China holds more than half of the world's growing cotton stockpile, and it's running out of storage space.
The world’s cotton stockpiles continue to mount. China holds more than half of the world’s stockpile of cotton, a situation that won’t be easy for Chinese policymakers to rectify.
USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) put world ending stocks for 2013-14 at 97.6 million bales of cotton, a 1.2-million-bale increase from its December report. China accounts for 60% of that total.
World cotton stocks have been steadily rising. In 2012-13, world ending stocks were nearly 9% lower at 89.17 million bales. In 2011-12, they were almost 25% lower at 73.32 million.
Even though, China’s year-over-year imports have dropped dramatically—from 24.5 million bales in 2011-12 to 20.3 million in 2012-13—China’s ending stocks continue to grow due to plunging demand and increased production, says Fred Gale, senior economist with USDA.
USDA notes that production in Xinjiang province, which accounts for about 60% of the country’s total, could exceed 2012-13 levels. World production of cotton, by comparison, is expected to slip to 117.8 million bales from the previous year’s 123 million.
Out of Space
"China has run out of storage space for cotton," Gale notes. Last week, the country announced that it would begin to shift from a price support policy to a target price deficiency payment for cotton farmers in Xinjiang province.
"They have not released any details yet," says Gale. "They haven’t explained how they will dispose of their stocks."
As a World Trade Organization (WTO) member, China has a tariff rate quota, but has released additional quota each year. This year, the country has been slow to release over-quota allotments, suggesting it will further slow its pace of imports.
At the same time both production and stocks are rising, demand is plummeting. Declining demand for Chinese cotton is the result of China’s decision to support its cotton farmers. The resulting higher prices have made the country’s textile industry less competitive. Higher prices have both spurred growing yarn imports and the use of synthetic fibers at the expense of cotton.
"With domestic cotton prices in China high, the textile processing and manufacturing industry is moving to Vietnam and other Asian countries," says Gale. "China’s demand for cotton has fallen quite a bit, and it is not clear whether it will bounce back to where it was three to four years ago." Demand for cotton in China since 2008 has plunged 29%, according to USDA.
"China is in a huge quandary," says Gale. "And its cotton policy is costing the country a lot of money."
China’s grain and cotton stocks also built to burdensome levels in the 1980s and 1990s, and it took the country about three to five years to work down the stocks by subsidizing exports.
"Now China has a rule that they have to sell stocks at prices higher than what they paid for them so they don’t lose money," says Gale. "They are supposed to recover storage and interest costs, too. When they hold auctions, they set a minimum price, and no one wants to pay it."
In its January WASDE report, USDA narrowed its marketing-year average price range to 72-77 cents per pound, putting the midpoint at 74.5 cents. If China slows its cotton imports more than expected, however, U.S. and world prices could drop further.