China, the world's top buyer of raw cotton and soy, will this year scrap its controversial scheme to stockpile the commodities and will trial direct subsidies for farmers instead, the government said in a policy document.
The announcement, published late on Sunday, is the first official confirmation the change will come in 2014, although market participants remain uncertain about how the move will pan out as the document lacks specific details on timing, as well as on the structure and size of subsidies.
"The key is not that they're subsidizing farmers but how much they will give," said a trade source, who declined to be named.
The shift had been widely anticipated after several years of stockpiling failed to encourage an increase in cotton and soy planting by farmers while also pushing domestic prices well above international markets, stimulating more imports.
Global cotton prices, which climbed around 12 percent in 2013, may come under pressure from the change as it could free up more locally grown cotton, denting China's demand for imported fibre. The country's hoarding of domestic supplies is expected by the end of July to reach more than 12 million tonnes, or 60 percent of global stocks.
China's soy purchases will be less affected by the move as most crushers in coastal regions are already largely dependent on imports.
Beijing also said it would maintain stockpiling for rapeseed, corn and sugar, as well as continuing to offer a minimum purchase price for wheat and rice. Some industry participants had expected changes to sugar and rapeseed stockpiling.
NOT YET CLEAR
But some market participants warned that if the cotton subsidies were not far-reaching enough, that could curb Chinese production and actually buoy appetite for imports.
Trials for the subsidy system for soybeans will be rolled out in the north-east and Inner Mongolia, while it will be tested in the far western province of Xinjiang for cotton growers. Xinjiang accounts for about 60 percent of China's cotton output, and much of its higher quality, finer fibres.
It is not yet clear if the subsidies will be offered to other cotton-growing provinces, which make up the rest of domestic supply.
"If they only support Xinjiang, the rest of China will produce very little cotton if any, and domestic prices could rise," said a second trade source.
Beijing has been promoting cotton cultivation in Xinjiang where larger farms allow for more efficient production. Several sources expect the new policy to encourage farmers in eastern provinces such as Henan and Shandong, where cotton output has already been in sharp decline, to switch to food crops.
The subsidy will be based on a target price, according to the document, following a system similar to one used in the United States.
The government said it would "gradually build a system of target prices for agricultural products so that when the market price is high, low income consumers will be subsidised, while when the market price is lower than the target price, producers will be subsidised the difference, therefore guaranteeing farmers' income". It did not give further details on how the target price would be set.
"I don't think they will give very big subsidies. The government wants to encourage grain production not cotton production," said another trade source. "I think we will see total production drop when the planting statistics are revealed in March."
The changes are expected to be brought in prior to this year's harvest in the third quarter.
China views the financial support of its 700 million farmers as crucial for both its food supply and political stability, particularly in regions with large ethnic minorities such as Xinjiang, its main cotton-producing area, and southern Guangxi and Yunnan, the principal sugar provinces.
Details of the policy change were published in the "number one document", issued every January by the Central Committee of the Chinese Communist Party. The paper sets the country's policy priorities for the year, and has focused on rural matters every year since 2003.