Christmas tree market a seasonal lesson in supply and demand

After scares over the past two years about shortages of petrol, toilet paper and flour, it's good to report that there have been no supply chain problems with real Christmas trees. And I paid the same for the tree this year as last: while inflation has hit energy prices and "homes at the inn", it has left the Christmas tree market alone.

It helps that real trees are sourced locally, so are unaffected by blockages in the Suez canal, or any other difficulties besetting international movement of goods. In contrast, the supply of artificial trees, usually from Asia, is subject to all the logistics problems associated with international trade: container shortages, congestion in Asian ports, higher shipping costs, and Brexit if they had to transit the UK.

While we don't have Irish data, the New York Times reported a 25 per cent rise in artificial tree prices in the United States this year compared with a 5 per cent to 10 per cent rise in the price of festive pines.

Economists, of course, research what is really important. So we know from a US study that even if the price of artificial trees skyrockets, it doesn’t have much impact on the demand for real trees. Essentially, they are two different markets.

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Price sensitivity

The demand for real trees is moderately sensitive to price – a 1 per cent price rise leads to a 0.7 per cent fall in demand. If a lower supply of real trees led to a rise in their price, demand would fall so as to clear the market.

Back during the financial crisis, fewer US families bought a Christmas tree, so many growers planted fewer the following seasons. The number of US Christmas tree farms fell from 22,000 in 2002 to about 15,000 by 2017, and the number of trees harvested dropped from 20.8 million to 15.1 million over the same period.

Given that the most popular size of tree takes 10 years to mature, the effects of recession-era cutbacks in planting were widely forecast to lead to a Christmas tree shortage last year. A couple of dry years were also expected to slow the rates at which trees reached maturity.

At the same time, demand for real trees was expected to be up as people, wearied by the pandemic, wanted a more traditional display.

Faced with this supposed supply crunch last Christmas, two journalists working for National Public Radio (NPR) in New York decided to collect some real data, attending a big Christmas tree auction in Pennsylvania. At the auction they bid for and won a small truck load of trees, with a view to selling them at a profit in New York.

Quite a number of the trees were “misfits” – not perfect in shape, which reduced the purchase price.

However, the media prediction of a real tree shortage proved unfounded. Initially, the journalists tried selling the trees in New York for about $150 but found no buyers. In their sales patter they tried to sell the “misfit” trees as being suitable for Zoom – their blemishes could be disguised. However, potential clients pointed out that Zoom could provide a “perfect” Christmas tree backdrop for free.

In the end the journalists lost money on the project. They had to resort to visiting the apartments of their colleagues, press-ganging them into buying an “NPR” tree to clear their stock. They discovered, at the cost of their losses on the venture, that there was actually no tree shortage.

They also learned the hard way that the market for trees was pretty competitive, and margins were low.

Labour shortage

I did my own practical research into this year’s US Christmas tree market at the start of December, when visiting our grandchildren. There was an abundance of trees in the lot at the end of their street. However, a labour shortage was in evidence as there were no scouts on hand to actually sell us a tree to earn funds for their troop.

So I had to fly home before the tree was purchased and erected, and admire its symmetrical shape and tasteful decoration – including a seasonal Voldemort – over Zoom.

As this is an economics column, I must report that the price of the US tree was similar to our own. The discerning may notice, however, that under the groaning decorations accumulated over the past 50 years, our Irish tree is what the NPR lads would call a “misfit”, so the quality-adjusted US price is a little lower.

We won’t know until January what the relative needle-shedding properties are. But I think our family’s Irish and US trees bring equal pleasure, which is where real value lies.