Another "ghost" that is already appearing and frightening, especially if we consider 2021 and the complex 2025 ahead.
• This reduces the long-term profitability of the industry.

Stock accumulation

• Cherries are perishable, so an excess supply can lead to enormous losses if not sold quickly.

4. Factors that aggravate the problem

Competence from other countries

• Other exporters, such as Australia or New Zealand, could take advantage of the situation to capture the market by offering differentiated products.

Limited demand

• Even if demand in China grows, there is a short-term limit, especially if the market is saturated with cherries.

5. What happens if production continues to increase year after year?

• If the trend continues, the market could stabilize at low prices due to a structurally higher supply than demand.

This could lead to a restructuring of the industry

• Some producers would exit the market.
• Only the most efficient and diversified survive.
• More sophisticated market strategies are developed (e.g., marketing campaigns to expand demand).

Image 3: Frusan team in China promoting MissO-branded cherries.

Conclusions - 2

If production does not adjust and continues to increase, the industry could enter a prolonged overproduction cycle, with negative consequences for prices and profitability. To avoid this, it is crucial to implement diversification strategies, supply control, and consumption promotion, ensuring sustainable growth for Chilean cherries in the Chinese market.

Images: Claudio Araya and Frusan

Claudio Araya
Technical Manager at Frutera San Fernando, Frusan, Chile

* Ndr. The web theorem is a model developed by economist N. Kaldor to explain market price fluctuations over time. The web theorem identifies the conditions under which the price converges to market equilibrium in the presence of static expectations.

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