How will the target price subsidy affect the world market? 

1. The target price direct subsidy initiative is highly complicated such that the acreage of cotton growing in Xinjiang and growers’ willingness to grow cotton will be maintained if the government subsidy is received by farmers in full. If the policy can not be effectively implemented, the growers’ morale is likely to be impaired and a rapid bounce-back of cotton prices is likely to take place in 2015, with high expectations for linkage between domestic and foreign futures markets and spot prices. The direct subsidy plan provides that no subsidy of any form will be given to inland cotton-growing areas in 2014, while the inclement whether in Yellow River and Yangtze River watersheds has caused significant adverse impact on quality and output of cotton, therefore it is predicted that much less acreage of cotton growing will be seen in inland China in 2015 and the income for cotton growers in Xinjiang will definitely become less in 2014 than in 2012 and 2013, making it inevitable to see a decline in cotton-growing acreage in 2015 even if the direct subsidy can be fully implemented for the benefits of cotton growers. Meanwhile, along with the increased costs of cotton mills, a large number of cotton growers and cotton processors might be phased out in 2015, which helps low-price foreign cotton enter Chinese market and contributes to the stabilization and bounce-back of ICE futures in the medium and long term. 

2. Direct subsidy helps improve the quality of Xinjiang cotton, reduce cotton costs and eliminate the import quota as an unfair and unjust platform. Although the percentage of machine-picked cotton in Xinjiang is increasing, cotton mills in Xinjiang are making greater efforts to clear of foreign fiber and impurities and regard improved quality of cotton processing as one of the top priorities in order to secure orders from textile companies because of the underdeveloped production technology, excessive cotton fiber loss and control of impurities and foreign fiber that remains far behind that in the US and Australia. But hand-picked cotton in Xinjiang enjoys significant advantage over American cotton in terms of fiber length, strength and color class. Xinjiang cotton enjoys remarkable quality advantage over Indian, west African and central Asian cotton and is even comparable with American and Australian cotton in terms of technical indicators as long as the foreign fiber issue is addressed and high-grade Xinjiang cotton can be transported out of Xinjiang efficiently. Since the government specifies that the subsidy will be given without the bottom line and the cap on amount of direct subsidy, the quality advantage of high-grade American, Australian and Brazilian cotton over Xinjiang cotton will be significantly reduced if the direct subsidy is received by cotton growers and the issuance of import quota might be adjusted across the board.

3. The full implementation of China’s direct subsidy policy will produce significant short-term impact on the quantity of imported foreign cotton, and the acreage in India, African and Central Asian countries might be reduced due to China’s direct subsidy policy, which will produce moderate impact on American cotton grower’s willingness to grow cotton. First, the percentage of hand-picked cotton in Xinjiang remains above 50%, especially in south of Xinjiang, while cotton is picked almost 100% by hands in India and West Africa. Like Xinjiang, Central Asia sees cotton picked by both machine and hand. China’s direct subsidy policy corresponds to the minimum seed cotton purchase price set by Indian department of textile industry as different forms of measures to protect the interests of cotton growers, although the former serves as a bail-out measure but the former are more efficient, immediate and challenging. Over the past three years, over 50% of cotton export volume from India entered Chinese market, but the minimum seed cotton purchase price means that the CIF price of Indian cotton S-6 can not be lower than 72-73 cents/pound. After the enactment of China’s target price direct subsidy policy, some institutions and cotton textile companies estimate the prices of CF1501 and CF1503 at around 12000 Yuan/t. Xinjiang cotton enjoys significant price and quality advantages over Indian cotton, therefore more Chinese cotton users might choose to purchase Xinjiang cotton in the first place before considering American and Australian cotton (SM and GM high-grade cotton accounted for merely 30%-40% in 2014). China’s direct subsidy policy will produce substantially little impact on production of American cotton since American farmers and farm owners enjoy a large amount of subsidy for a long period of time as well as well-established subsidy policy. 

Most of foreign dealers and cotton importers believe that direct subsidy is a good measure that may not be taken by wrong hands, emphasizing the need to extend the subsidy to inland cotton-growing areas after successful tryout in order to effectively protect the interests of farmers, stabilize the acreage of cotton-growing areas, prevent another market upheavals and reduce the losses to cotton users and export-oriented companies due to significant fluctuation of prices of raw materials. A Singapore-based cotton dealer believes that the demand for and consumption of low-grade cotton has decreased remarkably after three or five years of upgrading in China’s textile company. The price is not the key determinant of whether cotton textile companies will purchase aw materials, while the ability to produce high-quality, foreign-fiber-free, and low-impurity cotton is the key to increasing market share.         

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