Photo: Liu Keman, director of China   National Cotton Information Center
Replacing the unlimited temporary stocking policy with the pilot program of target price subsidy represents a critical step in the systematic adjustment to the cotton industry policy as part of the government’s efforts to implement the guiding opinions concerning leveraging the decisive role of market in resource allocation promulgated at the 3rd plenary session of the 18th national congress of CPC and the requirements set forth in the #1 decree of the central government in 2014. How to gain a deeper understanding of the target subsidy price of 19800 Yuan per ton in 2014? What kind of profound changes will the target price policy will bring about in China’s cotton industry? And where is the focal point of domestic cotton market price in 2014?

The national cotton market monitoring system might help cotton-related companies understand the aforesaid issues by monitoring, processing and analyzing several datasets. Four sets of data are provided below for reference only. 

1. Production, quality and planting costs of cotton in three major cotton-producing areas.

In terms of cotton output: according to the National Cotton Market Monitoring System data, between 2003 and 2013, cotton output in Yellow River Basin dropped from 2.03 million tons in 2013 to 1.47 million tons in 2013, a drop of 27.5%, while cotton output in Yangtze River Basin decreased from 1.15 million tons to 1 million tons, a decrease of 13%, and that in northwest China increased from 1.69 million tons to 4.49 million tons, a rise of 166%. The share of northwest China’s cotton output in the national total rose from 34% in 2003 to 64% in 2013.

In terms of cotton quality: according to the annual cotton quality report from China National Bureau of Fiber Inspection, in 2011 (2012-2013 is not representative), cotton produced in Gansu was of the best quality without remarkable flaw, followed by Jiangxi-produced cotton and then by Xinjiang-produced cotton which are in the largest quantities. The then conventional cotton-producing areas like Shandong, Hebei, Shanxi, Shaanxi, Hunan and Henan saw overall cotton quality inferior to the national average or being very poor. According to the National Bureau of Statistics data, the combined output of cotton in these conventional cotton-producing areas amounted to about 2.18 million tons, or 33% of the national total. 

With respect to planting costs: according to a December 2013 survey by the National Cotton Market Monitoring System, the cotton-growing costs in Xinjiang (including rental, materials, labor, machinery, agricultural insurance and transport costs) were 2267 Yuan per mu, of which the average costs were 1861 Yuan per mu in north of Xinjiang and 2675 Yuan per mu in south of Xinjiang, 1946 Yuan per mu in production and construction corps-controlled areas and 2296 Yuan per mu in other areas. The planting costs decrease according to the scale of planting, from 2367 Yuan per mu on average for cotton growers each with less than 100 mu, 2204 Yuan per mu on average for cotton growers each with 100 to 500 mu and 2100 Yuan per mu on average for cotton growers each with 500 to 1000 mu. 

Based on average per-mu output of 318 kg of seed cotton (from the System data for Xinjiang in 2013), average fiber yield of 40% and 2.2 Yuan per kg of cotton seed, the planting costs of ginned cotton in Xinjiang in 2013 approximated 16800 Yuan per ton. Given the subsidized target purchasing price (ginned cotton price) of 18800 Yuan per ton, the target average rate of return on cotton growing for subsidization purposes is about 12%. 

2. Domestic supply and demand landscape

After the target price policy replaced the temporary stocking policy, the downward trends of domestic cotton output were substantially established. The National Cotton Market Monitoring System monitored 38.50 million mu of cotton-growing acreage in 2013, including 33.46 million mu in Xinjiang. Conservative estimates indicate that at least 50% decrease will occur in inland China three years later, when the cotton-growing acreage across the country will approximate 50 million mu, with output of about 5.8 million tons.

Along with the global economic recovery, however, the cotton consumption in China is likely to bounce back in the next few years, but can it climb up to the peak level around 2008? Apart from the rising labor costs and the gradual vanishing of the age of demographic dividend, let’s look at a set of energy consumption data. In 2012, China’s GDP accounted for 11.5% of the global total and China’s coal consumption held 50.2% of the global total. In 2012, China’s per capita exploitable coal was 84.8 tons (as opposed to world per capita of 122.2 tons), per capita exploitable oil 1.78 tons (as opposed to world per capita of 33.46 tons), per capita exploitable natural gas 2295 cubic meters (as opposed to world per capita of 26581 cubic meters) and per capita arable area of 0.08 hectare (as opposed to world per capita of 0.2 hectare).

Obviously, the textile industry upgrading is an evitable path given the labor, energy and environmental conditions, and the government policy will not choose to protect low-efficiency and energy-consuming production capacities, with low-end textile production capacities just starting to move out. Along with the economic recovery in the next few years, if the cotton consumption in textile industry bounced back to 9 to 10 million tons, the annual production-demand gap in the country will approximate 3 to 4 million tons

Due to the need for textile product mix or cotton assorting, a reasonable quantity of import will be maintained every year. In 2003-2010 (before the temporary stocking policy), the average annual import in eight years amounted to 2.37 million tons.

Over the past three years, the government purchased 15.92 million tons of cotton as cotton reserves and about 6.8 million tons of cotton reserves are expected to be released by the end of August. With the remaining 9 million tons of national cotton reserves in warehouse, it will take about 4 years to release them all based on annual release of 2 million tons, a figure that is sufficient to ensure the security of cotton resources after the adjustment of the domestic cotton production landscape in the next three or four years. 

3. Evolution of global cotton supply-demand dynamics
Among the major cotton producers, India, Uzbekistan, West Africa and Brazil enjoy tremendous potential of cotton production, each with respective characteristics and advantages. Along with the implementation of China’s Silk Road Economic Belt Strategy and China-Africa Cooperation Strategy, out of the consideration for resources security, Chinese companies are likely to receive policy support to become major substitute areas for cotton supply in China as the efforts to expand the cotton resource channels to the aforesaid areas are accelerated. 

The industry policy readjustment characterized by replacing the temporary stocking policy with target price subsidy helps ensure the industry security in major cotton-producing areas in the country and the sufficient supply of cotton to domestic textile companies, without suffering the same setbacks as the domestic soybean industry once did. It is advisable for the government to leverage the sufficient cotton reserves at hand to hedge off the impact from international market for 3 or 4 years, and to help a group of financially capable domestic companies establish their presence solidly in overseas markets, especially in Uzbekistan, Africa and Brazil given China’s Central Asia strategy and China-Africa partnership, where the cotton production or processing business will be fostered and the local cotton resources will be brought back to domestic market. This can be done by implementing zero tariff policy for this portion of cotton so as to mitigate the impact of the declining cotton output in China on the industry security. 

4. An initial analysis of focal point of cotton price in 2014.

International market: in 2013, the economic growth in both the US and Eurozone was batter than expected and it is predicted that European and American economies will continue on the upward trend in 2014. In terms of global cotton supply and demand dynamics, according to the ICAC forecasts of production, distribution and inventory, the global cotton output will decrease and global cotton demand increase in 2014, with all countries except for China seeing a slight decrease in end-of-term inventory consumption for two years in a row. 

Historical data suggests that the M index of international cotton prices in the past decade (average level of quoted price of foreign cottons at major Chinese ports) was 81.9 cents/pound. Considering the stepwise upward trends of bulk commodity price along with economic growth, and given the revoked temporary stocking policy and the Chinese import policy remaining unchanged, the probability of cotton price returning to such average level is high in 2014. 

Domestic market: according to the ongoing analysis by the National Cotton Market Monitoring System, against the backdrop of global economic recovery, there are sings of recovery of domestic consumption and textile export and an increasingly growing demand for cotton, but textile companies still face rising labor costs, RMB appreciation, financial strain and decreased interest rate, leading to initial predictions that the domestic cotton output will decrease, cotton demand increase and the ratio of inventory to consumption continue decreasing slowly in 2014. 

After the implementation of the target price subsidy policy in 2014, the market mechanism has been dominating the domestic cotton prices and the price difference between foreign cotton and domestic one will return to the normal level. According to an analysis of ten-year data prior to the implementation of the temporary stocking policy, without any substantial adjustments to China’s cotton import policy, the price difference between imported cotton and local cotton of 1000 to 1500 Yuan per ton is acceptable to Chinese textile companies. Assuming the average price of imported cotton delivered to ports is about 82 cents (based on an exchange rate of 6.2), or equivalent to 14100 Yuan/ton of CIF price based on 1% RMB tariff quota, 14700 Yuan/ton CIF price including sliding duties and fees and 17900 Yuan/ton CIF price including all duties and fees, the average domestic cotton price of 15000 to 16000 Yuan/ton is highly likely in 2014 according to estimates. 



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