Tag Archives: cotton

05.11.2013 | International Trade: The Story of a Subsidy

Oddly, some US farm subsidies go to Brazil.

Imagine a safety net when you think of a subsidy. If prices are too low, then growers get money from the federal government. During the 1930s Great Depression, the goal of subsidies was to sustain a farmer’s purchasing power when he had a bad year.

Fast forward to 2013. Because the US is the world’s leading cotton exporter, our farmers depend on the world price. if that price is too low, they get a subsidy.

This is where Brazil enters the picture. Because US subsidies lower production costs, they depress world cotton prices for Brazilian farmers. Complaining to the WTO, a World Trade Organization composed of 151 countries that include the US and Brazil, Brazil said US cotton subsidies violated WTO rules. A WTO panel agreed.

However, Brazil still had a problem. Because WTO decisions are not enforceable and the US Congress was not about to eliminate subsidies voluntarily, the panel’s decision was virtually meaningless. Then though, Brazil threatened retaliatory measures that would include ignoring US pharmaceutical patents and music copyrights. It worked. Faced with WTO condemnation, angry Brazilians, US firms fearing retaliation, and subsidized US farmers, the US government devised a unique solution. As of 2010, through the Brazilian Cotton Institute, we would pay Brazilian farmers $147.3 million every year–$12.275 million monthly–until an acceptable farm bill is passed.

The farm bill is still being debated.

Our bottom line? Subsidies, like tariffs and quotas, are barriers that diminish the efficiencies of free international trade. As barriers, they obstruct David Ricardo’s comparative advantage and the ability of nations to produce goods and services for which they have the lower opportunity cost..

Sources and Resources: NPR’s Planet Money explains the US/Brazil cotton dispute in one wonderful 30 minute podcast. But then, for more of the specifics, I recommend this 2011 report from the Congressional Research Service. To complete the picture, this Slate column provides all you want to know about the Farm Bill that the US Congress is considering. (Econlife looked at the bill’s impact on the dairy industry here.)

Posted by: adminEcon
Tags: Brazil, cotton, exports, farm subsidies, international trade, Texas, world price, World Trade Organization (WTO)
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10.21.2012 | The Real Mother of Invention

Saying that profit, not necessity is the mother of invention, economic historian John Steele Gordon starts his column in this week’s Barrons. His focus was the 18th century clipper ships that earned people like John Jacob Astor $50,000 for a single voyage between the US and China. Furs went to China, tea returned and, because of the invention of the clipper ship, the voyage was faster than ever before.

More speed, more trips, more profits.

The Gordon column reminded me of a book I always enjoy rereading. In How We Got Here, Andy Kessler looks at a history of technology and markets. Echoing Gordon, Kessler takes the reader through the history of the steam engine. He begins with 18th century English coal mines that flooded because they were below water level. Realizing miners needed something better than their vertical bucket brigade, Thomas Savery invented the Miner’s Friend, a steam powered mechanized pump.

Here we can fast forward, from the first steam engines to the steamboat (yes, there is lots in between). But that gets us back to the clipper ship and again, how the quest for profits leads to invention. When steam power became cheap enough, because of their speed and cargo capacity (10 times more than sailing vessels), steamboats replaced clipper ships. Merchants, whose transport costs could run as high as three-quarters of the price of an exported good, saw their opportunity.

Again, more voyages, higher volume, lower prices, bigger profits and soon, the next invention.

Wouldn’t Adam Smith (mass production) and David Ricardo (free trade) both be smiling?

Sources and Resources: Happily, here you can easily take a look at the Kessler book (my source for steamship stats) while the Gordon article is here. For good brief bios on Smith and Ricardo, the econlib library, here and here, is a handy link.

Posted by: adminEcon
Tags: 19th century merchants, Adam Smith, Andy Kessler, clipper ships, cotton, David Ricardo, economic growth, economies of scale, exports, free trade, GDP, How We Got Here, John Steele Gordon, mass production, miner's friend, profit, steam engine, steamboats, Thomas Savery
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10.20.2012 | Peanut Butter Economics

Last year, we had a peanut shortage. As a result, Skippy raised its prices and Smucker’s removed its reduced-fat creamy peanut butter spread from supermarket shelves.

But now, supply has responded. Predicting a record year, the USDA says the peanut crop will exceed its recent 2008 high of 5.2 billion pounds. The reason? Farmers who had switched to more profitable commodities like cotton returned to peanuts when their prices went up.

As one LA Times blogger said, “Our national nightmare is over.”

And economists will be smiling because the peanut butter story is a perfect example of how incentives affect supply curves.

Sources and Resources: For lots of detail, I recommend this WSJ article and this one from the Chattanooga Free Press while for a smile, here is the LA Times blog. Also, you might enjoy this 1884 patent application for “peanut paste.” Finally, at econlife, here is some background from a past post on the peanut crop.

Posted by: adminEcon
Tags: cotton, drought, Georgia, law of demand, law of supply, peanut butter, peanuts, Skippy, Smucker
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10.12.2011 | Peanuts or Cotton?

Farmers decided to plant fewer peanuts when cotton prices soared. The result? Now peanut prices are skyrocketing. Here is the story.

Perhaps it all began with higher cotton prices. Responding, peanut farmers switched some acreage to cotton. Combine that decision with an unusually dry growing season in Georgia, the leading peanut producer, and too many scorched nuts and what do you get? A peanut shortage.

What will happen because of the peanut shortage? Peanut butter will cost us 40% more. And, to be sure they have enough of their basic peanut butter products, Smucker, the world’s largest peanut buyer, has temporarily stopped producing its reduced-fat creamy spread.

The NY Times said we had an acreage war between food and clothing. And here, a past econlife post discusses cotton prices.

The Economic Lesson

The peanuts story is a classic economics tale. On a supply and demand graph, the supply curve shifts upward and to the left when producers switch to a more attractive alternative. The result is less supply and a higher price.

An Economic Question: Now that peanuts are so pricey, what might you predict is the next supply curve move?

Posted by: adminEcon
Tags: change in supply, cotton, demand, peanuts, price, shortages, supply
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03.30.2011 | Cotton or Corn?

One farmer told the NY Times, “It’s going to be cotton stalks everywhere.”

With cotton prices soaring, acreage in Texas and other Southern states that had been used for wheat or corn now has cotton growing.

The result? A smaller increase in the U.S. corn and wheat crops; and much more cotton. The Times calls it an “acreage war” between the crops that clothe us and those that feed us.

The Economic Lesson

This is classic supply and demand. For cotton, the increase in supply will eventually push price down. Meanwhile, for corn and wheat, as supply is less than it would have been, price remains elevated.

On the demand side, with these supply curves moving, the quantity demanded will change. For cotton, the search has begun for alternative fabrics. And, as we previously noted, when crops get higher prices, so too does the land on which they are grown.

Consequently, even corn farmers are happy that cotton’s price is high.

Posted by: adminEcon
Tags: commodity prices, corn, cotton, demand, supply, wheat
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