ICAC Weighs in on Chinese Influence

Townsend

The International Cotton Advisory Committee (ICAC) has released their facts and figures regarding the state of the industry moving into 2013/14.

Lower cotton prices and an increased attractiveness of competing crops have taken a toll on the global production of cotton, according to the report, which was released December 3. An expected decline of 11% to 23.2 million tons in 2013/14 is the forecast, which would make this the second consecutive season of lower numbers and the smallest total output in four years.

Mill production, however, is on the rise. Increasing 3% to 24.2 million tons, this number can not only be attributed to global economic growth, but to the rise of South Asia. World cotton trade as a whole has the potential to remain stable at 7.8 million tons, as a projected drop in Chinese imports could be offset by a rise in demand from the rest of the world.

The cotton industry is facing uncertainty in all directions. One major source of this lack of predictability seems to stem from the lack of clarity on the future of Chinese policies. China has, ICAC reports, accumulated a national reserve of more than 7 million tons of cotton in the last 14 months by buying both domestic and foreign fiber. The predicted end date for the growth of the cache is in March 2013, although it remains unclear how the stockpile will be managed after that.

If Chinese policies remain the same, cotton prices could be supported and stabilized, which would clearly be beneficial for the industry across the globe. However, should these policies be changed after the March deadline, further instability could ensue.

Terry Townsend, executive director of ICAC, reflects on the phenomenon of such a powerful global influence by one country, saying, “The last time the world cotton industry was so dominated by the decisions of a single country was in the 1960s, when the U.S. maintained a policy of high stocks in an effort to support prices paid to farmers.” The difference between the power held by the U.S. policies and those of China, however, lies in transparency. “Everyone knew what was happening and could plan accordingly,” Townsend explains. “Today, the major problem is not just the size of the Chinese Reserve, but the fact that no one knows what they are planning to do with it, or when, or how.”

This uncertainty has led to a fierce debate about the best way to structure policies to support farmers without damaging domestic textile mills.

“Best case is that China just holds onto the reserve and then markets it in an orderly fashion over the next several years,” he explains. Taking a stab at the future, “This is the most probable result.”

The worst case scenario would be a liquidation of the reserves into the market all at once, which would result in record market lows. “I don’t think they will be this cavalier about their impact on prices though,” he reassures.

Even in the case of orderly liquidation over several years, however, cotton prices will remain under pressure until the reserve is reduced substantially, he concludes.

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