In recent years the government has bought up cotton from producers as a way to support cotton prices and farm income. But under that policy China’s cotton stocks have risen to oppressive levels. According to the USDA’s estimates, China will have more than about 20 months’ worth of cotton in storage at the end of the current crop year. The policy was unsustainable.

China’s new cotton policySo, China has announced a new approach to supporting cotton producers. Beginning this year, China will support cotton farmers through a deficiency payment type system. Cotton producers can sell their cotton at market prices and the government will provide subsidy payment if the market price is below a pre-set target price. This week the government set the 2014 target price at 19,800 yuan or $3,200 per tonne. That works out to about $1.45 per pound of cotton, which is significantly above at least current world cotton prices.

The switch to a deficiency payment type program has been expected, but the target price is much higher than many people had expected. With the high price guaranteed through the government program, China’s cotton acreage and production are expected to remain high. But this year, at least in theory, the domestic production will be available to domestic mills at market clearing prices. According to some reports China’s government will require that mills buy domestic cotton to qualify for import allowances.

China’s new cotton policyThat would suggest the potential for a significant decline in China’s cotton imports. In the last three years China has accounted for 44 percent of total world cotton trade over the last three seasons. This year China’s cotton deficit is 3.5 million bales – but they are forecast to import 12 million bales.

China’s cotton policy is important to the U.S. cotton market. China is a significant customer, accounting for about 7 percent of total U.S. sales. And cotton exports are the driver for U.S. cotton demand accounting for 75 percent of total demand. If China’s imports decline, reducing world cotton trade, the impact on U.S. exports could be substantial. U.S. cotton stocks are forecast to fall to their lowest level in 10 years by July, but stocks could rebound significantly if the foreign market for our cotton shrinks.