HC1072 Economics: Analysis of the Australian Cotton Market

This report provides an in-depth analysis of the Australian cotton market, focusing on its market structure, competitiveness, and the impact of changing conditions. It begins with an executive summary and an introduction that highlights the importance of agriculture to the Australian economy, with specific emphasis on the cotton industry's role as a major exporter. The report describes the cotton market, including production, and export data. It then examines the changes in market conditions, particularly the impact of drought on production levels, and utilizes the supply and demand model to illustrate these effects, showing how reduced supply influences price and quantity. While the model suggests that reduced supply should increase prices, the report acknowledges that the global market dynamics are more complex due to Australia's limited share of the global market. The report concludes that, despite the drought, the impact on global prices may be minimal due to other factors, such as increased cotton production in the USA. The report is structured with sections on market description, changes in market conditions, and a conclusion, with references included. The assignment was submitted for the Economics and International Trade course HC1072 at Holmes Institute.

Running head: AGRICULTURE PRODUCTION
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Name of the Student
Name of the University
Author Note

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Executive Summary
The report aims to describe the relevant market of the cotton in Australia in terms of its product
or service, degree of competitiveness and market structure which characterize the market of
cotton. The changes that have occurred are identified and their impacts are also discussed in
details. A proper analysis of the changing market conditions and the impacts are done thoroughly
by incorporating the supply and demand model along with the explanation of the determinants of
demand and supply. Finally a conclusion has been drawn about how the condition will affect the
global market.

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Table of Contents
Introduction......................................................................................................................................4
Market Description..........................................................................................................................4
Changes in Market Condition and their Impacts.............................................................................6
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

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Introduction
In Australia, the agriculture plays a very important role for the economy, contributing to
the overall economic, environmental and social sustainability. Australia is regarded as the major
producer and exporter of the agricultural products of the country. The nation exports 77% of
what it grows (Purves, Niblock, & Sloan, 2015). In 2016-2017 the country earned about $44.8
billion from the export, a rise from the previous export earnings of $32.5 billion as in the year
2010-2011. The agriculture sector is the best prospect industrial sector of the nation and greatest
contributor to the national Gross Domestic Product (GDP) growth. The sector contributes around
3% of GDP by employing roughly 4% of total country’s workforce directly. The agriculture
industry is one of the most important pillars having a worth of $60 billion to the Australian
economy (Pearce et al., 2018). Recently, it has become the rapid growing sector of the economy
even if the rate of growth differs with the seasons but still the growth trend is strong as well as
sustained. The Australian agriculture is becoming increasingly diversified with main crops
including wheat, rice, fruits, tobacco, coarse grains, oilseeds, cotton, sugarcane and others.
Among all these agricultural products, Australia accounts 99% of domestic cotton export and has
become one of the biggest supplier of the raw cotton in the whole world (Gain.fas.usda.gov,
2019).
Market Description
The wide open areas as well as healthy and favorable natural environment have made the
country, Australia, a perfect place for cultivating cotton. In the year 2015-2016, the healthy
cotton growing conditions along with proper water accessibility rose the productivity by 32%
accounting about 551 million kilograms of the produce. The cotton industry of the country has
become a successful industry in terms of efficiency, modernization and responsibility, producing

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the highest yielding as well as highest quality cotton across the globe while using few available
natural resources. The sector is continuously improving its practices by finding out the new
methods of growing the cotton in a smarter, better and more efficient way. The cotton producers
of Australia are constantly investigating for detecting various practical and new ways for saving
water, decreasing the use of chemicals (like fertilizers, insecticides, pesticides), soil
improvement, increasing the yield and finally to maximize their profit (Grace et al., 2016). The
industry domestically faces moderate entry barrier as all types of inputs required have ready
availability along with many farms offered for sale. The barrier lies in terms of required capital
investment, availability of water resources and problems related to financing (investment).
However, the cotton industry of Australia is operated under the unregulated and uncontrolled
market system (Silburn et al., 2014). The cotton producers have the opportunity to deliver their
product directly to processor or having it sold or marketed by independent merchant. The
Australian cotton which is sold in the globalized market faces high competition from
approximately hundred cotton producing countries for its global trade share. The industry has
been able to achieve the reputation of being the reliable supplier in regards to fastest shipping to
the export destination and product delivery. The demand for Australian cotton is relatively high
due to its high quality with nearly zero contamination in its product (Cottonaustralia.com.au,
2019). Above all, more sophisticated technology is employed in growing cotton and cotton
growers are seeking for new innovation for ensuring high demand for the Australian cotton all
over the world. China, Thailand, Indonesia, Korea, Bangladesh and Vietnam are some of the
main exporting markets for the country’s cotton. In 2017-2018, Australia became the fourth
largest cotton exporter in the world, dropping down from being the third largest exporter,
exporting 852 thousand bales of cotton, after nations like United States of America (3450

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thousand bales), India (1128 thousand bales) and Brazil (909 thousand bales) (Statista, 2018).
Besides exporting raw cotton, Australia too exports cottonseeds which is a by-product obtained
during the processing of cotton gin. Though Australia is the fourth largest exporter of cotton but
it only contributes 4% of the global cotton market. Each year the country produces almost
900000 metric tons of cotton with the major percentage (more than 99%) of the production being
exported through the ports in Sydney, Melbourne and Brisbane. It is worth mentioning that that
Australia produces barely 3% of the total world’s cotton but still the Australian cotton industry
maintains a good track of meeting the needs of consumers and manufacturers globally (Robinson
& Outlook, 2015). The international price for the county’s cotton vary sufficiently because of the
world price of cotton which is denominated in terms of USA (United States of America) dollars
and exchange rate of Australian-USA dollar. This is also dependent on several other factors like
world demand and supply, quality of cotton, value of Australian-dollar and so on (Apergis,
2014). The Australian cotton price is marked as being highly volatile which is basically driven
by several international forces.
Changes in Market Condition and their Impacts
In the recent years some changes in the cotton market condition of Australia have been
observed which have a noteworthy impact (Williams et al., 2015). Persistent bad condition of the
weather as well as drought in the major cotton yielding areas in Australia like Queensland and
New South Wales had an adverse effected on the cotton production of the country. The
extremely hot, dry weather and high water prices had reduced the irrigated production of cotton
by half (Roth et al., 2014). The acute scorching and dry climate during the summer period in
Australia accompanied by lower amount of rainfall have resulted in decreasing the water levels
mainly in the irrigated cotton yielding areas. This weather condition has also decreased the

Q2 Quantity of Cotton
E2
E1
Q1
P2
P1
D
S2
S1
Price
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moisture level in the soil making the soil too dry for cultivating the cotton properly (Roth et al.,
2014). It is forecasted by the Adam Kay, Chief Executive Officer (CEO) of Cotton Australia
Ltd., that in 2018/2019 the overall production will be 2.1 million bales which is less than the half
compared to the last year, even if the picking and ginning of cotton is still on progress (Jeffery,
2019). Insufficiency of water had reduced the yield of the cotton crop ranging from 7 to 14 bales
per hector. Furthermore, the drought will never stop its progress in the coming years dropping
down the production level of the cotton by half again. In this way the production of the cotton is
gradually decreasing thereby deteriorating the supply year after year. In order to analyze the
changing market condition signified by the reduction in the amount of cotton supply, economic
theory of demand and supply model is being incorporated to explain the effect of the changing
market conditions on the price and the quantity of the goods and services that are traded. The
demand and supply model explaining the phenomenon is illustrated in the diagram below.

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Figure 1: Demand and Supply Model
Source: Created by the Author
The above diagram portrays the Australian cotton market condition with the aid of the supply
and demand curve. The quantity of cotton is plotted along the horizontal x-axis while the price of
cotton is displayed along the vertical y-axis. Initially, in the normal situation the supplied
quantity of the cotton is represented by S1 curve and the demanded quantity of cotton by D
curve. The meeting point of the supply and demand curve is leveled as the point of equilibrium,
with its corresponding price and quantity as the equilibrium price and equilibrium quantity
respectively (Bose et al., 2014). In the graph shown above, the S1 (supply curve) and the D
(demand curve) meet each other at the point E1 which is the equilibrium point the cotton market.
The corresponding price and quantity of E1 which are the equilibrium price and equilibrium
quantity are P1 and Q1 respectively. As discussed earlier, due to the extremely dry and hot
Australian climatic condition that results into drought, the production of the cotton has reduced
to the half compared to the previous year. As production has dropped to its half, so the supply of
the cotton will also fall because of lack of cotton production up to the mark. Hence, the falling
supply of the cotton will shift the supply curve to the left (upward) as represented in the figure1
by S2 curve (Azevedo & Leshno, 2016). The new supply curve S2 cuts the demand curve D at a
new point E2 above the previous equilibrium level E1. Thus the new level of equilibrium is
restored at the point E2 due to the decline in the cotton supply level. The new equilibrium price
which corresponds to the new equilibrium level E2 is P2 and the new equilibrium quantity at Q2.
From the figure 1 it becomes clear that the new equilibrium price is more than the prior
equilibrium price (P2 >P1) but the new equilibrium quantity is less with respect to the previous
equilibrium quantity (Q2<Q1). Therefore, it can be said that due to the fall in the supply of the

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cotton as a consequence of low cotton production level the price of the cotton rises while the
quantity diminishes. Though the interpretation of the phenomenon with the help of the demand
and supply model shows that the reduction in the supply will drive the price of the cotton high in
the global market but in reality it will not be the same (Lu et al., 2015). The decline in the supply
of cotton will not lead to the price hike. This is because the Australian cotton contributes only
4% of the international market for cotton and such a small cotton production is not sufficient
enough to swing the prices of the global market in one way or by another way (Jeffery, 2019).
Moreover, the increase in the plantation of cotton in USA (the leading exporter of cotton) will
rise the cotton production therefore the supply in the global market and so there is a great
possibility that this will push the prices down (Roche, 2014). Additionally, the rise in cotton
plantings of USA could reduce the price of cotton for the Australian cotton growers.
Conclusion
From the entire analysis done above it is found that as a result of the drought in the main
cotton growing areas like Queensland and New South Wales as well as low-to-no allocation of
water to most of the cotton growers has declined the Australia’s cotton production to half.
Reduction of the amount of cotton growth to half has shrunk the supply of the cotton in the
global market too. According to the demand and supply model analysis done above, it is found
that as the supply of quantity of cotton in the international market reduces, it will rise the level of
the global cotton price but in reality this illustration and interpretation which is carried out with
the assistance of the demand and supply model does not work. The fall in supply of cotton will
not necessarily lead to price hike in the global cotton market. The foremost reason behind this
contradictory phenomenon is that the Australian cotton contributes only about 4% in the
international cotton market and this meagre production will not be able to swing the price of the

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global market in any way. Thus, even if the Australia drops the percentage of cotton supply this
year then it will not really going to affect the international market. Moreover, there is a tendency
that the price of the cotton will decline because the leading exporter of the cotton in global
market, United States of America (USA) will rise the cotton production as it has planted huge
amount of cotton crops this year. The rise in production of cotton in USA will push up the
supplied quantity of cotton in the global market thereby driving the price down. Hence, it can be
concluded that even if the supply of Australian cotton will get reduced in the global market due
to bad climate and drought but the price will not fall and in fact there is a propensity of the
international price to decline because the USA cotton will push up the supply to a great extent in
the global market.

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References
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