- DTN Headline News
China Battles Cotton Reserves
Monday, September 1, 2014 12:18PM CDT

By Lin Tan
DTN China Correspondent

BEIJING (DTN) -- Chinese cotton farmers will face a different marketing environment after harvest starts later this month.

The Chinese government's floor price purchasing program contributed to a mountainous stockpile -- almost twice annual consumption including the upcoming harvest. So this year, the government is switching to a target-price subsidy program and will pay farmers cash instead of buying more cotton.

"The cotton stockpile had increased a lot as government had to buy cotton at a higher price for the last three years," said Ruiping Li, vice president of Changshan Textile Co.

According to a recent survey, the state reserve is now as high as 11.6 million metric tons. As the world's largest textile producing country, China's cotton demand is around 7 mmt per year. It's estimated the country will produce 6.4 mmt of cotton in 2014.

International cotton prices have been cheaper than China's domestic prices over the past few years, leading to sizeable imports. China imported 4.14 mmt of cotton last year and 5.12 mmt in 2012. Its 2012 imports created global concerns and prompted India to halt all cotton exports.

It's not only price, Li said. "Imported cotton, especially U.S. cotton, has better quality that fits for higher quality textile products."

Textile companies complain about the quality of China's reserves because of the poor quality check in the government's purchasing system and long storage times that lead to deterioration.

"Usage of imported cotton also contributed to the large state reserve," Li said, because the industry uses less domestic cotton.

Each year, China sets the import quota at 894,000 metric tons, and some companies can apply for temporary quota after the threshold is reached.

Textile companies will also pay a higher import taxes if they don't have any import quota left. "Considering the better quality of imported cotton, it's still a good choice," he said.

The higher stockpiles have become a burden on the China Agricultural Development Bank, which provides financing for the purchase program, Li said.

Market prices have worsened, and the bank is struggling to sell off its reserves, even at a loss. It bought cotton at a price of $3,290 per metric ton, but auctioned off 17,000 mt (of 214,00 mt offered) at $2,796 per metric ton, a loss of $494 per metric ton.

While few details of the new target price program have been released, it will free the government from its obligation to buy more cotton from farmers. The new target price, at $3,193 per metric ton, is much higher than the current local price, and the government will pay farmers the price difference.

Li said he thinks market prices will keep in the lower part of their trading range until the textile industry consumes most of the reserves. Eventually, he believes the low prices in China will have an impact on international prices.

DTN Senior Analyst Darin Newsom said it sounds like China will still import higher quality cotton from the U.S.

"As for possibly influencing the global price of cotton in the future, the charts I look at would seem to agree," he said. The forward curve of futures contracts shows a strong carry in the market, indicating a long-term bearish supply and demand situation. The market is also mired in a long-term sideways trend with noncommercial traders holding a net-short futures position.

"Both would suggest traders in the U.S. market are generally bearish, having little reason to show any buying enthusiasm," Newsom said.


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