How will China cotton policy change impact the world market?

China , Commodities , Cotton Sep 17, 2013 1 Comment

CottonChina is the largest importer of raw cotton in the global market. In 2011, the Chinese government began stockpiling cotton in an effort to support domestic farmers through the establishment of purchase prices.

In 2012, the government stockpiled 85% of total domestic output and this purchasing program is set to continue throughout 2013.

China plans to end its cotton stockpiling program and will instead consider subsidizing domestic producers, according to a Reuters news report. Details are sketchy, however, and the new policy may take a year or more to implement.

The Chinese government is reportedly in the process of overhauling its stockpiling policies, which effectively made it cheaper for cotton users to import rather than buy domestically grown cotton. The USDA estimates that Chinese imports from all sources will fall by close to 50% from 2012-13, although some analysts see continued robust Chinese imports for the foreseeable future.

Hard evidence suggests that Chinese imports have already slowed down materially. For the new 2013-14 marketing year, which began Aug. 1, total Chinese purchases from the U.S., including shipped and unshipped, total 488,000 bales. In the comparable period last year, 1.821 million bales were sold to China.

Textile mills have been fierce critics of the scheme that started in 2011, as a complex quota system means their access to overseas markets can be limited, forcing them to either curb production or buy at high prices from the national reserves.

Global prices have climbed 13 percent since the start of the year, but could reverse as Chinese mills would be able to buy more locally grown cotton freed up for the local market.

The reform could also stoke calls to shift to subsidies for growers of other commodities such as sugar and oilseeds, with China’s sugar association already considering a switch.

Commodity trader Louis Dreyfus estimated at the beginning of 2013 that based on fundamentals the cotton price should be at around 50 cents per lb. The current cotton futures price is around 80 cents per lb, down 10 cents per lb from mid-August.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

One Comments

  1. Matt Lim

    Interesting.
    China is gearing up to become more autonomous. Reminds me of South Korea’s meteoric rise into the car manufacturing and electronics industries.

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