South-Western College Publishing - Economics  
U.S. Cotton Growers face Political and Weather-Related Storms
Topic Supply and Demand
Key Words cotton, America, trade, subsidies, supply, price.
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Reference ID: A148421847

News Story Drought does terrible things to a cotton crop. In fact, cotton doesn't like rain; it doesn't like dry weather; it doesn't like too much water; it doesn't like too little moisture. American farmers are used to dealing with all of those factors. And if other nations can convince the U.S. to cut its cotton subsidies, American farmers have to deal with lower income and additional weather risk, as they become more susceptible to changes in world market prices and in the weather.

Texas grows about 1/3 of the U.S. cotton crop--about 6 million bales out of 20 million annually. West Texas weather determines the outcome for much of the crop each year-a factor that cotton growers certainly cannot control. In an effort to encourage cotton growers, the U.S. has provided subsidies to cotton farmers to support their income for generations. Developing nations wanted to eliminate precisely those subsidies in the recent Doha Round of the WTO trade talks.

Developing nations in Africa, South America, and Asia argue that the $4 billion that the U.S. spends every year in subsidies amounts to an unfair advantage to U.S. farmers on the world market, because the federal government has essentially taken the risk out of planting decisions. As a result, U.S. farmers can sell their cotton for far lower prices than other nations can, which in turn pushes down world prices.

As with virtually every economic action, eliminating the subsidies would create both winners and losers. Developing nations would win because world prices will rise if the subsidies are withdrawn and American growers take on the full costs of growing cotton. Thus, U.S. farmers will lose, with some estimates suggesting that cotton income will fall by about 20% over six years. But when discussing "fair trade," developing nations argue, shouldn't those who talk about fair trade also walk the walk?

Questions
Discussion Questions:
1. Why will eliminating the subsidies increase the world price of cotton? Illustrate your answer with a graph of supply and demand for cotton; what changes as the subsidies are eliminated?
2. Do consumers benefit from the elimination of the subsidy? Why or why not?
3. What happens to the distribution of consumer and producer surplus with the elimination of the subsidy?
Multiple Choice/True False Questions:
1. A heavy drought in West Texas will:
  1. Raise demand for U.S. cotton.
  2. Lower demand for U.S. cotton.
  3. Raise supply of U.S. cotton.
  4. Lower supply of U.S. cotton.
2. As the subsidy is eliminated over time, and cotton farmers are forced to shoulder a larger burden of the risk of market fluctuations and weather changes, what will happen to the price of cotton?
  1. Lowers profits because production costs rise.
  2. Lowers profits because production costs fall.
  3. Higher profits because production costs rise.
  4. Higher profits because production costs fall.
3. The article suggests that the income of U.S. farmers will fall, even if the price of cotton rises. Assuming that U.S. supply of cotton doesn't change, what must also be happening for U.S. farmers' incomes to fall?
  1. Share of US cotton sold worldwide must fall
  2. Share of US cotton sold worldwide must rise
  3. Share of US cotton sold worldwide remains the same
  4. Share of world cotton sold must be falling.
Source "A Tangle of Troubles." The Economist. July 20, 2006.
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