Chinese Cotton Production Set to Fall

The debate over Chinese cotton production now and for the foreseeable future is slowly becoming a moot point. Much like the US, China is moving towards a situation where cotton acreage levels will incrementally decrease until a balance is reached among competing crops, such as grains, oilseeds and vegetables.

This trend started in Xinjiang last year as the Party Secretary and Chairman of the province, Wang Lequan, questioned the role of cotton in the province’s future claiming that farmers should look to improve their income by considering alternative crops besides cotton. At the time, no one really paid too much attention to Secretary Wang but his words have certainly proven to be quite prescient, given the rampant food inflation that hit China late last year and continues today. Earlier this year at the 11th National Party Congress, Secretary Wang used the national stage to bring the debate front and center about reducing cotton acreage, admitting “any further expansion in cotton acreage would have a negative impact on the provincial agricultural sector.” In the same speech, the Secretary questioned the role of Chinese textile exports in the overall economy, stating the industry operated with low margins and was a constant source of trade friction with developed countries. Most recently, Secretary Wang has encouraged the powerful Production Construction Corps and Xinjiang farmers to consider other crops in addition to cotton. Perhaps most importantly, he is on record stating the province should maintain cotton acreage at or around 20 million mu, the equivalent of 1.33 million hectare.

It would be foolish to think party secretaries in agriculturally strategic provinces such as Henan and Shandong are not following Secretary Wang’s words and actions closely. It would be equally as foolish to think that the upper echelons of power in Beijing are thinking more about maintaining cotton acreage versus ensuring an ample supply of grain if not vegetables, oilseeds and the like. While no official—other than Secretary Wang—is on record suggesting farmers opt for other crops at the expense of cotton, government policy makes it clear that grains are the clear winner in this battle for acreage. Farmers willing to plant grain in China receive a total subsidy of 960 yuan per hectare, of which 210 yuan is a direct subsidy and the remaining 750 yuan is for agricultural inputs. Cotton, however, only receives a subsidy of just 225 yuan per hectare, which only functions to encourage farmers to use improved seed varieties. Adding to farmers’ enthusiasm for planting other crops besides cotton are the price rises for grains, rice, corn and beans, all of which are up sharply versus a year ago. Though cotton prices have remained relatively strong in China this year, they have not witnessed the kind of price increases seen in competing crops. Further, as the cost of production has increased dramatically from last year, farmers have been forced to consider these price gains in the equation. Nevertheless, the single largest obstacle facing farmers in terms of planting cotton is the dramatic labor shortage hitting the countryside. Several generations of youth have left the fields for better opportunities in urban areas and are not likely to return. As a result, this has left an acute shortage of bodies that rural farmers have yet to replace. In turn, labor costs—field hands, planting, etc—have all skyrocketed, while there are additional costs of harvesting the cotton once it is ready. Even now, the Xinjiang province is recruiting field labor for fall harvest.

Given the current reduction in cotton acreage has started in Xinjiang, the province is a good reference point to see where Chinese cotton production might be in 2008, 2009 and beyond. In 2007, Xinjiang planted 25.7 million mu of cotton (1 mu = 15 ha). According to Secretary Wang, acreage in 2008 should be closer to 20 million mu, indicating a drop of 22 percent. Using a five year historical yield average of 106.7 kilogram per mu for the province would deliver an output of 2,134,000 million metric tons—the equivalent of 9.8 million 480 pound bales. Xinjiang usually accounts for 30 to 35 percent of annual output. Knowing that steeper drops in acreage will occur in Xinjiang in 2008 we can assume that acreage for the rest of the country will be about the same. Therefore, the weighted overall drop in acreage for China will probably fall between 5 to 10 percent. By using a five year national yield average, total output would fall somewhere between 6.34 to 6.7 million tons. If using the USDA’s 7.6 million ton production estimate, this would imply a drop of 11 to 16 percent in total production from 2007. As other provinces follow Xinjiang’s lead in reducing cotton acreage for other crops, total output for cotton will be sharply affected in the coming years.

Inevitably, China has topped in cotton production and is likely heading to production levels closer to the beginning of this decade—perhaps even lower. And, while no official word has been passed it seems highly likely the country has made a major economic decision, preferring to import what they wear and planting what they need to eat.