China Cotton Still in Excess Supply

The good news is that China's elimination of price supports has reduced the incentive for its farmers to produce large volumes of poor quality cotton. The bad news is that the world still has too much cotton.

According to China Cotton Association data reported by a textile industry analysis, the country has 12 million metric tons (mmt) of cotton in storage. This year, Chinese production is expected to add another 6.6 mmt to the supply. Its import quota has been chopped to 890,000 metric tons (imports have been running over 4 mmt in recent  years). Adding up inventories, production and imports, China will have 19.7 mmt of cotton available. That's nearly three times estimated annual consumption of 6.8 mmt.

The Chinese textile business is not what it once was. Factory bosses complain that they pay 3,000 yuan more than the international price for every ton of cotton they use. They are also paying higher wages and sometimes encountering labor shortages.

The Chinese cotton price is 14,821 yuan/mt. The New York cotton price for December is 63 cents/lb, translating to 11,912 yuan/mt at Chinese ports, 2909 yuan/mt lower than the domestic market price.
Chinese textile factory bosses complain that orders have been down since the 2008 financial crisis. With high costs and insufficient innovation, they can't compete with southeast Asian producers on an equal footing. Some are going bankrupt or going on the lam to escape unpaid debts.

In a market where supply and demand determine prices, a decline in price sends a signal to producers that they should produce less cotton. China introduced a support price in 2011 to prevent cotton prices from falling. Chinese farmers kept turning out cotton and the government bought it up.

This year the support price--known as a "temporary reserve" policy--has been canceled. Farmers are to sell their cotton on the open market. The market will set a price. The government will calculate the difference between the market price and a "target price", then pay farmers the difference as a cash subsidy. That's the theory.

In practice, the market is not actually having the "decisive" role promised. The government's Agricultural Development Bank is flooding the countryside with cash to ensure farmers aren't turned away or paid with IOUs. The bank has allocated 60 billion yuan (nearly US$ 10 billion) to fund cotton purchases. A single cotton company in Xinjiang autonomous Region said it got a 1-billion-yuan line of credit. It is said that commercial banks have pulled out of the cotton-financing business due to the high risk (of prices falling?). Once again the Agricultural Development Bank is lending money to purchase commodities that are falling in value.

Peoples Daily introduces a Xinjiang farmer who says his seed cotton is selling for 6.3 yuan per kg this year, down from 9.8 yuan in 2013. He says farmers can't make any money at this price--they have to depend on the subsidy for their profit this year.

The target price is set at 19,800 yuan/mt for cotton that has been ginned. A 6-yuan/kg seed-cotton price translates to a lint cotton price of 14,000 yuan. thus, the subsidy is 5800 yuan/mt--over 40 percent of the purchase price.

According to Peoples Daily, the new policy will improve quality. The temporary reserve policy encouraged farmers to grow the maximum volume of cotton without regard for quality. This year, farmers have incentive to plant good quality cotton varieties (everyone gets the same subsidy per kilogram--that gives farmers incentive to sell at a higher price). The poorly calibrated mechanized equipment in Xinjiang also degrades quality by damaging fibers and introducing impurities. Foreign fibers are also mixed in [intentionally?] with hand-picked cotton. A Xinjiang cotton enterprise manager thinks the quality improvement will be the most important impact of the new subsidy.