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Cotton Inc.’s Podcasts Explain Chinese Cotton Policy

Continuing its educational mission to widely disseminate the best available data about an increasingly complex cotton market, Cotton Incorporated is making available a series of podcasts on Chinese cotton policy and its global effects.

The informational podcasts were developed by Jon Devine, Senior Economist at Cotton Incorporated, a research and marketing company devoted to cotton. The mini-seminars chart the challenges the global cotton market started to confront in 2010/11 as cotton acreage began to disappear as well as the complex response the Chinese government crafted to both stabilize its domestic supply and fix wildly fluctuating prices. This narrative arc chronicles the dramatic turmoil the world’s central fiber underwent, profoundly affecting the textile and apparel industries worldwide.

Devine said, “The spike in raw cotton fiber prices in 2010/2011 was unprecedented.” China’s initial response to the problem was an aggressive one, and ultimately produced unintended consequences that only exacerbated its scope. As part of a nationally directed effort to protect a battered rural economy, China began stockpiling cotton, buying more than 10 million tons from local farmers at above market prices. Problematically, this artificially driven up global cotton prices, sustaining its own domestic prices as much as 40 percent above the global benchmark. Ballooning prices have hit textile mills that buy fiber hard, often forcing them to carry heavy losses.

Li Ming Ge, general manager of Henan Huapeng Group, said, “The price pressure on textile factories is huge. The gap with foreign cotton is 3,000 to 4,000 yuan per ton. We can get import quotas, one ton for every three tons of local cotton, but it’s not a big help.”

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China used a combination of a government reserve system and a complex basket of import quota options to guarantee stable prices and exert control over import volumes. The reserve system essentially permitted the Chinese government to buy and subsequently withhold cotton that would have otherwise circulated on the open market. Some of that cotton could be stockpiled indefinitely some could be sold at government auctions at prices tightly controlled by state fiat.

The problem became severe enough that the Chinese government finally had to candidly address it. Gao Fang, the vice president of the China Cotton Association, apologetically explained, “It is not our intention [to harm mills] when we formulated the policy…we didn’t expect it would be implemented for so long. We have reached a consensus that we need a better policy for the Chinese government.”

Finally, the Chinese government, in a rare fit of self-criticism, reversed course and announced that it will eliminate the price guarantees enforced by the reserve system and substitute a new approach centered around a “target price.” If market prices dip below the target price, the government pledges to compensate the grower for the difference between the two. This should ultimately provide relief for Chinese mills from the onerously high prices they have been saddled with in recent years.

According to Devine, the imprint China’s cotton policy made on the apparel industry was deep and wide. He said, “Many brands and manufacturers turned to blending cotton with alternative fibers to protect their margins. As a result, cotton’s market share went from 62.5% in 2009, to 56.3% in 2012.”

Out of this problem, Cotton Incorporated’s “Customer Comments Project” was borne, an initiative designed to mine customer sentiment as catalogued across  retail comment sections all over the internet. Kitchings said, “We looked at more than 250,000 comments that customers had posted to 2,600 retailer and brand web sites. We focused on twenty-six key apparel items and found that consumers had issues with both the feel and the performance of garments that had historically contained high percentages of cotton.”

Now, Chinese cotton can flow freely from farms to mills without passing through the reserve system that artificially inflates prices. In effect, the space for the regeneration of a real domestic market has been carved out, diminishing the price-obscuring effects of heavy-handed governmental intervention into the market.

Cotton Incorporated’s podcasts on the recent evolution of cotton policy explains the significance of China’s about-face regarding its reserve system. Given the often convoluted dynamism of the cotton market, and its importance to the global economy, a lucid account of its diverse parts is more necessary than ever. To learn more about China’s cotton policy, click here to peruse Cotton Inc.’s podcasts.