ECN120 Economics : Exports to Global Markets

1. A) The Law of Demand

1) Locate a news article that discusses how demand may have changed in some way.  Use the newspaper, Internet, or magazines.

2) Headline of the article: Australian sugar supply chain shake-up as sugar demand increases

3) Write two-paragraph summary of the article.  Include the following:

1. a) Summarize the article

The main idea in the article is the how Australian supply chai shook-up as sugar demand surge. The articles hold that the supply chain of Australian sugar is set to shake-up due to the announcement by the Wilmar International (giant miller) that it will cease exportation via Queensland Sugar Limited. The Wilmar International would cut ties with Queensland Sugar at the end of 2016 harvest season (AFN-Staff-Writers, 2014). The giant would create individual export channel for 2017 harvest season going forward. It holds that the Australian sugar exports has been controlled by Queensland sugar in the past. The legislation initially required that all sugar had to be sold to Queensland sugar. This meant that only one channel to market existed. All Australian were still went through Queensland despite deregulation in 2006.  However, the held that this one-sided channel was set to change in 2017. The article hold that by Wilmar establishing its individual export channel, it was in essence creating an opportunity for growth of revenue. This could be essential to the company’s success.

The sugar manufacturers looked to export markets for their growth  as the slower annualized growth of a mere 1.10% was forecast for sugar manufacturing industry over the coming 5 years while businesses were becoming increasingly focused on international markets for growth in revenue. The manufacturers expected more than fifty percent of industry revenue in year 2013-14 to emerge from exports, indicating the significance of such global market to sugar industry. It was demonstrated that Wilmar’s own export channel would provide the company better control over exports to global markets thereby contributing to strong forecast growth in revenue of the coming five years.  The farmers were less thrilled with the plans of the Wilmar as the Queensland Sugar export channel has precluded price competition on sugar export market. Farmers feared that the new channel creation would trigger a race to bottom on prices of sugar exports as many farmers (more than 2,500) were expected to grow the cane for manufacturers. The farmers thus had negligible power to negotiate with giant sugar manufacturers and hence contended with fluctuating weather trends, alongside volatile farmgate prices triggered by downstream export market exposure. Thus the farmers held that competition via price in the export market would put price pressure on farmers, thereby reducing revenue as well as affecting their profitability.

1. b) Identify what is being demanded in the article.

The sugar and sugar cane by products.

1. c) Identify whether demand has increased or decreased.

The demand has increased

1. d) Explain why demand has changed in this way.  

There was also rising demand for sugar by-products that made the sugar cane farmers even in a stronger position. This was due to surging global concerns regarding ongoing sustainability of oil that drove the biofuels’ demand higher. Thus demand had been surging for the by-product of sugar utilized in ethanol production. Demand for sugar cane was thus projected to increase suddenly as the technology was becoming more and more sophisticated and vastly embraced. Such a demand would balance off the adverse price effects triggered by second export channel creation. The global sugar consumption was thus expected to increase over the coming five years. Both income- and population growth in economies like India and China besides rising westernization of diets, in those economies, were expected to propel sugar consumption upwards. This would then stimulate the sugar cane demand hence promoting the growth in revenue as well as higher margins for profit for the growers. Consequently, annualized revenue growth of 3.20% was forecasted for sugar can growing industry over the coming 5 years, to hit a healthy 1.20 billion dollars in 2018-19.

1. e) Identify whether the product has an elastic or inelastic demand and explain why.

The product (sugar and its by-products) has an elastic. This is because a small change in quantity demanded triggered a corresponding in price as indicated in the summary whereby farmers are worried that price competition would lead to less revenue and hence less profitability.

4) Draw a demand schedule graph for the product and on the graph show how demand has changed.  Include labels as well as a supply line (S, Q, QD, QS, P, etc.) 

5) Equilibrium (Supply and Demand)

1. a) Did price increase, or did it decrease?  Did quantity increase, or did it decrease?

The price increased from P1 to P2 as shown in the above diagram where the demand shifted from D1 to D2 outwards. The quantity demanded increased from Qd to Qd2 as shown above.

1. B) The Law of Supply

1) Locate a news article that discusses how supply may have changed in some way.  Use the newspaper, Internet, or magazines.  

2) Headline of the article: Sweet news for Australia's cane growers as global sugar price surges.

3) Write two-paragraph summary of the article  

1. a) Summarize the article

The main idea highlighted in this article revolves around the good news for the growers of cane in Australia as the global prices of sugar increased in 2016. The raw sugar shortage triggered the product’s hugest rally in almost 30 years. The sugar supply was back in Australia town and sugar cane growers expected to regain their ground they lost in year 2015. The sugar prices in Australia for March 2016 supply contract closing at 14US cents a pound on February, 2016, up 1.30 cents. This represented the largest percentage increase in twenty-eight years. This change caught Australian market by surprise as the speculative interest remained often frenetic at that point. The large rally was due to global supply turning from the surplus to deficit for the 1^st time in 5 years. The conditions had been dry in India and Thailand. The International Sugar Organization decreased its global production estimates on the basis of the losses in production in India and Thailand hence catching the market extremely short. Sugar remained a volatile product that goes up and drops frequently. The bounce is believed to be one with increased air time, provided that sugar demand was forecast to well-outdo supply for coming 2 years. Further advance in prices were expected in the short run thus pointing to a return to prices over US15 cents per pound. This was good news for Australia’s 4,000-odd can growers. It was expected to add a promising kicker to end of season for 2015 pricing pool.

1. b) Identify what is being supplied in the article Sugar

1. c) Identify whether supply has increased or decreased Supply has increased

1. d) Explain why supply has changed in this way.  Use at least one reason.

The situation was described as the sugar being back in town. It was a short in arm to cane growers who were watching nervously the losses which took place in early 2016 January. It was a large boost in confidence. The sugar industry in Australia remained firmly geared to export market with over three million tonnes sold in foreign economies by Queensland Sugar Limited per year. The sweetest news was that local consumers who like the spoonful of sugar remained vastly insulated by the price movement per day because of long-standing contracts. The growers hoped to regain ground they lost in 2015 by supplying more as the rally was probably a correction on the challenging prices in the course of 2015 season which saw certain speculation might have plunged beneath US10 a pound (Zonca, 2016).

It was definitely the right course. It was never the price where growers would wish to see since then the break-even prices had gotten above US14 cents a pound. It was only hopped that the price would get to about US16 to avail certain opportunities for growers who dearly pay for high electricity bills due to irrigation reliance to supply more. A boost in prices of sugar would go some way balancing off such bills by giving growers confidence for promising 2016. The price was going forward and this would make growers excited and pick up the lost ground which had been witnessed in the last 12-18 months.  

1. e) Identify if the product would have an elastic or inelastic demand

Sugar would have an elastic demand. A change in price of sugar leads to a change in quantity demand in an opposite direction. A positive change in price leads to a positive change in supply of sugar by the cane growers selling more of the raw products hence sugar has an elastic supply.

4) Draw a supply schedule for the product and identify how supply has changed.  Include as many labels as possible. Include a demand line that shows whether the product would be elastic or inelastic for consumers. Explain this in your analysis.

5) Equilibrium (Supply and Demand)

1. a) Did price increase, or did it decrease?  Did quantity increase, or did it decrease?

With the demand remaining fixed, the price decreased from P1 to P2 as shown above while the quantity supplied increased from Q1 to Q2 as shown above.

1. C) Price Ceiling or Price Floor

1) Locate a news article that discusses either a price ceiling or a price floor.  Use the newspaper, Internet, or magazines. (Think about an using an article that discusses minimum wage, though not the one I gave you)

2) Headline of the article: Minimum wages and the path to poverty

3) Write two-paragraph about the article.  Include the following:

1. a) Summarize the article

The articles holds that minimum wage leads to poverty. The article is based on a review that set its sights on minimum wage. The review acknowledges that by keeping individuals out of labor market, the minimum wage creates the very poverty trap it purposed to alleviate. The overarching question asked by the Productivity Commission in Australia is whether minimum wage trigger unemployment. The article commission sought to prove or disapprove whether or not there is an influence from minimum wage on employment. The question ask here is whether imposing price floors decrease supply of labor.

It is true that any adequately huge minimum wage above market prices shall lock workers out of workplaces. Doubling the minimum wage for instance from present $16.87 per hour to $34. This will make the employers to shrink their workforces and solely hire individual whose productivity might justify new cost. Tripling minimum wage or quadrupling will make minimum wage to be $168.7 per hour. People will obviously lose jobs. Labor markets are government by impersonal, and amoral economic forces of demand and supply. The Fair Work Commission thinks that modest minimum wage adjustments have a trivial or even zero, impact on employment (Berg, 2015).

As minimum wage increase towards zero, the unemployment cost will also approach zero. Minimum wage cause employers to prefer young workers from more privileged households than less privileges households. Minimum wage thus hurts growth of jobs over time, a burden which falls mostly on young workers as well as low-wage industries. Minimum wages are thus comparatively ineffective social policy for helping the poor. Minimum wage contains misemployment impacts which befall heavily by low-skills workers. The minimum wage discourage human capital formation. It culminate in price surges on commodities often consumed by low-income households.

1. b) Identify who is supposed to benefit from the price control

Young workers and low-skilled workers and poor and near-poor households

1. c) Identify who is hurt because of the price control

Young workers; low-skilled workers; poor- and near-poor households

1. d) Explain whether you think the price control is a good idea or a bad idea, whilst discussing surpluses and shortages

The price floor controls is a bad idea since it triggers unemployment and hence creates the poverty trap it is intended to cure. Thus it hurts the very people it ought to have helped. Minimum wage through price floor appears to do very little, if anything, to boost income of poor and near-poor households. It is more likely to have negative effects on such families. It will even be more harmful if the Abbot Government legislates its no-welfare-for-six-months policy. The young workers willing but unable to land jobs at minimum wage shall be ineligible for dole-recipe for destitution.  Minimum wage through price floor thus creates the very poverty trap it is intended to alleviate by barring the most vulnerable individuals from getting the foothold in labor market.   

4) Draw the graph of the price floor.  Include all labels, including the dead weight loss. 

5) Draw a second graph explaining what could happen in the market in the future to reduce the effectiveness of the price control if the price control remains the same. Include a one paragraph analysis. (Think laws of supply and demand)

The economic forces of demand and supply can work to erode the effectiveness of the price floor. For example, a price floor remains a guaranteed minimum wage, and hence workers and employers can choose to trade at higher prices. Thus the price floor set a lower wage will be effective. 

From the above graph, it is shown the the workers and employers may choose to work above the price floor and hence willl be opearting at a new equilibrium above the price floor making the price floor being ineffective.

References

AFN-Staff-Writers. (18th June 2014). Australian sugar supply chain shake-up as sugar demand increases. AUSTRALIAN FOOD NEWS, 1-2. https://www.ausfoodnews.com.au/2014/06/18/australian-sugar-supply-chain-shake-up-as-sugar-demand-increases.html 

Berg, C. (27 Jan 2015, 8:14am). Minimum wages and the path to poverty. The Drum, 1-2. https://www.abc.net.au/news/2015-01-27/berg-minimum-wages-and-the-path-to-poverty/6048126 

Zonca, C. (24 February 2016 at 11:34 am). Sweet news for Australia's cane growers as global sugar price surges. ABC-News, 1-2. https://www.abc.net.au/news/rural/2016-02-24/global-sugar-price-surges-as-supply-surplus-turns-to-deficit/7197486