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Unsure How to Reverse Course, China Regrets Inflating Cotton Prices

According to a report just released by the Cotton Advisory Committee (ICAC), cotton prices are expected to remain on the rise. The prime driver behind the price increase is China’s stockpiling of cotton and the tightening of stocks outside of China.

China continues to exert considerable influence on global cotton prices. Based on China’s estimates regarding its own cotton consumption for 2012/13, the report predicts it’s overall consumption will top 8.3 million tons with stocks totaling 9.4 million tons. Currently, China maintains a national reserve of 7.8 million tons. Chinses stocks in their totality are enough to cover just over a year’s worth of domestic consumption, and private sector stocks equal about two months of consumption.

The ICAC forecasts that world production will reach 25.6 million tons in 2014, while consumption hits twenty-four million tons. The same report predicts a jump in the season average on the Cotlook A Index from eighty-eight cents per pound in 2012/13 to more than a dollar in 2013/14.

As part of a nationally directed effort to protect a battered rural economy, China has been aggressively stockpiling cotton, buying more than 10 million tons from local farmers at above market prices. Problematically, this has 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.”

The problem has become severe enough that the Chinese government has finally begun 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.”

It remains unclear how precisely China will wind down the stockpiling strategy. Ma Jun, a cotton analyst at Founder Commodities, warned, “There’s no way they can keep stockpiling. There’s nowhere to put the cotton, the warehouses are full.”