March 1, 2012

China's 2012 cotton supplies to remain tight

A cotton reserve policy started by China last year is seen to lead to continued tight stocks globally and high Chinese import volumes in 2012, warned agricultural economists.

However, there is also a potential, if China starts selling its stockpile, to lead to a sudden and damaging drop in world prices for the fibre.

The USDA announced last week that it anticipates China will continue purchasing massive amounts of cotton throughout 2012 as part of its reserve policy, squeezing the supply of cotton available to its textile industry and driving up demand for imports, including from the US.

But economists say this track is unsustainable and will inevitably lead to a situation where China must begin to sell its stock, thereby depressing world prices. They believe it is only a question of when, and by how much.

"Governments have a long history going back to the 1940s of trying to suppress price volatility in cotton," said Terry Townsend, executive director of the Washington-based International Cotton Advisory Committee (ICAC). "It may work for a short period of time, but it has never worked over the long period."

Townsend argued that China's own reserve policy will unavoidably face the same fate, simply due to the ballooning costs entailed in continuing to purchase, insure and store the commodity. "And when it does, there will be pain to pay," he added.

This has happened before, economists point out. China amassed a large stockpile in the mid-1990s and then began to sell it off in 1999 and the early 2000s, leading to record low prices in the world cotton market. Even when the US decided to end its reserve program in 1986 in favour of a marketing loan model, the administration's careful planning was unable to prevent a US$0.30 drop in the price of cotton per pound, Townsend noted in a subsequent interview.

The reason China is buying so much cotton now involves a mix of politics and economics. With an earlier stockpile nearly depleted and the onset of extreme price volatility early last year, the Chinese government promised its cotton farmers last April that it would buy their crops at RMB19,800 per tonne -- or about US$1.42 per pound at current exchange rates -- through March 2012 if prices dipped below that value.

But it did so at a time when prices were volatile and abnormally high, hovering around US$2 per pound. Then in October, domestic prices began to drop, triggering Chinese purchases from farmers; the reserve also began to gobble up imports, with a lower world market price of around 90 cents a pound.