China will hold its target price for cotton steady at 18,600 yuan per metric ton for the next three years--unless authorities decide to change it.
A Q&A released by China's National Development and Reform Commission on March 17 explained that this is part of a "deepening" reform of the target price subsidy for cotton. The target price will be set by calculating the average production cost for the past three years and adding a "reasonable profit"--a kind of cost-plus pricing. The target price will be set once every three years instead of annually, and there will be an upper limit on the amount of subsidy a single recipient may receive. The subsidy only operates in Xinjiang Autonomous Region (although a number of other provinces have distributed their own "target price" subsidies as well).
The target price replaced the temporary reserve program in 2014. When the market price is less than the target price, the government pays a subsidy to farmers based on the shortfall between the market price and the target price.The initial three-year pilot program is now complete. The new target price of 18,600 yuan/metric ton is the same as this year's target price and will apply for 2017/18, 2018/19, and 2019/20. The market price has been below the target price during each of the first three years of the pilot.
The Commission proclaims the pilot a success for having narrowed the gap between domestic and foreign cotton prices, protecting farmers' profits, giving subsidies directly to farmers, raising profits for textile producers, reducing production in marginal regions, shedding huge government reserves, and improving cotton quality. The Commission says that farmers are now producing cotton demanded by downstream users instead of growing poor quality cotton to sell to the government.
However, the Commission acknowledges some conflicts and problems related to the pilot. Farmers and enterprises were unsure whether the subsidy would continue after the end of the three-year pilot, the Commission said. The yearly determination of the target price failed to give industry participants stable expectations which was said to prevent stability of cotton production. The Commission said farmers need to have stronger incentives to plant cotton and further improve quality.
Futures Daily said there will be pilot programs for other experimental cotton subsidies as well, including "insurance + futures" in which producers pay a premium to an insurance company (actually about three-fourths of the premium is subsidized) and receive an indemnity payment if the market price is less than a target. A linkage between subsidy and cotton quality will be set up in another pilot. Authorities apparently are not in a big hurry to decide on an approach to subsidies. Futures Daily said authorities will accumulate experience with different types of cotton subsidies that will guide the approach to overall subsidies.
Meanwhile, a group of least-developed countries are still hammering on the "western countries subsidize cotton farmers" meme. At the WTO, Benin led a proposal for "urgent action" to limit subsidies by developed countries. Apparently, nothing was mentioned about China creating the world's largest subsidized cotton base in its central Asian Xinjiang region while essentially shutting down its imports from the "cotton 4" west African countries--Benin, Mali, Burkina Faso, and Chad--during 2015 and 2016.