Cotton Trade: China Shift on Stockpiling Policy Sparks Questions

23 January 2014

China appears to be moving away from its practice of building cotton stocks, in a move that analysts say marks a dramatic shift in policy. Two other major players in the global cotton market - the US and Brazil - are also engaged in a separate tussle on the subject, as the process to pass a new Farm Bill continues to drag on in Washington.

The stockpiling programme was notably absent from a recently released policy document outlining China's agricultural priorities for the year. Instead, a new programme with target prices will deliver region-specific subsidies to ease the change for farmers.

Any change in Chinese cotton policy is expected to have international ramifications on trade, production, and prices, given the Asian giant's status as the world's top producer, consumer, importer, and holder of these stocks.

Cotton prices are expected to fall regardless of what happens, some agriculture experts have told Bridges. Acquisitions for the country's stocks, believed to be half the world's holdings, have buoyed prices in recent years.

As a current net importer of the fibre, a release from the country's stocks would alleviate the need for China to buy cotton from abroad. It could even become a net exporter if domestic production exceeds consumption, barring changes elsewhere.

The latter would be a "worst case scenario," experts say, especially if the existing reserves are dumped on international markets. US-based farmers, the largest exporters of cotton to the Asian country in recent years, would likely be among those to bear the brunt of the impact. Others, such as poor producers in West Africa would also have to be wary of releasing their holdings at the same time as China, for fear of depressing prices further.

National stocks of other countries pale in comparison to China's 12.6 million tonnes. India and Brazil, the next largest holders, have 1.9 million and 803,000 tonnes, respectively. Beijing is expected to trim its stocks to 10.5 million tonnes by the end of the season.

New target prices

Agriculture policy in China is a complex political calculation, given that the country is home to nearly 700 million farmers. With the majority of purchases in years past concentrated in the Xinjiang region, the government has decided to pilot a target price programme, which would take the place of the stockholding policy.

The planned target price scheme would guarantee farmers' income, though details remained unclear at the time of this writing. The programme would initially be limited to Xinjiang, with producers elsewhere left to make planting decisions based on the competitiveness of other crops and the world cotton market.

Soy stockpiles are also expected to be reduced. However, food security concerns will likely lead to a different response from the government on how to handle the changes in policy.

US and Brazil

US and Brazilian cotton producers have similarly expressed concerns to Bridges about China's new policy. The two countries have long fought among themselves over cotton, with their latest battle focusing on current efforts in Washington to resolve their WTO dispute.

Members of the Brazilian cotton farmers' association, ABRAPA, visited Washington earlier this month to express their frustration to US policymakers over the content and slow pace of reform, as the process to pass a new Farm Bill drags into its third year.

Under the terms of a "framework agreement" signed by both countries that effectively put WTO-sanctioned retaliation on hold, Brazil is meant to receive US$147 million annually from the US. The payments are supposed to be transmitted on a monthly basis until a new Farm Bill has been passed by the US Congress that satisfies both countries. Approximately US$500 million has been transferred so far.

ABRAPA officials, speaking on condition of anonymity, say that Brazil has not received these payments since last September. The official warned that the suspension of payments to the country breaks the terms of their agreement, and could set the stage for Brazil to issue retaliatory trade measures.

Brazil's Foreign Trade Council, CAMEX, has already prepared a list of US goods that could face such countermeasures, if it is deemed that Washington is not in compliance with the framework agreement.

Farm Bill watchers are hoping for a new bill in the coming weeks. Proposals for this legislation include a new cotton insurance programme, known as the Stacking Income Protection programme or STAX.

The US National Cotton Council issued a sharp rebuke last week to the issues raised by ABRAPA members, insisting that it was time for Brazilian industry to acknowledge that the new insurance programme "is substantial reform."

ICTSD reporting.

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