Wednesday, September 22, 2010

Don't worry about the price of tea in China, BUT you better care about the price of cotton in China---that is if you wear clothes...

This is the second day in a row I have an entry concerning China and its impact in commodity makets. Today it is the market for cotton....

Cotton Tops $1 a Pound ""Cotton prices breached the $1-a-pound level for the first time in 15 years as delayed harvests and booming demand in Asia are cutting into supplies, putting clothing makers on edge...Prices have surged 33% since the beginning of the year due to bad weather in China, which is both the world's No. 1 grower and importer, and the flooding that has washed out Pakistan's fields. Global cotton inventories are estimated to fall 22% from a year ago as demand outstrips supply, according to the U.S. Department of Agriculture....""

The first graph shows the Market for Cotton at equilibrium price and quantity "A".  


 Delayed harvests as described above serve to DECREASE the supply of cotton on the world market. This is shown be the shifting of the supply curve to the LEFT ("Supply 1") and movement along the demand curve to a new equilibrium price and market quantity at "B".

 Compounding the problem is the "booming demand" from Asian clothing manufacturers.  This is illustrated by the shifting of the demand curve ( from Demand* to Demand 1) to the RIGHT  and movement along the supply curve to another new equilibrium price and market quantity at "C".  The article suggests there is still have shortage of cotton on the market so we don't quite return to market quantity "Qe". 

There is potentially good news, however:

""High prices are a boon for producers in the U.S., which is the world's biggest cotton exporter. The U.S. is shipping at a torrid pace to keep up with demand. Exports sales have already exceeded half of the 15.5 million bales the U.S. is expected to produce, Ms. Johnson said. The U.S. cotton harvest is running ahead of normal, a situation that could potentially damp prices. The USDA on Monday said 13% of the cotton crop was harvested as of Sunday, ahead of last year's 7%.""

Markets for most commodites are not static and they dont recognize "ceterus paribus" (hold all varibles constant except for the one you are testing).  Many factors effect demand and supply constantly. Some natural, like the weather, and some more concrete, from scarcity to market manipulation.  Change is inevitable, so it provides opportunities for me to make blog entries and create supply and demand graphs...Does life get any better??? :)

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