INTERACTION EFFECTS OF PROMOTION, RESEARCH, AND PRICE SUPPORT PROGRAMS FOR U.S. COTTON

determinants of retail and intermediate textile demand are substituted into the farm-level demand
equation. This results in reduced-form equations for prices, which have the following form:

Prd = Prd(Ptd, Ptm, Ag, Ab, Af, Wr, Zr), and                                         (13)

Prm = Prm(Ptd, Ptm, Ag, Ab, Af, Wr, Zr).                                             (14)

Substituting (8) and (9) into equations (13) and (14) for P_tm and P_td, respectively, and substituting (13)
and (14) into (5) yields a partially reduced-form equation for domestic textile mill demand for
domestically produced cotton:

Q_f^d_d = Dfd(Pcd, Pcf, Ag, Ab, Af, Rt, Wr, Wt, Zr).                                     (15)

In addition, we modeled the export demand for raw U.S. cotton as

Q_f^d_x = Dfx(Pcd, Pcf, Wm, Zx, Tf).                                                    (16)

Domestic demand plus export demand gives us total demand for domestically produced cotton.

In addition to a model of the demand for domestically produced cotton, a model of the domestic
supply of cotton is developed so that we could simulate equilibrium price and quantity under different
conditions. Annual production of cotton depends on the expected effective price of cotton (i.e., the price
producers expect to receive when they sell their output, adjusting for government programs) and other
factors that shift the supply function (e.g., input costs). Thus, the domestic supply of cotton is modeled as

Q_f^s_d = Sfd(EPcd, Ra, Wf)                                         (17)

where EP_cd is the expected effective price of cotton. An expected price is used because of the lag
between planting, harvesting, and selling cotton. It includes not only the market price expected by
producers, but also the expected effects of government payments. The higher the expected market price,
the more producers are willing to supply, everything else being equal. However, in addition to the effects
of the market price, U.S. government price support programs for cotton may also influence cotton
producers’ decisions. When producers are anticipating government payments that vary with the quantity
produced, the relevant supply price they face is the expected market price plus the expected government
payment per unit.

<<   8   9   10   11   12   13   14   >>

More intriguing information