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Demand and Supply IA

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Introduction

´╗┐Claudia Cheng Tight cotton supply/demand situation to continue in 2011 Feb. 5, 2011 6:33pm by Cotton Nelson, National Cotton Council National Cotton Council economists say a tight overall cotton supply/demand situation coupled with continued pressure from competing crops for the coming year is consistent with cotton prices above historical norms. ?As 2011 begins, the global cotton market is experiencing unprecedented prices with the ?A? Index at $2.00 and nearby futures trading in the $1.70?s,? Council economist Dr. Gary Adams said in his outlook for delegates at the NCC?s 73rdAnnual Meeting here today. ?Unlike the price spike of March 2008, the current price situation has support from the fundamentals.? Adams, the NCC?s vice president, Economics and Policy Analysis, said a key issue to watch will be the ability to sustain cotton demand in the prevailing market conditions, particularly given the uncertain nature of the macroeconomic recovery. He said that consumers in developing markets such as China and India will increasingly become the drivers of global retail cotton demand. ?Growth in cotton demand bodes well for total cotton trade,? Adams said. ...read more.

Middle

The main determinant for the price rise is due to the demand being strong from ?new? markets such as China and India. As China and India are ?developing markets? with an increasingly large population, the number of buyers of cotton are due to increase. As seen in Figure 1, the new markets have caused the demand curve to shift to from Q to Q1 to the right, thus increasing the demand level as well as the quantity of cotton. As the national cotton council stated, the demand for cotton in the U.S tends to be relatively stable. However, the foreign and imported demand outside the U.S is rising due to the increased mill use in foreign countries, especially China. China exports a relatively large portion of their cotton output. Therefore, in the short term, the import demand may be rising from these developing markets. On the other hand, crop failures in both the U.S and foreign countries can also raise demand for China?s products. So in the long term, the industry in China may be insufficient. It can be seen in Figure 2 that the foreign demand is not increasing but appears to have an extension at a lower price. ...read more.

Conclusion

As a result from these changes, the equilibrium price of cotton has increase from P1 to P2 in Figure 3 as well as the quantity supplied increasing from Q1 to Q2, meaning that more of the product is being bought at a higher price due to rising demand. The inelasticity of both demand and supply of cotton can be seen here from how steep both the demand and the supply curve are. Since the cotton market is not in ceteris paribus at a certain time, other factors like opportunity costs, tight demand/supply markets and demand of cotton from mill can cause persistent increase of demand. The effects of this economic change on stakeholders will cause the supply of cotton to decrease for domestic producers as the foreign producers have increase their supply due to pressure of population rising from new markets. In the short run, while a growth in demand of cotton is expected to increase cotton prices, the quantity of cotton produced and the amount of cotton stocks available will not drastically change. Therefore, in the long run, the export demand of foreign markets will increase due to the size of the population rising, the U.S will not have to stock up for cotton. ...read more.

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