Courtesy of Mish.
Inevitably, bad things happen when governments interfere in free markets. Here’s an interesting example regarding cotton stockpiling.
In 2011, China put a floor on the price of cotton and started a stockpiling program.
In general terms, if a floor (on anything) is too high, the result is overproduction and forced stockpiling.
If a ceiling is too low (hoping to stop price inflation), as is the case in Venezuela right now, merchandise disappears from the stores and a black market thrives. (See Venezuela’s Hyperinflation Anatomy; Army Storms Caracas Electronics Stores; Total Economic Collapse Underway; Could This Happen in US?)
With cotton, China set the support price too high, resulting in massive overproduction and huge stockpiles. As an interesting twist, there appeared to be shortages in spite of the huge stockpiles.
How? Because the floor price was set too high, Chinese textile mills could get a better price by importing cotton. Ironically, all Chinese production went into stockpiles instead of textile mills, and the Chinese clothes mills had to import, driving up prices worldwide.
As a result of non-free market intervention China is stuck with half the world’s cotton supply and falling prices as well.
The Financial Times discussed this situation in China abandons failed cotton stockpiling programme.
However, the Times failed to mention the free market principles as to why the program was such a disaster.
Lessons Not Learned
Curiously, China still has a soybean reserve program in place. The Financial Times notes “A representative for the Heilongjiang Soybean Industry Association said his group hoped that some sort of improved stockpiling policy would remain in place.”
…
