How will the new policy impact market?

Zhu Beina: President of China Cotton Textile Association

Reporter: How do you think the target price policy will affect the cotton textile industry in light of the details?

Zhu: the target price policy is undoubtedly a remarkable progress relative to the temporary stocking policy, but for the cotton textile industry as a whole, a single target price policy means not so much to the industry. From the perspective of the whole cotton textile industry, other supporting policies that consummate with the overall market need to be developed and promulgated in order to produce truly favorable impact on the cotton textile industry. Only when related policies including quota policy and textile industry empowerment policy have been implemented effectively will a long-term and substantial impact be brought to the cotton textile industry.

Reporter: what do you think is most worthy of mention?

Zhu: the implementation of the target price policy requires careful considerations about whether Chinese cotton market can truly play a decisive role in resource allocation and whether Chinese cotton market can become as much market-driven as its foreign counterparts, which is crucially important. For cotton textile companies, the biggest good news is not the decline in cotton price. What concerns cotton textile companies more is whether the price difference between homegrown cotton and foreign cotton will continue growing, and any significant price difference will put cotton textile companies in a disadvantaged position in terms of international competition. Only when both the prices of foreign and homegrown cotton approach a reasonable level can Chinese cotton textile industry become most internationally competitive. 

Reporter: in your opinion, what is the biggest uncertainty in the next year?                        

Zhu: for the next year, the biggest uncertainty about the market is whether this market remains a government-led market. Nowadays, cotton textile market accounts for about 20% of the total textile industry and most of textile companies prefer chemical fiber textile. Chemical fiber is a highly market-driven industrial product, which has become a product of choice for textile companies given the high prices of cotton in recent years. It is exactly because the reasonable prices of chemical fiber versus high prices of cotton in recent years that many textile companies have improved the spinning property of chemical fiber by improving technology and retrofitting equipment and established a good image among the consumer community by expanding the marketing channels and improving the chemical fiber process. If the cotton market remains to be led by the government, more cotton textile companies would probably prefer use of chemical fiber in the future.   

Du Min, director of Agricultural Research Center of the Ministry of Agriculture

Reporter: will the target price policy better protect the interests of cotton growers and maintain the acreage of cotton growing?

Du: Xinjiang government has made extensive and detailed survey and research on how to implement the target cotton price policy, and developed science-based and reasonable implementing rules for the target price policy, which can be summarized as follows:

First, in terms of form of subsidy and distribution of funds, the government subsidy will be given based on the actual acreage and the sales volume of seed cotton at a ratio of 60-40%. After the governmental funds are appropriated, the government at the provincial, prefecture and county levels will allocate the funds according to the predefined method of subsidy and distribution of funds. Second, the basis and criteria for subsidy. Xinjiang government will determine the specific subsidization criteria according to the amount of governmental funds allocated. (1). Amount of subsidy per mu=total amount of subsidy in current year x60% / acreage across the region as determined by Xinjiang government; (2) amount of subsidy/kg of seed cotton = total amount of subsidy in current year x 40% / total cotton output (ginned cotton) as determined by Xinjiang government x average gross lint percentage across the region as determined by Xinjiang government; (3) the amount of subsidy to special cotton (including long-staple cotton and colored cotton) will be 1.3 times of the amount of subsidy to upland cotton as determined by Xinjiang government. Third, the financial subsidy will be given at the end of February in the next year. 

The year 2014 is the first year of implementation of the target cotton price policy, and the policy and its implementing rules are intended to ensure stable return on cotton growing to cotton growers and facilitate the sustainable development of cotton industry. But whether and to what extent this objective can be achieved is subject to the test of time.

Reporter: according to the implementing rules, market price data acquisition will take place during September - November and the subsidy might be given once again. When do you think the cotton growers can receive the subsidy? And how? Will cotton growers accept this form of subsidy?

Du: according to the implementing rules of the target price policy for Xinjiang, in early January of the next year, Xinjiang Department of Finance will determine the per-mu amount of subsidy and develop an acreage-based subsidization plan for all prefectures and cities in consultation with related departments based on 60% of total amount of subsidy appropriated by the central government less the reserve funds and the cotton-growing acreage as determined by Xinjiang government; after that, Xinjiang Department of Finance will determine the average amount of subsidy per kg of seed cotton output-based subsidization scheme for all prefectures and cities in consultation with related departments based on the remaining 40% and the cotton output as determined by Xinjiang government.  The subsidy allocation schemes will be reviewed by the leadership team for the pilot program and then reviewed and approved by Xinjiang government before Xinjiang Department of Finance appropriates the subsidy level by level. 

Reporter: the market predicts that the cotton price in the next year will drop dramatically, therefore cotton mills lowered their expectations for the purchasing price of seed cotton in the next year. If the prices of seed cotton are very low at the initial stage of purchase, do you think cotton growers will sell their cotton after knowing that they will receive the subsidy later?

Du: The subsidy policy is intended for cotton growers. In light of the fixation of target price, the expected or actual decrease in price will affect mainly the difference between target price and the selling prices quoted by cotton growers, i.e., the changes in the amount of subsidy. In other words, it will affect the amount of government subsidy to the cotton growers and whether the companies can do their business normally, without any adverse impact on the cotton growers.

Reporter: the implementation of the target price policy in this year implies that many scenarios might be unexpected. How do you think the implementation of the policy will affect the market?

Du: governmental departments all levels have given generous support to the implementation of the target price policy in Xinjiang this year. This policy has been scrutinized and discussed many times by almost all related departments governing the cotton industry, and extensive and in-depth survey and research and publicity efforts have been made by Xinjiang government after the announcement of the policy.

It is the first time China ever implemented a target price policy for cotton industry, which coupled with the small size of production operations of cotton growers in China and the low level of marketization of cotton industry, mean that problems and conflicts will be inevitable in the process of implementation. I believe the primary concern is the operating costs of the policy, but I also believe that this policy is well-meant and realization of the policy’s objectives requires concerted efforts of decision makers, enforcing departments and other related stakeholders so as to minimize the costs of implementation. 

Reporter: the market actors think the government might purchase cotton as a bail-out option if the cotton prices dropped substantially at later stage. What do you think of this perception?

Du: Since the market-oriented reform of cotton industry in China, the cotton prices have been determined substantially by the supply and consumer market, while cotton consumption mainly comes from the demand of cotton textile companies. The cotton demand of textile companies changes for various reasons, so the fluctuation of cotton prices is a commonplace. Since this is the first time China implemented the target price policy, the sufficient availability of funds of subsidy is the key to the success of the target price policy. I personally believe that the policy objectives will be achieved as long as the subsidy in the amount of difference between market price and target price is received by cotton growers according to the target cotton price policy, and that it is simply not necessary to enact a bail-out policy after the target price policy is enacted in Xinjiang.

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