MAKE OR BREAK: Living Under the “Volcano” of China’s Cotton Policies

MAKE OR BREAK: Living Under the “Volcano” of China’s Cotton Policies

From Cotton Grower Magazine – April 2015



For five years running, the surplus in global cotton stocks has cast an ominous shadow over the cotton market. Cotton farmers from Texas to Xinjiang, from Gujarat to Mato Grosso, have been fully aware that the world has produced more cotton than it has needed during that span. Yet cotton farmers continued to plant and harvest the crop, because the market has told them to do so.

To kick off his annual economic update address at the Mid-South Farm and Gin Show in late February, Joe Nicosia illustrated this point with an apt analogy. China’s massive cotton reserve has and continues to account for the bulk of cotton stocks globally.

“We know that as long as China holds a surplus, it doesn’t really matter how much cotton there is in the world, because we can only experience what is free and open to the rest of the market,” said Nicosia, the global platform head for cotton at Louis Dreyfus Commodities.

“So life can be peaceful under the volcano for a period of time, as long as it doesn’t erupt. And if it does, that lava – that cotton – can flow slowly, sometimes oozing out into the market place. Or it can erupt, and we can get flooded with it.”

The message was clear. The manner in which China goes about ridding itself of its massive cotton reserves will have a major impact on cotton producers. For American growers, the slower the better.

During his sprawling 45 minute speech, Nicosia honed in on a number of the factors influencing the cotton market, which has languished in the 60 cent range for much of the past several months.

China accounts for over half of global cotton stocks, thanks to a policy the country began implementing in 2009/10. At the time, the country held little to no cotton in reserves. In response, the Chinese government set into motion a plan to prop up its own cotton farming and cotton milling industries – one that involved importing and hoarding massive of amounts of cotton.

For the last four years, Nicosia said, the Chinese government averaged 17.7 million bales of cotton imports annually from around the globe. For comparison’s sake, that’s more than the entire U.S. crop, which averaged approximately 16 million bales during the same timeframe.

Eventually, China was going to have to reconsider its policy of buying the world’s surplus crop, Nicosia said. The country is expected to import only seven million bales in 2015, and even fewer the following year. Instead of a policy that stockpiled cotton and propped up the global market, China is now implementing a target support price policy to prop up its own domestic producers. China’s old system served to prop up global prices, helping to perpetuate the problem of oversupply.

“So what we have is a sea change that took place, and a lot of it was driven by China stopping from buying the world’s surplus,” Nicosia said, “They finally realized that they couldn’t just buy it, and store it, and change the world. Because at the elevated price, everyone in the world continued to grow it, and (China was) the only buyer of it.”

China’s shift in cotton policy created waves in the cotton market around the globe almost immediately. As soon as the country began hinting that it would no longer be importing large swaths of the world’s cotton, prices began slumping.

Now, Nicosia says, the world’s producers will have to take corrective measures to bring prices back. While current prices are unsavory, they could be just what the doctor ordered for cotton to right-size its supply and demand scenario in the long term.

“In 2015 and 2016, the world is going to have to grow less cotton,” Nicosia says. “It cannot continue this. And those are the reasons why December delivery is substantially below where it was last year, and that’s why cotton prices went into the upper 50 cent range. Because we have to force (reductions in cotton production) to take place.”