Cotton: reserve purchases and import barriers

China's cotton demand has fallen as U.S. demand for Chinese textiles has slowed. Textile manufacturers are closing or cutting back production as they experience losses and accumulate unsold inventories. Commercial reserves of cotton in November were 3.5 million metric tons (mmt), 10% higher than November 2007 (1.78 mmt in Xinjiang alone). Unsold textile and yarn inventories were up too. Enterprises were estimated to be holding 28.5 days of unsold textile products and 21.57 days of yarn inventory.

As is the case in the soybean market, the government is the main active buyer as it procures cotton for government reserves to prevent prices from collapsing. On Dec. 9, the State Council issued a document floating ideas for policy support of the cotton market that featured planned procurement of 1.5 million metric tons (mmt) of cotton at 12,600 yuan/mt. According to one news report State procurement for cotton reserves totals 660,000 mt this year so far, but commercial reserves are still up 310,000 mt. A subsidy for good quality cotton varieties will be spread nationwide to all cotton fields and there will be unspecified "relief" for the textile sector.

Also similar to the soybean market, cheap imports are an obstacle to supporting domestic prices. According to at least one news report, a quality management system for imported cotton introduced by AQSIQ this year will be used as a nontariff barrier to slow cotton imports.

Cotton imports have already slowed. November cotton imports are reported at 76,000 mt, down 21% from October and down 25% from November 2007. This is the lowest value in four years. The average unit value of imports was $1.64/kg (11,270 yuan/mt). Estimated imports for the last three months of 2008 are down 36% from the same period in 2007. The total for January-November is estimated at 1.943 mmt, down 9%.

The falling cotton prices are affecting farmers. The breakeven seed cotton price is said to be 2.6 yuan/kg, but the current price is around 2.3-2.4 yuan and falling. It's as low as 1.8 yuan in some areas; at this price, farmers are estimated to lose 200 yuan per mu.