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NDRC: China to Release Cotton From Reserves This Year

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In a much-awaited move, China said Thursday it will start to sell off its stockpile of cotton this year, and a plan for the reserve release is expected to be announced within the next 10 days.

The full implications of the stock sale remain unknown without the forthcoming details, but a statement from China’s National Development and Reform Commission (NDRC), the government entity responsible for managing the cotton reserve system, notes that transparency is a key objective, and that care will be taken to prevent depressed prices.

“At the end of the day, releases from reserves imply additional supply coming onto the market,” said Cotton Incorporated senior economist Jon Devine. “As China works down its stocks, it is hard to see prices increasing.”

Domestic mills have been hesitant to make purchases in previous release and some have complained about the quality of China’s reserve cotton and the significant delays in the delivery of that cotton post purchase.

“Most of the cotton in China’s reserve is old and of low quality,” said Robert P. Antoshak, managing director of apparel manufacturer and founder of the Kingpins jeans fiesta, Olah Inc. “There may be some short term impact on global cotton prices with their announcement but China’s textile industry will still need to import quality cotton. This will be very helpful for U.S. growers with new crop later this year.”

Because of the quality and delivery concerns, reserve purchases were incentivized in past seasons, Devine explained, and one way to encourage buys was by tying them to access to import quota.

The process functioned through ratios, where a volume of reserve purchases would result in the right to import a portion of that amount from the world market.

China’s reserve system also holds some foreign-cotton, that is generally accepted to be higher quality than the existing Chinese cotton in the stockpile—access to which was yet another incentive.

“Although the impact could be expected to be limited, whether or not ratio-based incentives are part of the release plan will be something to pay attention to,” Devine said. “If a new ratio-based incentive program is announced that ties reserve purchases to import quota, there is limited potential that it could lift Chinese imports above the very low level currently predicted.”

The United States Department of Agriculture (USDA) currently projects China to import 6 million bales of cotton, which would be the country’s lowest import volume since the 2002-03 season and 70 percent lower than the average level of imports during the reserve purchasing period from 2011-12 to 2013-14.

“This forecast is above the WTO-related minimum of 4.1 million bales, implying that a ratio-based program could fit into current market expectations,” Devine said.

He added, “Even if a ratio-based system to incentivize reserve purchases does lift Chinese imports above current projections, any effects on international prices should be mitigated by the fact that the rest of the world (world-less-China) is collectively holding a record amount of stocks. In particular, there is significant amount of cotton held by the Indian government that could be expected to flow onto the market if Chinese import demand were to increase.”

The Chinese government has indicated that the import quota would be severely restricted this crop year, suggesting the possibility for Chinese imports to move much beyond the USDA forecast could be unlikely.

“Given the volume of reserves and comments from Chinese officials indicating that release will be gradual, it can be expected that releases will occur over a period of several years,” Devine said. “As a result, we may have entered a new multi-year period of low cotton prices.”

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