Avocados as an Underlying Asset in the World of Derivatives

Introduction 

An underlying asset is a security upon which derivatives are based. Options are an excellent example of derivatives. A derivative, therefore, is a financial instrument with a price that is based on an underlying asset (Chen, 2020). Avocado is a superfruit that is grown in different regions of the world. The fruit as a commodity has appreciated in terms of its price due to several factors such as increased demand as a result of its health benefits. Avocado is a fruit from the plant, also called avocado. The plant is commercially grown and is known to have originated from south-central Mexico. It grows well in the Mediterranean and tropical regions throughout the world. The fruit is described as a large berry with one large seed at the center and a creamy pulp when it is ripe. The skin is green and may change color when they ripen. The fruit is rich in fat content that is healthy for human consumption. Historically the fruit is thought to have originated from the state of Puebla, Mexico, in the Tehuacan Valley. Early traces of the fruit's pit/seed were in the Coxcatlan cave 10,000 years ago. This shows that the fruit used to grow wildly before it was domesticated to a cultivation crop and largely commercialized. The introduction of avocado to the different regions of the world was solely based on their nutritive value (Schaffer, 2013, p. 3). The value impelled colonizers of the Americas to take the crop to their possessions in the eastern hemisphere, where the climate was favorable for growing avocado. The popularity of the avocado fruit has grown because of its health benefits. The fruit is now categorized as a superfood, meaning it is packed with different nutrients that benefit human health. The avocado plant is a perennial hence is grown once and produces annually. Avocados are in high demand because of their health benefits amid the desire for people to lead healthy lives. 

Avocado Trading and Use 

Countries producing the largest quantities of avocado export to countries that may be producing but still have a high demand for the superfruit. Currently, Mexico is the leading country in the production of avocado and export. The biggest importer of Mexican importer is the United States (US) even though they grow their avocado in California. Trade occurs when there is supply and demand. A party has a commodity, and the other party requires the commodity. Currency is the medium of exchange, while the act of supplying the commodity to receive money from the person requesting the commodity is referred to as a trade. Different forms of trade exist in the industry. For instance, the trade between Mexico and the US on matters Avocado is called intra-industry trade (Westernhagen, 2002, p. 122). The US produces avocado in the state of California but still imports the same commodity from Mexico. Californian avocado may still find its way into Mexico, depending on the season. In such a case, California may be in production while Mexico is off its season. The export of Avocado from third world nations like Kenya into the Middle East is inter-industry trade as the trade is only one-sided. The Middle East does not produce nor export avocado. 

Avocado demand has mainly been because of its nutrition. Its essential use is to be used as a food by its consumers. Its status as food varies with the region where it is consumed as well as the familiarity with which the local populace knows it. For instance, in Mexico, avocado is pureed and mixed with garnishes like coriander, onions, and tomatoes to make a salad dressing called guacamole. The pureed pulp is a high-priced luxury commodity used in different parts of the US. In Guatemala, avocado is used as a daily food for laboring individuals. In other countries, it is eaten with sugar, salt, or ice cream. The baseline use of the fruit is food, and its popularity continues to grow as food given its nature as a superfood. Despite being used as food, avocado is also used as a raw material in the manufacture of oil. The fruit has lipids and amino acids, which act as an essential ingredient in the processing of oil. The oil is used for cooking, dressing, and a basic ingredient in the manufacture of various commodities (James, 2019). These commodities include but are not limited to hair products, medicine, soap, shampoos, and skin products. As natural oil, avocado oil is widely accepted for its properties. When used as a dressing or cooking oil, it is light and healthy. The same applies to its use as a manufacturing ingredient: it will not cause harm in the form of side effects or have long-term influences on one's health. These properties are some of the factors that are contributing to the popularity of the fruit. With the continued increase in demand and popularity, what does it mean for avocado as an underlying asset in the financial industry? 

Avocado Industry Analysis 

Avocado is mainly consumed as a food and used as an ingredient in the manufacturing industries. The production of avocado and the demand is still growing and has had a big impact on the pricing of the fruit. To better get the historical aspect of avocado price trends, it is vital to focus on Mexico and the US as it is the leading producer and consumer of avocado fruit. Mexico grew around 30,979 hectares of avocado in the 1980s, but the land under avocado production is 167,745 as of 2019. This shows an 87% increase in the growth of avocado fruit. Their greatest importer of avocado is the US. The US produces its avocado in California and Florida. However, because of increased demand in the US, the two states cannot handle the supply. The US has to import from Mexico to bride the supply deficit. The continuous steady demand for the fruit and realization of its health benefits has led to an increase in prices over the years. The graph below (figure. 1.1) represents what America has been producing against imports from Mexico. 

Figure 1.1 

In the 1980s, well into the mid-90s, America relied on its net production. After the signing of the 1994 North American Free Trade Agreement, Mexico was set to gain by exporting their avocado across the border into the US. The US lifted an 83-year-old ban on the fruit in 1997, which open the flood gates for Mexican avocado. From the year 2000 to 2010, the export of avocado grew tremendously, and with it increasing the price of the commodity. Avocado used to cost less than a dollar in the 1980s, and going into 2010, the price was over a dollar. From a worldly perspective, the world produced 697,900 tons of avocados in 1961. The amount grew to 869,000 in 1966, 1,075,300 in 1971, 1,269,800 in 1976, 1,532,900 in 1981, 2,303,400 tons by 1996 (Schaffer, 2013, p. 6). Production has increased immensely between 1961 and 1996 but has not been able to serve the demand. 

More people are realizing and gravitating towards the benefit of healthy living. With the realization, even more, individuals seek avocados as a light superfruit. The phenomenon has increased the demand for the fruit, while production increases slowly. The phenomenon has instigated the prices of avocado to skyrocket. The graph in figure 1.1 shows the increase in avocado exports from Mexico to the US. US avocado imports immensely increased after 2010, and their net production begins to dwindle. American production cannot be pegged on the pressures of Mexican imports but blamed on the effects of climate change (Macharia, 2018). The Californian desert grows by the day, and water scarcity affects the production of avocado. Therefore the two major influencers for avocado prices are demand and climate. When the demand for avocado continues to surge, its supply continues to rise steadily as the plant takes about three years before it begins production. In terms of climate change, areas that used to be great for avocado cultivation are no longer viable, decreasing the production of regions that used to be leading. 

Economic Environment for Avocados 

Supply and demand factors are some of the intrigues impacting the economic environments. The demand for avocado is currently high, but the supply is not capable of meeting the demand. In figure 1.2 below, within the period 2016-2018, China's demand grew from 25,127 metric tons to 43,859 metric tons. China's discovery of the benefits of avocado has pitted it among the countries that have created a new supply for avocado. According to ITC's Export potential map, the avocado market still has an estimated $2.9 billion that is not yet tapped (International Trade Centre). It means that the demand is too high and cannot be served with the current supply. 

China, as a new market, presents a boost for avocado producing countries. However, we have to remember that there are geopolitical factors that are affecting the nation's avocado-growing practice. Peru, Chile, Brazil, Mexico are among the leading countries in producing avocado. Currently, they are faced with climate change, and less water is available for the fruit. As production goes down, supply reduces, and the demand keeps on rising, causing prices to skyrocket. It is difficult for the South American nations to export to China, given the geographical distance involved. It is easy for South American nations to export to America -the leading consumer because it is just beyond the border. This creates a supply crisis for China. Kenya, South Africa, and Rwanda may be leading exporters, but they cannot scratch the Chinese market (Persistence Market Research, 2018). 

Geopolitical issues do have influences on the demand and supply of avocado. For instance, when trump was campaigning for the Presidency and threatened to build the Mexican wall, trade must have been negatively affected, including the avocado trade. According to a documentary on Netflix – "rotten" the success of avocado farmers because of the rising price trends has led to them being targets of kidnappings by various militia groups. Is this the trend that may continue in other countries growing avocado? It remains to be seen. 

Forecast for the Avocado Industry 

The Persistence Market Research forecasted that Latin America - America the avocado market research between the years 2017-2027 and came up with the conclusion that the market will improve 1.8 times. The global avocado market has shown an upward trend since 2012 and according to another, forecasting will continue to grow. By 2027, the industry is assessed to reach a valuation of $23 billion, putting into consideration that the compound annual growth rate CAGR is 6.2% throughout the assessment (International Trade Centre). Going by data collected by FruiTrop weekly a website that monitors fruit prices on a weekly basis in Europe has the data below. 

I support the report that claims avocado price trends will go up in the economy. However, there is a new factor that needs to be put into context. The coronavirus pandemic is affecting different trade aspects, especially on the demand-supply side. The fear of the pandemic can cause both demand and supply to reduce, which, in my opinion, is a status quo in regards to the price. Avocados perform well as an underlying asset in any industry. Reflecting back on the data from FruiTrop we can note that the price of avocado continues to steadily drop from €13.50 to €12.08. However, the prices are higher than those from last year, the steady drop is attributed to a decrease in demand due to the coronavirus pandemic. If the coronavirus is likely to be contained, demand will go up and prices would surge despite supply being high as the harvest period commences for most producing nations. 

References 

Chen, J. (2020, January 29). Underlying Asset Definition. https://www.investopedia.com/terms/u/underlying-asset.asp 

Westernhagen, N. V. (2002). Systemic transformation, trade and economic growth: Developments, theoretical analysis and empirical results . Heidelberg etc.: Physica-Verlag. 

Schaffer, B. (2013). The avocado: Botany, production and uses . Wallingford: Cabi Publishing. 

James, E. (2019). Effectual Guide to Avocado Oil: A Ultimate Guide to the Use of Avacado Oil for Health, Nutrition and Skin Care . Independently Published. 

Macharia, J. (2018, July 13). Why you shouldn't Worry about hass avocado Market. http://oxfarm.co.ke/tree-fruits/hass-avocado-farming/why-you-shouldnt-worry-about-hass-avocado-market/ 

International Trade Centre (n.d.). Export Impact For Good. http://www.intracen.org/news/Avocado-global-trades-golden-fruit/ 

Persistence Market Research. (2018, February 28). Increasing Consumer Preference for Mexican and Pan-Latin Flavors to boos the Sale of Avocados in the Next 10 Years. https://www.persistencemarketresearch.com/mediarelease/avocado-market.asp