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Butter-nomics: Protectionism and Food Shortages

Norway, a fully industrialized country and ranked first in the latest Human Development Index, a United Nations’ metric that tries to quantify the quality of life across countries, is suffering through a butter shortage, a common food staple and an important input in the food industry. Food shortages wouldn’t be out of place in places like Cuba, North Korea, Venezuela and some poor Sub-Saharan nations; it is almost unfathomable that they occur in one of the most developed nations in the world.

Norwegian authorities seem puzzled by the shortage and subsequent rise in butter prices. They blame a new low-carb high-fat diet craze for the additional demand. Additionally, heavy rains during the summer affected grazing areas for cows, which resulted in reduced milk production. The shortage is especially alarming during the Christmas season, where many traditional recipes rely on significant amounts of the dairy product. Norwegians have actually resorted to churning their own butter, including a restaurant owner interviewed by The Wall Street Journal: “We have to [churn butter]. We can't get hold of any butter, not any at all. And it's right before Christmas, so we have a lot of customers. It's really strange. It takes a lot of time since we use hand mixers.”

While the diet combined with unfavorable conditions for dairies has limited the amount of available domestic butter, it doesn’t address the biggest issue for the limited quantities of the good: trade regulations.

Since Norway is not part of the European Union, imports from other nations are subject to tariffs and other protectionist restrictions. Butter tariffs in Norway equaled 25 kroner per kilo (about US$ 4.25), effectively eliminating any incentive to import butter from abroad. While the tariff was lowered to four kroner in December allowing Norway to import more than 750 tons of butter for consumers and 1,000 tons for industry, it will do little to solve the shortage, as it will take time for butter to become available to consumers.

The result: A black butter market. One seller on a Norwegian auction website offered 500 grams (1.1 pounds) of butter Tuesday for roughly 30 times the normal price. Two Swedes were arrested in Norway for smuggling around 550 pounds of butter into Norway. Danish and Swedish airports are selling butter at their free-duty shops. Swedish supermarkets are enticing Norwegian customers living near the border with free butter. In short, market forces and regulations have created some incredible situations in one of the wealthiest nations in the world.

The government response has been unsurprising. As Agricultural Minister Lars Peder Brekk said last week: “The market regulations are important to uphold long-term stability in the production of food in Norway.” Unfortunately for the Norwegian government, only free trade creates stable markets. Complete dependence on domestic markets leaves Norway open to unexpected local calamities that could make prices volatile. Free trade distributes risk among many different countries, so an event in one country will have a smaller effect on availability and overall prices of goods. Finally, given the Norwegian government’s record on butter and unwillingness to change policies, Norwegians might face shortages in other goods as well.