China's shifting cotton policy and the bearish market

The globe's largest user of cotton, China, is feared to see its output fall by 24 percent in the coming year due to the government's decision to end direct purchases from farmers. It is predicted that the prices of this highly sought-after agricultural commodity may remain bearish in the face of record international stocks. The main reason for the slump is the uncertainty over cotton policies in China, leading to price depression and a significant decline in demand for imports from the largest consumer of the crop.

The International Cotton Advisory Council (ICAC) said that cotton prices in the upcoming season are expected to be the weakest in five years. With the possibility of a decline in Chinese imports due to excessive stockpiling of the commodity, cotton supplies from countries like the US and India are said to have a major influence on prices. According to the China National Cotton Reserves Corporation, the country's output will drop in 2015 from 6.6 million tons in the previous year to 5 million tons this year.

The levels of cotton stocks withheld will increase outside China in the coming season. The new measures in the cotton policy for 2014 offer significantly more support to the northwest Xinjiang province than any other places in China. The area accounts for fifty percent of China's official output, approximately 6.8 million tons in 2013. The policy also aims to achieve less distortionary producer support and less generous producer support.

Under the Xinjiang Uighur Autonomous Region, a pilot program will provide target price-based subsidies directly. The target price is supposed to be 5 percent less than the reference price of 2013, reported to be 19,500 RMB per ton. In other provinces situated in the Yellow and Yangtze River regions, which are not covered under the pilot program, the harvest price is said to be determined by market forces and reserve management, expected to be about 15,000 RMB per ton.

Many experts believe that it is a bold move under the new Chinese leadership to understand that growing cotton in the small farm plots of the eastern parts of the country was unprofitable and lacked the scope for mechanization and expansion. Market watchers also predict that there may arise a domestic demand for cotton in the month of September since storing cotton might lead to weight loss, color degradation, and also affect deterioration in spinning quality. Stockpiling cotton also means that with every passing day, the quality of stored cotton weakens.

Moreover, mills that have purchased cotton from the stockpiles have had to blend it with imported cotton or a new crop to improve the overall quality of the yarn. It also seems that the newly harvested crop from Xinjiang will be available in the eastern market only after January 2015. Hence, until then, the domestic demand for cotton crops will be satisfied from the bales that are stocked up, imports, and the produce available from the eastern provinces from September to December.