The China Factor

Sitting on huge stocks of raw cotton and expected to decrease her raw cotton imports, China could significantly influence the world market in 2014.

By Mark Lange
NCC President/CEO

 
What is China’s stocks/policy situation?

Since 2011, the Chinese government has purchased and stored almost 75 million bales of its production at a price well above world market prices. To meet its textile mills’ demand, about 20 million bales of that cotton have been sold, but as of early 2014, more than 50 million bales still resided in government storage.

China’s stocks policy has been a recent boost for U.S. cotton farmers because its textile industry looked increasingly to the world market to satisfy its demand for cotton. For the 2011-2013 marketing years, China is estimated to have imported some 55 million bales – about 15 million of those being U.S. cotton.

Unfortunately, China is poised to change its policy for 2014. It has announced it will cease building reserves and support its farmers through a target price mec-hanism with the new policy beginning as a pilot program in the country’s western region – which accounts for 60 percent of its total cotton production. Pre-sumably, if market prices fall below the target, its farmers receive support based on the difference between the market and target prices. Details will be sorted out, and China’s production will adjust to the new policy. Cotton production may drop in China’s eastern regions.

What about China’s raw cotton imports?

The looming questions, indeed, are what happens to the 50-plus million bales of Chinese government-owned cotton and how will those stocks affect their imports? In short, with Chinese mill use of 36 million bales and production in the range of 30 million bales, expect China’s imports to decline this year. Based on these estimates, China could import 6 million bales in 2014, as opposed to 11 million bales in the current 2013 marketing year. Barring a surprise in production or consumption, the smaller import number would leave China with essentially no change in stocks.

In other words, 50 million bales of cotton will not disappear overnight, turning what has been a short-term boost into a long-term market drag. That drag, though, could be mitigated if distortive policies in China are kept in check. There must be greater transparency in market access and the administration of import quotas. Support to China’s farmers should be monitored in order to make sure they abide by the terms of their WTO accession agreement. Further, China’s cotton demand should be allowed to grow and not be hampered by distorted fiber prices and government plans biased toward manmade fibers.

Meanwhile, Turkey and Mexico should continue to be significant buyers of U.S. cotton, but growth in export demand will come from countries such as Vietnam, Bangladesh and Pakistan. Another source of increased demand for U.S. cotton is our own textile industry, which is seeing a renewed competitiveness in cotton yarn production.

So, while the bulk of U.S. cotton production will continue to be exported, timely delivery and competitive pricing will become even more critical.

Mark Lange is the president and chief executive officer for the National Cotton Council of America. He and other NCC leaders contribute columns on this Cotton Farming page.

 

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