China is more than just the 800-pound gorilla in the world cotton market. The Asian giant is both the world’s biggest producer and importer. As such, China has tremendous market manipulating power that leaves other producers, including those in America, at its mercy.
China provides unstinting support to its cotton farmers with the end result being that cotton prices in China are often found above world market prices, yet actions in China can create extreme fluctuations in world prices that affects everyone else. A few years ago, a small crop in China coupled with robust demand sparked a rally which lifted prices to their highest levels since the U.S. Civil War in the 1860s.
But the pendulum could easily swing the other way. Recent forecasts by the U.S. Department of Agriculture show that China currently holds half of the world’s cotton stocks. Releasing too much of that surplus on the market could cripple prices for American farmers, creating uncertainty and anxiety.
Gerald Bange, a USDA official charged with estimating global supply and demand, said in a recent interview with China Daily: "Will China continue the same [cotton] policies that it has had for several years now, or will it change those policies? Obviously, that's up to China. We just have to wait and see what China does."
So far, China has shown no inclination to cut back on its support for its cotton farmers and mills in the country. A recent report by the international OECD found that China has been steadily increasing its farm support levels well above those found in the United States, and there has been some talk of the country resorting to a direct payment method to support its farmers.
Darren Hudson, the director of the Cotton Economics Research Institute at Texas Tech University, said in an interview with Farm Policy Facts that if China “abandons its reserve policy in favor of paying its producers, that could result in significant price declines leaving U.S. (cotton) producers vulnerable to low prices for no other reason than China dumping its stocks.”
Meanwhile, the debate in the U.S. has turned to further decreasing support for its farmers in the Farm Bill.
“Thus, unilaterally dismantling U.S. (farm) policy would expose U.S. producers to significant downside risk at the whim of Chinese policy,” Hudson explained.
The point underscored a recurring fact of global farm trade these days. Countries are boosting the level of their farm supports whether it is China in both the cotton and rice industries, Thailand in its rice pledging program, or Brazil in its combined sugar-ethanol supports. In many ways, the U.S. is headed in the opposite direction by trimming its farm supports.
Getting a grip on the ins and outs of Chinese cotton subsidies can be challenging, but the International Cotton Advisory Committee said in a report that China’s intervention is done by using a sliding scale of import quotas to “ensure that the effective cost of imported cotton exceeds international market prices and thus boost prices paid to farmers in China.”
ICAC said the estimate of benefits resulting from government intervention in China for its producers was around $1.6 billion in 2008/09 and then rose slightly to $1.7 billion in 2009/10.
On top of that sliding scale import quotas, the Chinese government also pays growers a subsidy to use high-quality cotton seeds. In the past two seasons, China also provided subsidies for the transport of cotton from the western province of Xinjiang near Central Asia to mills in the east and south of the country where most of its textile and apparel industry is located.
China’s Finance Ministry paid about $290 million in the first half of 2011 to pay for interest on loans give for agricultural projects benefiting the cotton, grain, and vegetable oil processing industries.
The government also foots the bill for keeping over 1 million tons of cotton in China’s warehouses. Reserves are released to mills when supplies are a bit tight and to make the fiber affordable for textile companies that are already among the world’s biggest.
“China restricts the inflow of cotton so that the internal price of cotton remains higher than the international price. It allows imports (or sells out of the reserve) to domestic mills so that their domestic spinners remain cost competitive,” said Hudson.
“It is quite the balancing act trying to keep internal cotton prices to producers high enough to maintain them while keeping raw materials prices low enough so that domestic mills do not lose significant market share,” Hudson concluded.
And right now, U.S. farmers are the unwilling participants of that balancing act.