January 21, 2014


China to discard cotton, soy stockpiling in 2014



China will scrap its controversial scheme to stockpile cotton and soy in 2014. 
The country will also implement direct subsidies for farmers, which will be conducted at trial level.


The announcement is the first official confirmation that the changes will come in 2014, although market participants remain uncertain about how the move will pan out as the document lacks specific details on timing, as well as on the structure and size of subsidies.


The shift had been widely anticipated after several years of stockpiling failed to encourage an increase in cotton and soy planting by farmers while also pushing domestic prices well above international markets, stimulating more imports.


Global cotton prices, which climbed around 12% in 2013, may come under pressure from the change as it could free up more locally grown cotton, denting China's demand for imported fibre. The stockpiling of domestic supplies is expected by the end of July to reach more than 12 million tonnes, or 60% of global stocks.


As most crushers in coastal regions are already largely dependent on imports, China's soy purchases will be less affected by the move.


Beijing also said it would maintain stockpiling for rapeseed, corn and sugar, as well as continuing to offer a minimum purchase price for wheat and rice. Some industry participants had expected changes to sugar and rapeseed stockpiling.


Market participants also warned that cotton subsidies could curb Chinese production and support demand for imports.


Trials for the subsidy system for soy will be launched in north-east and Inner Mongolia, while it will be tested in the far western province of Xinjiang for cotton growers as Xinjiang accounts for about 60% of China's cotton output.


It is not clear if the subsidies will be offered to other cotton-growing provinces, which make up the rest of domestic supply.


Beijing has been promoting cotton cultivation in Xinjiang where larger farms allow for more efficient production. The new policy is said to encourage farmers in eastern provinces such as Henan and Shandong, where cotton output has already been in sharp decline, to switch to food crops, according to some market sources.


The subsidy will be based on a target price, according to the document, following a system similar to one used in the US, but did not give further details on how the target price would be set.


The changes are expected to be brought in prior to this year's harvest in the third quarter.


China views the financial support of its 700 million farmers as crucial for both its food supply and political stability, particularly in regions with large ethnic minorities such as Xinjiang, its main cotton-producing area.


Details of the policy change were published in a 'number one document', issued every January by the Central Committee of the Chinese Communist Party. The paper sets the country's policy priorities for the year, and has focused on rural matters every year since 2003.