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: Opportunities in Improved Market

January 16, 2017

March futures have improved, and January is looking like a good month. The big question and the uncertainty is whether or not this will last.

Market Analysis

Market Holds in Face of USDA Report Adjustments

January 16, 2017

From now likely into the mid-March trading period, the very bullish call sales ratio will continue to carry the ball for the bulls.

Market Analysis

Export Sales Drive Market as Potential for Explosive Growth Builds

December 19, 2016

U.S. export sales continue to lead trading. But conditions are growing for a potential “explosive fire” under the market.

Market Analysis

Shurley: December Numbers May Contain Hidden Stocking Stuffers

December 12, 2016

USDA’s December production and supply/demand estimates were as expected in some respects. But it also contained a few unexpected and positive surprises.

Market Analysis

Is Market Opening Window for “Made in U.S.” Revival?

December 12, 2016

USDA’s seemingly bearish December supply demand report failed to break cotton’s upside momentum, presenting a small window to potentially revive the “Made in U.S.” theme.

Market Analysis

Prices Hold as U.S. Quality Cotton Moves to Market

December 2, 2016

U.S. crop quality is essentially the highest on record. While mills may be facing potentially higher prices, they are getting a bargain on their U.S. purchases.

Market Analysis

Market Set for Shift to March Contract

November 21, 2016

The market is expected to rally higher early in the week as shorts buy their way out. Grower prices will then be based on the March contract, as December will be its expiry period.

Around The Gin
Product News

Enlist Duo Herbicide Registered for Use on Enlist Cotton

January 13, 2017

The U.S. EPA has registered Enlist Duo herbicide for use on Enlist cotton varieties, beginning in 2017.

Product News

Data Show Yield Gains from Indigo Cotton in 2016

January 9, 2017

Data collected from 2016 trials show that Indigo Cotton – a seed treatment based on naturally occurring, in-plant microbes to help increase water use efficiency – led to yield improvements on testing acres, including an 11% average yield increase in West Texas.

Product News

FiberMax and Stoneville Release New Varieties for 2017

January 9, 2017

Cotton growers searching to match the right variety the right field now have two new FiberMax varieties and two new Stoneville varieties to consider for 2017.

Product News

PhytoGen Rolls Out Seven New Enlist Varieties for 2017

January 5, 2017

PhytoGen is releasing seven new cotton varieties with the Enlist cotton trait and WideStrike 3 Insect Protection for the 2017 growing season.

Product News

Do You Qualify for the Stoneville Legacy Club?

January 3, 2017

Signup is now open for the new Stoneville Legacy Club, celebrating both the rich history of Stoneville and the generational wisdom of the growers who make 3-plus bales.

Product News

FiberMax Celebrates Growers Who Maximize Dryland Production

December 30, 2016

The new FiberMax Maximizer Club celebrates growers who produce great dryland cotton yields, and signup for the club is now open.

Product News

EPA Registers Engenia Herbicide from BASF

December 21, 2016

The EPA has registered Engenia herbicide for control of more than 200 broadleaf weeds, including glyphosate-resistant weeds, in dicamba-tolerant cotton and soybeans.

Product News

Growers Impressed with First PhytoGen WideStrike 3 Enlist Variety

December 19, 2016

The first growers to plant PhytoGen brand PHY 490 W3FE say the germplasm and technology combination helped them work smarter and increase cotton production.

Latest News
Market Analysis

Shurley on Cotton: Opportunities in Improved Market

January 16, 2017

March futures have improved, and January is looking like a good month. The big question and the uncertainty is whether or not this will last.

Market Analysis

Market Holds in Face of USDA Report Adjustments

January 16, 2017

From now likely into the mid-March trading period, the very bullish call sales ratio will continue to carry the ball for the bulls.

Market Analysis

Bull Market Pushes Prices to Five Month High

January 9, 2017

Prices reached a five-month high, as cotton demand flexed its muscles and pushed the market up.

Market Analysis

Could the Market Drift into the Mid-70s? It’s Possible.

December 28, 2016

The 70-73 cent price range remains very firm, with a good chance that the market could drift into the mid-70s.

Market Analysis

Export Sales Drive Market as Potential for Explosive Growth Builds

December 19, 2016

U.S. export sales continue to lead trading. But conditions are growing for a potential “explosive fire” under the market.

Market Analysis

Shurley: December Numbers May Contain Hidden Stocking Stuffers

December 12, 2016

USDA’s December production and supply/demand estimates were as expected in some respects. But it also contained a few unexpected and positive surprises.

Market Analysis

Is Market Opening Window for “Made in U.S.” Revival?

December 12, 2016

USDA’s seemingly bearish December supply demand report failed to break cotton’s upside momentum, presenting a small window to potentially revive the “Made in U.S.” theme.

Market Analysis

Prices Hold as U.S. Quality Cotton Moves to Market

December 2, 2016

U.S. crop quality is essentially the highest on record. While mills may be facing potentially higher prices, they are getting a bargain on their U.S. purchases.

Market Analysis

Market Set for Shift to March Contract

November 21, 2016

The market is expected to rally higher early in the week as shorts buy their way out. Grower prices will then be based on the March contract, as December will be its expiry period.

Market Analysis

Shurley on Cotton: Closing Out 2016, First Look at 2017

November 21, 2016

The 2016 U.S. crop may still be somewhat of a question mark, but USDA’s November numbers provided clarity on a few things – the crop got smaller in some areas as expected, but still got bigger overall.

Market Analysis

Cleveland: Volatility Reinforces Market Fireworks

November 11, 2016

The cotton market continues to show extreme volatility, as mills and speculative funds attempt to fix prices before the expiry of the December contract. The same fireworks are predicted for the next two weeks.

Market Analysis

Watch for Volatility as December Contract Period Ends

November 4, 2016

There are only a few trading days left before March becomes the lead spot month. The best remaining pricing opportunity for growers should be within this time frame, which could be active and volatile.

Market Analysis

Potential Supply Squeeze Could Push Market Higher

October 31, 2016

With December first notice day only three weeks away, mill buying and other potential squeeze factors could push the December contract to 75 cents and beyond.

Market Analysis

Cleveland: Prices Healthier; China’s Buying

October 21, 2016

After jumping higher on the heels of a bullish world supply demand report, the surge in cotton prices was halted at the 72 cent resistance level. But China is back in buying mode, snapping up nearly 200,000 bales.

Market Analysis

Shurley on Cotton: Prices Showing Stability and Potential

October 17, 2016

Many growers want to know when and if the market will get back above 70 cents and provide options to enhance marketing positions. Several factors now in play could give them that opportunity.