What Would a Change in Chinese Cotton Policy Mean?

For several years, cotton producers from around the globe have kept one eye on China’s massive cotton reserve program that has propped up cotton prices and simultaneously threatened to send the market into a free fall. Now some, including Joe Nicosia, executive vice president of Louis Dreyfus Commodities, say the Chinese could finally be on the verge of changing that policy – for better or for worse.

Speaking to a room full of cotton industry professionals at the Mid-South Farm and Gin Show, Nicosia said 2014/15 could be the year the Chinese government begins the process of reducing its 57 million bales of reserve cotton stocks onto the market. Drawing down those 57 million bales represents an enormous task – and that number doesn’t include the bales that are currently being stored in mills and on farms around the country. And, Nicosia says, China was still importing cotton at least through the end of March.

But there is no doubt that China is looking for a way out of its currently bloated cotton reserve policy.

“They have new leadership in China,” Nicosia said. “They realize what they’ve done has created some kind of dislocations, and they have to step forward with a new policy in 2014/15.

“So China has finally come to the table and said ‘Alright, it’s time for us to do something different.’”

The Chinese studied many of the policies previously employed by the United States to determine how they should move forward, according to Nicosia.

“They seem to have settled on some form of target price or direct subsidy program going to their growers so as to try and free up their stocks instead of having everything go into their reserve programs, which is what is currently happening,” Nicosia said.

In the past, China had supported its farmers by buying the cotton directly from them at advanced prices – often as much as $1.20 per pound, before placing that cotton into its domestic reserve. Nicosia noted that this shift in policy was not finalized, but the government was at least considering a change.

Of course, the ramifications from such a policy shift would be felt around the globe. For U.S. cotton producers, the most apparent effect from this change would be a reduction in exports to China. By lowering its premiums paid to domestic farmers, the Chinese government would open the door for Chinese mills to begin to source their cotton domestically – reducing the need for cheaper, imported cotton from America. This would have an immediate bearish impact on cotton prices in the U.S. But, Nicosia said, this is a necessary growing pain for the cotton market.

“Ultimately, this is the beginning of the process of what has to happen for us to start to work through a 100-million-bale carryover,” Nicosia said, referencing global carryover stocks in 2013/2014 – a figure for which China accounts for over half.

Silver Linings

Although a Chinese policy shift would have negative short term impacts on the U.S. cotton market, there are potential positive implications as well.

For starters, without a lofty support price, fewer Chinese growers would plant cotton in the coming year. Nicosia estimates the country’s production could drop to as low as 30.5 million bales in 2014/15. Paired with increasing Chinese consumption of 38 million bales in a year, the country could end 2014/15 with a net cotton deficit of around 7.5 million bales.

Topics:

Leave a Reply

Market Analysis Stories
don shurley
Market Analysis

Shurley on Cotton: Prices Slip Under Pressure

August 15, 2016

The sudden jump in cotton prices was recently referred to as “Christmas in July.” Well, the new wears off eventually – even for Christmas gifts.

Market Analysis

Bears Impact Market, But Long Term Still Bullish

August 22, 2016

The near term technical perspective for the cotton market has turned a bit bearish. But, the longer term outlook remains bullish.

Market Analysis

Cleveland: Feed This Hungry Cotton Market Now!

August 1, 2016

The cotton market is hungry and wants to be fed. It’s time for growers to move their price fixations up and sell it some cotton!

Market Analysis

Mother Nature Now in Charge of the Market

July 24, 2016

At this point in the crop production year, be assured that Mother Nature will still have the major say with respect to cotton prices.

Market Analysis

Cleveland: USDA Turns the Bulls Loose

July 18, 2016

Say it again: Technicals are the leading indicator of fundamentals; they kept telling us higher prices were coming.

Market Analysis

Shurley on Cotton: It’s Christmas in July!

July 13, 2016

The calendar says July. But for cotton growers, it may as well be “Merry Christmas.”

Market Analysis

Watching Bulls, Bears and Fundamentals

July 11, 2016

Fundamentals rule in the long run, but technicals provide the roadmap. Just be sure to keep an eye on the bulls and bears.

Around The Gin
Product News

ChemChina/Syngenta Deal Gets U.S. Foreign Investment Approval

August 22, 2016

ChemChina and Syngenta have received a key clearance for the proposed consolidation of the companies.

Product News

Enlist Cotton Trait Earns Full Export Approval

August 10, 2016

Cotton varieties containing Dow AgroSciences’ Enlist trait now have full export approval in key countries.

Product News

Spray Equipment Offer Helps Maximize On-Target Applications

August 3, 2016

A new spray technology equipment offer can help growers participating in Roundup Ready PLUS Crop Management Solutions upgrade their sprayers to maximize on-target applications.

Product News

EPA Allows Sale and Use of Existing Belt Inventory

August 2, 2016

The U.S. EPA’s Environmental Appeals Board has upheld an earlier decision to cancel registration for Bayer's insecticide Belt, but is allowing sales of existing stocks to growers for use.

Product News

Indigo Launches Water Efficiency Product for Cotton

July 26, 2016

Boston-based research firm Indigo has launched its first commercial product – Indigo Cotton – which helps improve the cotton plant’s water use efficiency.

Product News

Enlist Technology Provides Tolerance to Three Key Herbicides

July 13, 2016

The Enlist weed control system will give growers the ability to use three modes of action postemergence in both cotton and soybeans.

Product News

Providing Upland Varieties with Acala-like Quality

July 13, 2016

PhytoGen offers growers several upland cotton varieties with Acala-like fiber quality for added premiums and higher profitability.

Product News

PhytoGen Names Winners in Best Yielder Club Sweepstakes

June 29, 2016

A North Carolina cotton grower was named grand prize winner in the 2016 PhytoGen Best Yielder Club sweepstakes.

Latest News
Market Analysis

Bears Impact Market, But Long Term Still Bullish

August 22, 2016

The near term technical perspective for the cotton market has turned a bit bearish. But, the longer term outlook remains bullish.

Market Analysis

Shurley on Cotton: Prices Slip Under Pressure

August 15, 2016

The sudden jump in cotton prices was recently referred to as “Christmas in July.” Well, the new wears off eventually – even for Christmas gifts.

Market Analysis

Market Holds On in Face of Neutral Report

August 14, 2016

USDA’s August cotton reports were neutral-to-supportive, keeping the 70-78 cent trading range in place as the major trading channel.

Market Analysis

Market Strong, But Looking for Answers on China, India

August 5, 2016

This market has 80 cents written all over it. But it’s also calling for a closer look at reported cotton stocks in China and India.

Market Analysis

Cleveland: Feed This Hungry Cotton Market Now!

August 1, 2016

The cotton market is hungry and wants to be fed. It’s time for growers to move their price fixations up and sell it some cotton!

Market Analysis

Mother Nature Now in Charge of the Market

July 24, 2016

At this point in the crop production year, be assured that Mother Nature will still have the major say with respect to cotton prices.

Market Analysis

Cleveland: USDA Turns the Bulls Loose

July 18, 2016

Say it again: Technicals are the leading indicator of fundamentals; they kept telling us higher prices were coming.

Market Analysis

Shurley on Cotton: It’s Christmas in July!

July 13, 2016

The calendar says July. But for cotton growers, it may as well be “Merry Christmas.”

Market Analysis

Watching Bulls, Bears and Fundamentals

July 11, 2016

Fundamentals rule in the long run, but technicals provide the roadmap. Just be sure to keep an eye on the bulls and bears.

Market Analysis

Cleveland: A Fun Week of Bulls, Bears and Brexit

July 5, 2016

The cotton market experienced a fun, exciting week as trading focused on strong bullish and bearish fundamentals – and little to no impact from Brexit.

Market Analysis

Shurley: Acreage Numbers Could Challenge Range-Bound Prices

July 1, 2016

In light of the June 30 USDA acres planted numbers, it would have to be considered good news if cotton’s “range bound” prices can remain at or above 64 cents.

Market Analysis

Market Fundamentals Positive, but Not Yet Bullish

June 20, 2016

July prices are still bumping into resistance. But there are enough positive fundamentals in the market to provide a bit of bullish hope.

Market Analysis

Shurley on Cotton: Thoughts Ahead of the Acreage Report

June 16, 2016

There’s usually speculation on the June USDA Acreage number and how it might compare to the March Prospective Plantings number. So far, it's all quiet.

Market Analysis

Commodity and Mill Actions Pushing Cotton Higher

June 10, 2016

It was a pretty good week for cotton, as fund money continued to flow to all commodities, and mills began to ease their price expectations higher.

Market Analysis

Mills, Speculators and Weather Driving Cotton Prices

June 7, 2016

Mother Nature’s recent whims are driving new money into cotton, as mills come to grips with rising prices and price fixations, which fuel buying by hedge fund long speculators.