2.2 Cotton Program-Induced Market Shocks
Commodity research and promotion may lead to shifts in retail demand, production costs, and/or
marketing costs. It is expected that the activities performed under the CRPP will simultaneously cause
each of these three types of shifts to occur in the domestic market for cotton. This is because the CRPP
engages in promotion designed to increase retail demand, research into fiber and textile quality that is
aimed at increasing mill-level demand directly (because of reductions in the cost of processing cotton),11
and agricultural research into methods of reducing production costs or increasing yields.12 In addition,
there is a shift in the supply curve resulting from the assessment itself. The assessment increases the cost
of production, resulting in a decrease in supply, all else equal. Because the assessment and the results of
agricultural research shift the supply curve in opposite directions, the net shift of the supply curve
depends on which effect is larger.
The existence of federal farm programs greatly complicates the calculation of the effects of these
shifts on price, consumption, and returns to producers. Although the 1996 FAIR Act was ostensibly
going to eliminate commodity price subsidies, they remain for cotton producers in the form of LDPs.
Moreover, cotton demanders (mills) receive payments under the Step 2 program to cover the gap between
the U.S. cotton price and the world cotton price. Figure 2 provides a diagram of these interactions
assuming an increase in demand due to the CRPP.13
Panel (a) in Figure 2 represents the undistorted market solution. Here supply and demand
intercept without subsidies on either the demand side or the supply side. A shift in the market demand
**
induced by the CRPP will cause a rise in the market price from Pm0 to Pm1. The shaded area (producer
surplus) represents the return to producers.
11This research may also increase retail demand if the quality of retail products improves as a result of the research
activities.
12There is compelling empirical evidence that producers should not be indifferent to the type of shift being funded (i.e.,
it is important to separate the effects of promotion, agricultural research, and nonagricultural research because they
may have very different returns to producers (Wohlgenant, 1993).
13Supply shifts resulting from the CRPP are not shown in this diagram to simplify the graphs and focus on the demand
effects of promotion and nonagricultural research, the areas where the majority of CRPP funds are allocated.
10