Expect minimal impact from recent Chinese cotton reserve policy changes
An analysis of a recent price decline in China's reserve cotton finds that the dip will have minor impacts on China's cotton production, consumption, ending stocks and imports, according to a study led by Texas Tech University agricultural researchers. Meantime, the impacts on the U.S. cotton market are likely to be negligible.
This may be due to the fact that China's support price reduction is small, and the beginning support price was relatively high compared to existing world prices. A larger support price reduction could produce more dramatic market results, though.
"The upshot is that this move by China is not likely to cause big waves." said Darren Hudson, director of Tech's International Center for Agricultural Competitiveness. "But, if this signals a broader move to begin drawing down stocks, it could have implications for price and U.S. exports."
Aimed at supporting domestic cotton farmers and fostering rural development, the government of China designed and implemented a price support policy, which allows the government to purchase domestically produced cotton at above world market prices, Hudson said. The stockpiling program has led to domestic cotton prices in China that are higher, on average, than world price.
As a result of these and other policies, imports of raw cotton and yarn into China have increased in recent years. It is estimated that China currently holds 12.8 million tons or 58.8 million bales of cotton in reserve. That accounts for about 60 percent of global ending stocks and is sufficient stocks for more than a year of China's domestic consumption.
The Chinese government recently announced that it would lower its reserves by cutting the price of domestic cotton being sold from its state reserves. According to the China National Cotton Reserves Corporation, beginning April 1, mills can bid as low as $1.27/lb. for standard-quality cotton in the daily state auction, below the current floor price of $1.33/lb. fixed in November, a decrease of 4 percent, and will allow spinners to purchase one bale of import reserve for every three bales purchased from Xinjiang warehouses.
Written by Norman Martin
CONTACT: Darren Hudson, Director, International Center for Agricultural Competitiveness, Texas Tech University, (806) 834-0546 or email@example.com
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