Cotton Economics: Demand is the Hare, Supply is the Tortoise

So what did you think of cotton back in April? If you had charted its price, here’s what you would have seen:

Wow! Isn’t that pretty certainly the next sure thing? It’s going through the roof. Let’s buy some cotton futures. China is becoming the world’s largest consumer of cotton, and their economy continues to grow. Production has dropped recently–maybe we should think about “peak cotton,” as we thought of peak oil.

That chart shows data through March of this year. Let’s update with the most recent information:

Oops. What happened? Supply and demand.

One reason for commodity price run-ups such as cotton’s rise is that demand can usually rise faster than supply can increase. Demand is the hare. Supply is the tortoise. But how long does it take to increase supply? For many agricultural commodities, about one growing season. It will be longer for tree fruits and grapes, but field crops acreage can increase fairly quickly.

Other commodities have longer supply time lags. Many metals take several years to get new mines and smelters running. Oil probably has the longest time lag, as increased production requires seismic studies, drilling, laying pipelines and finally adding refinery capacity. Supply will eventually increase, but it takes a while.

For agricultural commodities, remember that harvests vary with weather conditions and pests and blight. It’s not unusual to have a very bad year of output, with production fully recovering the following year.

Whenver I see a commodity price spike, I anticipate a price decline. I may not be sure whether the price will rise higher before the fall, or exactly when the fall will occur, but pretty much any sharp commodity price hike will be followed by a decline.

About Bill Conerly 34 Articles

Affiliation: Cascade Policy Institute

Dr. Bill Conerly is the consultant who connects the dots between the economy and business decisions. He holds a Ph.D. in economics from Duke University and was formerly Senior Vice President at First Interstate Bank.

Dr. Conerly is author of Businomics: From the Headlines to Your Bottomline—How to Profit in Any Economic Cycle (http://www.businomics.com), which provides business leaders with a framework for understanding current economic news. He is co-author of Thinking Economics, a multi-media high school economics curriculum used in 24 states.

Dr. Conerly has been interviewed on the News Hour with Jim Lehrer, CNN and local television and radio stations across the country. He has been quoted in ...More the Wall Street Journal, Fortune Magazine, and USA Today.

Dr. Conerly is chairman of the board of Cascade Policy Institute, a member of Oregon Governor Ted Kulongoski’s Council of Economic Advisors, and a Senior Fellow at the National Center for Policy Analysis.

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