Commentary: China's cotton supports dominate world market
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.
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